§ Order for Second Reading read.
§ 11.20 a.m.
§ The Minister of State, Treasury (Mr. Denzil Davies)
I beg to move, That the Bill be now read a Second time.
This short Bill is necessary to enable the United Kingdom to participate in a Financial Support Fund which has been set up by the Organisation for Economic Co-operation and Development. An Agreement establishing this Fund was signed in Paris by the members of the OECD on 9th April and 30th May this year. The fact of the signature was announced by my right hon. Friend the Chancellor of the Exchequer to the House on 9th April and the text of the Agreement was published as a White Paper on 5th October. The Bill gives legislative force in this country to that Agreement.
The Agreement will come into force and the Fund starts to operate when member States with quotas representing 90 per cent. of the total of the Fund have deposited instruments of ratification. We have therefore an obligation to our partners in OECD and it is in our own interests as a nation to complete the legislative processes leading to ratification as soon as possible, even though the Fund is intended as a "safety net", which OECD members are not likely to need to use unless other sources of borrowing are not available.
Perhaps I can briefly recount the history behind the setting up of the Fund. As hon. Members will know, one of the major problems caused by the oil price rises of autumn 1973 to summer 1974 was the problem of financing the massive balance of payments deficits which resulted from the oil producers' limited capacity to absorb imports from the industrialised countries. This problem was aggravated, first, by the danger that the oil producers' pattern of investment for their hugh surpluses would not correspond to the pattern of deficits caused by the oil price increases and, second, by the very real threat to the stability of world financial markets caused by the massive potential accumulation of claims in the hands of the oil producers. Both these dangers meant that individual countries, through no fault of 1197 their own, could find themselves faced with acute financing difficulties.
These were the reasons lying behind the numerous proposals which were considered in the international financial community in 1974 for coping with the problem of "recycling" what came to be known as petrodollars, and they are the reasons lying behind the agreement to set up the OECD Fund. It is, of course, true that up to now the world economy and the international monetary system have in some respects coped surprisingly well with all these problems and, as the capacity of the oil producers to absorb imports improves, the magnitude of the problem may be decreasing. But the danger is still with us. We are still in the depth of the world recession created by the oil crisis.
A large part of the world, including a number of industrialised countries, faces the prospect of having to finance substantial balance of payments deficits for some time to come and the need still exists for facilities to enable countries to adjust to the new situation without having to adopt measures which might correct their balance of payments but would lead to delay in their recovery and further deepen the present world depression.
As I said, the Fund is based upon an Agreement between the countries concerned, and the Bill gives legislative force to it in this country.
The purposes of this Fund are to assist member States which are facing balance of payments difficulties as a result of the oil crisis by giving them access to multilateral credit facilities. The Fund was conceived as an addition to existing sources of credit; it is a condition of eligibility for borrowing that an applicant member should demonstrate to the Governing Committee of the Fund that it has made the fullest appropriate use of its reserves and credit from other sources.
I should here explain that what is envisaged is not a fund in the sense of another international institution with its own resources, but, rather, a fund providing a facility whereby moneys raised will be immediately lent on to the member State in response to an application from that member State.
The total amount laid down in the Agreement which can be raised by the Fund, to be lent out to other member 1198 States, is 20 billion SDRs or 24 billion United States dollars, determined by the quotas set out in the Agreement. The quotas establish the maximum liability in sharing risks and the normal proportions of contributions to assist a borrowing member. The United Kingdom's share in this is 1,600 million SDRs—that is £917 million at current market rates. This is 8 per cent. of the total of the Fund.
A member wishing to borrow must demonstrate two things to the Committee. It must show the Committee that is is encountering serious external financial difficulties, and that it has made the fullest use of its reserves and other forms of credit.
The Support Fund then raises the necessary finance and determines the terms and conditions applying to that loan. The only terms specified by the Agreement are that loans will be subject to economic policy conditions to be agreed between the borrower and the Governing Committee, and that the loans shall last for not more than seven years and be in convertible currencies of the contributing member's choice—they could also be in SDRs.
The amount of the loan will be related to the borrower's quota and will depend on the voting support given to the proposal by the other members. A member can draw up to its full quota on a two-thirds' majority of voting members; over the full quota and up to twice the amount of quota would require a 90 per cent. majority, and a request for borrowing more than twice a member's quota can be agreed only if all other OECD members are content. Voting is weighted according to quota.
