COUNTER-INFLATION POLICY

HC Deb 30 June 1976 vol 914 cc393-405

The Secretary of State for Prices and Consumer Protection and Paymaster General (Mrs. Shirley Williams)

With permission, I should like to make a statement about the attack on inflation.

My right hon. Friend the Chancellor of the Exchequer has today laid before the House a White Paper which sets out the Government's general strategy for the second year of the attack on inflation. The White Paper reflects the Government's recent agreement with the TUC on a further period of strict voluntary pay restraint for the 12 months from 1st August. The details were announced by my right hon. Friend in the House on 5th May; and the agreement has since been approved by an overwhelming majority at the TUC Special Congress on 16th June. There will be an opportunity to debate the White Paper fully in the House next week.

The White Paper stresses the importance of building up British industry. It goes on to explain that certain changes in the Price Code are essential. I have today laid before the House a consultative document setting out in detail the Price Code modifications which the Government propose.

I have already consulted widely on both sides of industry about the modifications proposed to the code. There is general agreement that the overriding objective to be borne in mind should be to encourage new investment, higher output and more jobs. It is common ground that if firms are to raise the funds they need to favour high investment and output, some changes in the existing Price Code are necessary. It is with that objective in mind that the Government have formulated the prices package.

The new code will continue to be based upon the control of proposed price increases, and upon the control of the profit margins of enterprises. The Government have been pressed to abandon these controls, but have refused to do so.

The main changes are: first, an increase from 20 per cent. to 35 per cent. in the rate of investment relief; secondly, new provisions relating to the depreciation of assets and to the appreciation of stocks, which go some way to offset the damaging effects of inflation; thirdly, a redefinition of the categories into which firms fall, so as to take account of inflation; fourthly, measures to moderate the present disincentive effect of the code on saving costs and increasing output, including the abolition of the productivity deduction, which has little impact now owing to pay restraint; fifthly, other measures to reduce the administrative burden on companies of operating the code.

I have asked the Price Commission to monitor carefully the reliefs in respect of investment, depreciation and stocks to ensure that they are not abused. Price Commission monitoring ensures that investment relief applies only to investment in domestic manufacturing and service industry and in distribution, not to property and overseas investment.

The code will affect different firms in different ways. Which changes in the code are used depends on each firm's pricing and marketing situation. Allowing for the slow recovery of the domestic market which makes it difficult and in some cases impossible to increase prices even when increases are allowed by the code, the Government estimate that the effect of the proposed changes will be to add about 1 per cent. to the RPI over the coming 12 months. I am inviting the interests concerned to give me their comments on the proposals by 16th July.

Two Orders have today been laid before the House in draft. That laid by my right hon. Friend the Chancellor of the Exchequer extends until 31st July 1977 the operation of the Remuneration, Charges and Grants Act 1975 and of certain sections of Part II of the Counter-Inflation Act 1973. That laid by my right hon. Friend the Secretary of State for Employment adds the new counter-inflation White Paper to Cmnd. 6151 for the purposes of the Remuneration, Charges and Grants Act. When the former Order, that relating to the Act, has been affirmed in both Houses and made by the Privy Council, and after the completion of my consultations on the Price Code, I will lay before the House an Order made under the Counter-Inflation Act and containing the new code, which will be effective from 1st August.

Mrs. Sally Oppenheim

I thank the right hon Lady for her statement, which she has entitled "The Attack on Inflation", and reaffirm that the Conservative Opposition believe that that attack is not broadly enough based and is, therefore, unlikely fully to succeed. The relaxations under the Price Code which she has announced will be welcomed as far as they go, particularly as the operation of the Price Code over the past two years has significantly contributed to the level of unemployment and will continue to do so.

Is the right hon. Lady aware that for many companies these reliefs will come far too late for the many people who are already out of work, that they appear to fall far short of the urgent needs of business and industry and do not bear any relation to the rosy rhetoric of the Prime Minister at the CBI annual dinner?

Will the right hon. Lady tell the Prime Minister and the TUC, as I am sure she knows, that it is not purely a question of industry's ability to finance itself but of industry's confidence in future profitability that will determine future levels of investment, and that this has not adequately been restored by the amendments which she has announced today?

Finally, will the right hon. Lady tell the House what would be the difference between the estimated effect on the RPI of the proposed amendments and of the total abolition of the Price Code? Return on capital is now running at 2½ per cent. How much will this return be raised by the proposed amendments she has just outlined?

Mrs. Shirley Williams

I did not think that I would win the commendation of the hon. Lady the Member for Gloucester (Mrs. Oppenheim). I never do. I am sure she will appreciate that anyone who deals with this area has to walk a very difficult tightrope between the importance of restoring confidence in industry and the importance of sustaining the counter-inflation policy as far as pay and prices are concerned. It would not be in the interests of industry for the pay and prices policy to disappear because of what would appear to be an attempt by industry to ask for too much for itself. That is not in the interests of any part of the community in what is bound to be a delicate and difficult operation.