Faced with a request for loans from a prospective borrower the Support Fund can raise money in a number of alternative ways. It can call on members to make individual contributions or it can borrow on a collective undertaking provided by all the OECD members. If the Support Fund calls for individual commitments, contributing members have two options. A member may either transfer moneys directly to the Fund, or provide an undertaking or guarantee for a Fund borrowing. In the case of a guarantee, the Fund will seek to raise the money in international or domestic financial markets first, and if it is unable to do so, the sum required may then be 1199 raised in the domestic market of the individual member. The purpose of providing an individual guarantee is that the member undertakes to stand behind the Support Fund's obligations to lenders in general.
The Support Fund may choose to borrow on the basis of a collective guarantee. For this it can choose either domestic or international markets, so long as these markets are within the territories of OECD members. All members participate in such a collective guarantee and the contingent liability on them is determined by the proportion of their quotas in the Fund applied as a percentage to the total amount raised in this way. For example, if the Support Fund raises $100 million, the United Kingdom would underwrite 8 per cent. of this so that, if there were a default by the borrower, we should be paying from the Consolidated Fund interest payments and capital repayments on $8 million. To offset against this, of course, would be the claim we should have against the defaulting borrower, but it is extremely unlikely that any OECD member would default from an international borrowing obligation.
Provision exists in the Agreement for members in balance of payments difficulties to be relieved of or be assisted to meet their obligations under the Fund. In practice we believe that the Governing Committee would take account of the external position of member countries when making calls to lend on to other members, and seek to raise money in those countries and those markets which are best able to support the financing involved.
Having tried to recount briefly the actual Agreement, perhaps I may turn to the Bill and deal with three of the main clauses. The first clause and the last clause are really only descriptive, and I need not go into them in detail. It is only Clauses 2, 3 and 4 which make changes in existing United Kingdom law.
Clause 2 provides that if the Support Fund seeks to raise money under Article 8 of the Agreement by making a call for individual commitments from OECD members, the United Kingdom may respond to this call by making a direct contribution. The clause specifies that the source of that direct contribution shall be the National Loans Fund. Subsection 1200 (2) provides that payments of interest, repayments of capital and any other receipts arising from a direct contribution to the Support Fund shall be paid back into the National Loans Fund. The NLF will also receive any moneys due to the United Kingdom when the Support Fund is liquidated.
The Support Fund will be liquidated under Article XIX when the last repayment or outstanding loan has fallen due. This could be after nine years, because the Fund has power to grant new loans for two years after the Agreement comes into force and loans cannot have a maturity of more than seven years. Liquidation, of course, may take longer than this in the event of possible deferments and default. Alternatively, there is provision for the members of the Fund to extend the facility if all members agree to do so.
Clause 3 provides that if the United Kingdom responds to a call for individual commitments under Article VIII by opting to give an undertaking by way of guarantee of the borrowing, or if it participates in a collective undertaking by all OECD members, as provided for in Article IX, any moneys required to implement such guarantees shall be paid out of the Consolidated Fund, and the Consolidated Fund will take in any consequential receipts.
If the United Kingdom is required to give an undertaking under either Article VIII or Article IX of the Agreement, the Treasury must lay a statement of the undertaking before each House of Parliament.
Finally, I turn briefly to Clause 4. This clause extends to the Support Fund those immunities and privileges which cannot be provided by Order in Council under the International Organisations Act 1968. For those, a draft Statutory Instrument will be laid before the House for affirmative resolution. The Statutory Instrument will provide that the Support Fund shall have the legal capacities of a body corporate, that is, it shall have the usual legal immunity, that its archives will be treated like that of a diplomatic mission and that the Fund shall have the tax exemptions as are accorded to a foreign sovereign Power. Hon. Members will, of course, have an opportunity to debate the draft instrument after it is laid before the House.
1201 Clause 4 also covers tax exemptions which are not within the scope of the International Organisations Act, and relates to the securities issued by the Support Fund. In effect, it provides an exemption for non-residents from income tax in respect of these securities. Also, securities issued by the Support Fund are to be treated as property outside the United Kingdom for the purposes of capital gains tax and capital transfer tax. Again, that affects people domiciled outside the United Kingdom and not those who are in the United Kingdom. There will be an exemption from "Bearer Instrument" stamp duty in relation to Fund securities.
As we believe that the United Kingdom is most likely to meet its obligations to the Fund by providing direct financing, it is unlikely that the Support Fund will wish to issue securities in the United Kingdom. We have, however, to take the powers in Clause 4 so that, if such a remote eventuality arises, the Support Fund is not disadvantaged because we have not taken these powers.
In conclusion, as I have said, this is a short Bill, and I hope that it is uncontroversial. It is another attempt by the industrial countries to alleviate a little the consequences of the steep rise in oil prices which has taken place over the last four years and to mitigate somewhat the effects of the present world recession. Both of these aims, I believe, must be in the interests of this country, and I hope, therefore, that the House will agree to give the Bill a Second Reading.
§ 11.33 a.m.
§ Mr. David Howell (Guildford)
I shall come in a moment to the details of the short Bill, but there is a place for a few preliminary remarks on the attitudes and economic thinking that he behind arrangements of this kind. It has been observed that if our problems could be solved by the sheer volume and number of credit facilities and swop arrangements that have been set up, we should be well on the road to recovery, but, unfortunately, they cannot.
The arrangements and the Bill are part of an attempt which Western Governments have decided, in their wisdom, to make to manage their payments deficits arising particularly, but not exclusively, from the substantial rise in the cost of oil imports. 1202 Like all arrangements of its kind, it assumes that the Government have the ability to overcome all the instabilities caused by ups and downs in current deficits and capital flows as a consequence of a sharp rise in the cost of oil imports or any similar impulse. The claim is that Governments can do better than these forces would do if left to themselves.
That is a big assumption, and I am sure that the Minister of State is the first to recognise it. I am sure that he and his colleagues, therefore, approach arrangements of this sort, and the United Kingdom's involvement in such arrangements, with some caution. I certainly do. I feel it necessary to say that from the Opposition Benches, because we sometimes get the impression that the Chancellor has an almost blind faith in the power of such arrangements and of the act of borrowing to anaesthetise the pains of readjustment or to overcome the need for readjustment. It is right to put formally on record that when involving ourselves as a nation in arrangements of this sort we need to approach them with considerable caution and not with a glowing faith that in borrowing arrangements of this sort the answers to our problems lie, because they do not.
The Bill seeks to legislate in relation to lending by the United Kingdom and to authorise us to participate in the support for the new Fund. That is curious, because in the House nowadays we are more accustomed to talk about borrowing rather than lending. But here lending is involved, and we are required to be prepared to make a contribution of up to £1,600 million in special drawing rights. In the Annex to Cmnd. 6242, which sets out the Agreement, appears the table of quotas expected from member countries. Our quota is £1,600 million. The quota for the Federal Republic of Germany is £2,500 million, for Japan it is £2,340 million, and for France £1,700 million—a slightly humiliating reminder that a nation with a smaller population and a smaller labour force is now a richer country. Those are the categories that have been decided, and that is the quota that we shall be expected to meet.
The Bill allows for our quota to be met either through direct support or through Government guarantees for loans raised in the United Kingdom market. The explanatory document asserts how unlikely 1203 it is that the quota will be met through further guarantees for loans and how al most certain it is—as the Minister of State confirmed—that we shall meet the additional burden through direct support from the National Loans Fund. That is not surprising. We should have been amazed to hear any other view asserted. In view of the state of Government debt and public sector borrowing it would be strange for the Government to suggest that more money should be raised in that way.
If the Government met their quota through a direct handout from the National Loans Fund, in the end their problems would be thereby increased by that amount, and they would still have to face the choice of how to get the revenue to fill the hole, whether by further borrowing, taxation, or printing money. In the present state of affairs an additional borrowing liability placed on the Government would be a sensitive and risky liability to take on. It is, therefore, no surprise to us that both the Minister of State and the supporting documents hurriedly assert how unlikely it is that any further guaranteed borrowing will take place to meet this quota.
By giving a Second Reading to the Bill and passing it into law in due course we undertake to meet our quota. The question which then has to be put is: what do we, as a country, get in return?
The Minister of State reminded us that this arrangement was christened the "safety net". He pointed out, rightly, that this is because it is regarded as the last in the line of the various swop facilities and credit arrangements which have been set up. It is the one to which countries are supposed to turn, on a number of conditions, of which one is that it should be used after all other multilateral facilities have been drawn on to the full. I think that is one important condition.