The hon. Lady referred to confidence in industry. Before the Labour Government came to power there was no investment relief of any kind in the Price Code. There was no recognition of the importance of investment. The Labour Government made an exception for investment and have now improved upon that exception.

The hon. Lady's question about the effect of the abolition of the Price Code on the RPI is unanswerable, because it depends on the level of the market. I do not believe that the CBI's optimistic assessment some months ago that the effect of removing the Price Code would be as little as 1 per cent. or 2 per cent. on the RPI can be justified by what we know of the probable effects of removing the Price Code. What I propose is a reasonable compromise which is directed towards increasing output, jobs and investment and as such it should commend itself to the House.

Mr. Grimond

We welcome the emphasis which the right hon. Lady put upon increased investment. If we are to get increased investment does she agree that we must have continuity in Government policy and an end to constant Government interference in industry? It would be of great advantage if we could have a definition of how she sees the mixed economy working, and where divisions are to be drawn between the public sector and the private sector. At present the public sector is ever increasing at the expense of the private sector.

Is the right hon. Lady satisfied that the incentives offered in her statement will be sufficient? Do I understand that increments subject only to 12 months' delay are to be granted, in spite of the Government restraint on incomes and regardless of efficiency?

Mrs. Shirley Williams

I share the right hon. Gentleman's view of the importance of continuity for industry, whether it be public or private, because investment cannot be maintained on a one-year or two-year basis. In the Price Code amendment, for the first time we have indicated to industry, both public and private, that the investment relief will be sustained in any new form of price control there may be, whatever shape it takes, after 1977, because we recognise the significance of what the right hon. Gentleman said in this respect.

The right hon. Gentleman referred to the public sector—private sector pattern. Once again in the code we have embraced exactly the same restraints on the public sector and the private sector and have adopted the same safeguards for both. The only distinction is that, for obvious reasons, investment relief does not apply to the public sector, but the reliefs for appreciation and depreciation do apply to the public sector.

Where private sector industry can be encouraged to finance its own investment within guidelines which are broadly acceptable to the community—that is to say, where there is no leak into undesirable forms of investment—this relieves public expenditure and is worth while.

Mr. Ioan Evans

Does my right hon. Friend agree that the success of the Government's policy for bringing down inflation has been due to the co-operation of the trade union movement in restraining incomes? Is there not an obligation on Government to try to keep prices down and to offset the difficulties created by the common agricultural policy? Will the Government consider maintaining food subsidies and give their highest priority to bringing down unemployment, which is what the trade unions want?

Mrs. Shirley Williams

I hope that my hon. Friend will appreciate that what we are trying to do in the Price Code is to link the reliefs that exist very closely to investment and employment. The consultative document shows how closely that attempt is being made. We have built into the Price Code singularly effective forms of monitoring which determine that the reliefs given will go for the purposes that have been agreed, and for no other, both for investment and for stock appreciation and depreciation, and that is an assurance that the general public can reasonably demand.

My hon. Friend referred to food subsidies and the common agricultural policy. I remind him that food subsidies this year will continue at the rate of over £400 million. As to the common agricultural policy, the Government have put the greatest possible emphasis on dealing with areas where structural surpluses arise from exceptionally high prices. The Government are very much concerned with those.

On unemployment, I hope that my hon. Friend appreciates that it has been shown to us in some degree of detail that there are areas where the code has conflicted with the desire to maximise employment and that is one of the factors we have borne in mind.

Mr. Neubert

How is it possible under the Government's prices policy for a monopoly public industry such as the Post Office to push up its prices so severely that it makes a profit of £250 million, while private industry languishes and men are made redundant through lack of resources to carry it through the recession and to increase investment?

Mrs. Shirley Williams

The hon. Gentleman may be aware that certain firms in the private sector, like the Post Office, from time to time make exceptional profits. The Price Code exists to make sure that such firms, whether in the public sector or the private sector, have either to hold prices or to reduce them to bring them within the reference level which applies to everyone else.

Mr. Arthur Lewis

I thank the Secretary of State for confirming what has been on the news bulletins every hour since 9 o'clock this morning. On the assumption that she and not her Department leaked this information, may I be assured that although she has discussed this matter with various parties which she might name, she has not troubled to discuss it with Members of Parliament? In future will she consult Labour Back Benchers and possibly Back Benchers on both sides of the House before she makes a statement?

Mrs. Shirley Williams

Whoever may or may not have leaked any information, no leaks came from me. I spoke to no one about the changes before I came to the House nor do I intend to speak to the Press until after the statement today. My hon. Friend is being a little unfair.