The other important condition, to which I do not think the Minister of State referred—it is strange that he did not, because it is the No. 1 objective of the whole Fund—is toavoid unilateral measures which would restrict international trade or other current account transactions, or which would artificially stimulate visible and current invisible exports.That is apparently the No. 1 condition upon which the Fund was set up. I want 1204 to say a little on these matters, on the other multilateral facilities, and on the need for the avoidance of unilateral restrictions on trade.
On the other facilities, this is the occasion to ask the Minister of State, should he speak again in the debate, to give us a little more information about the other facilities. What are the other loan facilities now remaining open to this country? One sometimes feels that there is less openness on the full extent of our existing indebtedness and our possibilities for further resort to borrowing than one might expect in this House.
What is the position now? The list of published other multilateral facilities that I have before me includes the IMF General Account. I think that we made an application to borrow £400 million from the General Account, the limit being in the region of $3.3 billion. There is the IMF 1975 oil facility. We have applied to borrow £575 million from that. There is the $3 billion United States' Federal Reserve swop line. I do not know how far we are into that, or what the position is there. There is the OECD Support Fund, which we are now discussing, to which we are expected to make a quota contribution of up to £1.6 million in special drawing rights. There is the EEC Joint Borrowing Scheme. It would be useful to know where we stand in relation to that. There is the whole of our existing outstanding amount of foreign currency loans to the public sector, which I calculate—the Minister can perhaps confirm this figure—is in the region of $9,500 million, on which, presumably, we have to meet a very substantial annual interest rate. My own calculation is that that is in the region of $900 million a year.
Those are the other facilities. As the Minister of State mentioned those other multilateral facilities, it is right that we should have some more details on the question whether we are going to make use of those at the moment. I would not expect him to predict the future too closely, but we should like to know a little more on that point.
Let me come to the second aspect—the prime objective and condition of the Fund; indeed, almost the basis upon which it was set up. I repeat that I find it odd, to put it at its mildest, that the Minister of State made no mention 1205 of this No. 1 objective of the Fund which I earlier read out. The newspapers are full of stories about impending announcements of selective import controls, and it would be the height of cynicism if we were asked, this morning, to slip through Parliament this little Bill, one of the key conditions of which is that we avoid unilateral trade restrictions, at the moment when the Government were planning to announce unilateral trade restrictions. What the true position is I do not know. The Prime Minister has played his part in obscuring it, as usual.
In the Financial Times of this morning there is an interesting story by the Washington Editor, in which he makes some points that are germane to this condition laid down in the Agreement, in Cmnd. 6242. These comments were as follows:Over the past few days high-level and strongly worded representations have been made to British embassies in Washington, Tokyo and a number of Common Market capitals warning of the damaging precedent such controls"—referring to import controls—would create and the serious diversionary effect they could have on world trade.The article continued:The Americans are particularly annoyed at the way Mr. Harold Wilson, the Prime Minister, claimed that controls had been endorsed by the Rambouillet summit meeting. They maintain that no such endorsement was given and that Mr. Wilson twisted an innocuous remark by Mr. William Seidman, the White House economic councillor, to give the impression that President Ford was acquiescing.That is very surprising to hear—the Prime Minister actually twisting words. What a thing!
The report continued:The American position at the moment, which appears to be very similar to that taken by Japan—is that the 'Rambouillet communique specifically reaffirmed the pledge the major countries had already taken in the OECD' is to refrain from protective trade measures. Any British import controls, whether justifiable under GATT or not would be highly undesirable in the present world situation, and a breach of the spirit of Rambouillet.Where are we? We are here this morning discussing a Bill which depends, as a matter of good faith, upon the No. 1 condition that we avoid unilateral measures. Yet here are the newspapers, full of the most loaded and worrying reports, when we are just about to break 1206 that condition and introduce unilateral trade restrictions. I do not know whether the Minister of State knows anything about this, or whether he is going to say that it does not arise. In fact, it does arise. It is central to this Bill and we must have some reassurance from the Treasury on the precise position, because otherwise we, as a House of Commons, will be placed in a most ambiguous situation in relation to this measure.
Those are the remarks I want to make on the details. Let me now make a general remark on the Bill as a whole and return to something that I was saying earlier. Borrowing through facilities of this kind, or exchange rate intervention, cannot be a substitute for correct internal policies. I hope no one in the Treasury imagines that they can be. Our view on the Opposition side of the House is that the correct internal policies are not yet being pursued and that until they are pursued all the credit arrangements, swop facilities and other devices which can be set up in the Western world cannot solve our problems. It is in that spirit that we look at this Bill.
§ 11.49 a.m.
§ Mr. Denzil Davies
With the leave of the House, I should like to deal with the point raised by the hon. Member for Guildford (Mr. Howell) and, indeed, agree with some of his latter remarks as well as some of his first remarks.
We do not see the Bill as a solution to our deep economic problems. I wish it were as easy as that. By passing the Bill and joining in the Agreement with other OECD countries, however, we can solve our economic problems. We shall not solve them by general borrowing or through external factors. We shall solve them only by our own hard work and our economic policies.
The Bill sets up a facility. I remind the hon. Gentleman that it is, not only we, not only the United Kingdom, who are setting up the Fund in order to borrow from it. This Fund concerns all OECD countries, like the United States, Germany, Japan and France. The Fund, in fact, was a response to a very difficult international situation caused by factors fully outside the control of the Western industrialised nations, and they decided to get together to try to alleviate some of the consequences of that situation. But 1207 that will not solve the problem either, since so many of these matter are outside our control. None the less—I am sure that the hon. Gentleman agrees—I regard the setting up of this Fund as a worthwhile attempt to come together and try to ensure that, in circumstances of this kind, we do not indulge in panic measures and that we do what we can to resolve the imbalances.
The hon. Gentleman asked me about the powers under the Agreement, and he read from the preamble to the Agreement relating to the restriction of trade between countries. The United Kingdom, as we have repeatedly said, subscribes to the view that general world trade is of benefit to this country. We are a trading nation and we rely upon general international trade to benefit our economy. We hope that there will be an upturn in the world economy fairly soon, and we hope also that we shall be able to take advantage of it. Therefore, I see nothing in the preamble to the Agreement which does not conform to the British Government's views on these matters.
We are not borrowing money from the Fund as a result of the Bill. We are merely entering—not just the United Kingdom, but all these countries—into a safety-net facility of last resort with our partners in the OECD. The terms of any agreement for borrowing money which might be reached between a member country and the Fund will be open for negotiation between that member country and the Governing Committee of the Fund.
§ Mr. David Howell
I was not referring to the condition for borrowing money from the Fund. I referred to the objectives of the Fund and, in particular, to the first objective. By the Bill we are asked to give our approval to participation in the Fund and, accordingly, in the pursuit of the objectives of the Fund. The No. 1 objective is to encourage and assist members to avoid unilateral measures which would restrict international trade. There is no ambiguity in that, and the Minister of State must accept it at its face value.
§ Mr. Davies
Indeed, we are members of the OECD and I acknowledge at once that the words of the preamble to the Agreement state one of the fundamental principles of the OECD. We do not resile 1208 from that. I was merely making the point that there has not been any application yet from any member State to borrow from the Fund since the Fund has not been set up. If there were an application, these matters would be decided between the member country and the Fund in the light of circumstances at the time.
The hon. Gentleman asked about newspaper reports, and he spoke of various stories in the Press. There are always stories in the newspapers, and I do not think that the hon. Gentleman can expect me to comment on reports and rumours published in the Press about various meetings between Finance Ministers, Prime Ministers, Foreign Ministers, civil servants or any other group of people. I am sure he does not expect me to do so. The United Kingdom has made clear that we want to see an upturn in world trade. It is in our interest that there should be such an upturn. We hope that it will start next year and we hope that it will enable us to sell more of our goods abroad, which is in our interest as a trading nation. I cannot say more than that.
I repeat that the Bill represents a welcome attempt by the industrialised nations to come together to meet what was an external threat, a threat by primary producers to the industrialised countries. It was a grave threat, and this is an attempt to mitigate and alleviate the consequences. It will not solve our problems, nor will it solve the problems of the Western industrialised nations. But at least it is an exercise in co-operation to try to overcome the difficulties and bring us back again to the path of economic recovery, not only for the United Kingdom but for the whole of Western Europe and the Western world. I ask the House to give the Bill a Second Reading.
§ Question put and agreed to.
§ Bill accordingly read a Second time.
§ Bill committed to a Committee of the whole House.—[Miss Margaret Jackson.]
§ Committee upon Monday next.