I laid on two meetings for my colleagues and it is their responsibility that, mainly, they did not turn up.

Mr. Hugh Fraser

When the right hon. Lady has further consultations will she review again the question of the fiscal allowances that she proposes for investment which will not apply overseas. The key to employment and to the maintenance of the export-led boom is investment in the proper servicing of British goods overseas. Will she look at that carefully in future discussions?

Mrs. Shirley Williams

I thank the right hon. Gentleman for that question. There is no division in the House about the importance both of exports, the after-service of exports and of investment. Whatever else may divide the House, we are on common ground there. I hope that hon. Members will recognise that in the proposals that we are making in the Price Code consultative document, we are making a specific concession for exports to enable firms to increase and service exports without that affecting their unit costs of production. That is a detailed matter, but it will be of considerable benefit to firms that try to increase their exports.

Mr. Heffer

My right hon. Friend says that the proposals that she has put forward are to encourage new investment and that there will be a monitoring of new investment relief. What will happen if the investment does not take place? What guarantee has she that the extra reliefs will lead to new investment by the various companies?

Mrs. Shirley Williams

I am happy to explain the situation to my hon. Friend. Investment relief will be granted only when investment takes place. If a firm announces that it proposes to invest but does not undertake that investment, it will receive no concessions in terms of prices. Indeed, it will be obliged to give back any concessions made in the light of statements about its investment plans. More than that, any firm which wants to claim investment relief must give details of the level and nature of its proposed investment, it must compare that with the preceding three years and it has to give a report on its investment after six months to show that its plans are being carried out. It will have to make a further submission at the end of the year and will finally have to take the whole position up to within six weeks of when the report is made.

I am convinced, in the light of the last year's experience, that we have, in this, produced a system of monitoring which is virtually completely foolproof. It enables the Government to determine that any relief on prices will go on investment for home manufacturing and home distribution and will not leak into overseas property and investment overseas as it did in the earlier investment boom.

Mr. John Davies

Is the Secretary of State aware that I would have preferred the elimination of the price control mechanisms? Is she aware that I am glad to see that the proposal incorporates some relief for stock appreciation and like matters? Will she assure the House that that represents an acceptance of the principle involved, and that when the committee appointed to look into inflation accounting has reported the effect of its report will be incorporated in any price control which at that time may, regrettably, still exist?

Mrs. Shirley Williams

On the reliefs proposed for depreciation and for stock appreciation the Government have endeavoured to take account of at least some, although not all, of the effects of inflation. What we are doing is making a crude move towards Sandilands, although it cannot be a detailed move because the accounting profession has not yet accepted a single set of rules for that purpose. What we are proposing at this stage is a crude uprating for the purposes of depreciation and stock appreciation which will take account of a substantial part of the effect that inflation has had on accounts in the last two years.

Mr. MacFarquhar

Is my right hon. Friend aware that my constituents will accept a 1 per cent. rise in the RPI if they can be sure that her Department and the Price Commission are successful in monitoring price increases by trigger-happy firms, private or public? Does she accept that her earlier answer to the effect that sometimes firms, whether the Post Office or those in the private sector, make exceptional profits will not be sufficient for my constituents? If exceptional profits are made, will she undertake to examine whether there have been any unjustified price increases in the past?

Mrs. Shirley Williams

I thank my hon. Friend for his question. The estimated 1 per cent. on the RPI, which is the result of a fairly flat market, could be justified only in a situation in which inflation is still powerful if it can be shown to have a direct effect on economic activity. I believe that it can. The purpose of the relief is to encourage the recovery of the economy that we badly need if we are to deal with employment. I hope that his constituents will take the proposal in that spirit. My hon. Friend referred to the position of the Post Office. The position is the same for public and private sector firms. Where an enterprise makes an exceptional profit it must either hold its prices to allow a normal erosion of costs to bring it back within profit margins, or it must reduce its prices. We shall stick to that rule in both the public and the private sector.

Mr. Lawson

Does the right hon. Lady agree with paragraph 35 of the Chancellor's White Paper, where it says: Market forces have ensured that the prices of many goods and services are now below the level which companies would be entitled to charge under the Price Code; but as economic recovery progresses, the Code will play an important part in keeping down the cost of living"? If so, while I welcome this belated official recognition that it is market forces rather than the Price Code which led to the fall in the rate of inflation over the past 12 months, why does she think that market forces will cease to operate in the year ahead?

Mrs. Shirley Williams

The hon. Gentleman's question slightly surprises me because I suspect that he knows the answer to his own question. Market forces operate in a period of extreme recession more strongly than the Price Code. In a period of recovery, of the kind that most economists are forecasting, the Price Code tends to operate below the market. If the hon. Gentleman looks back through the reports of the Price Commission made since the Conservative Administration introduced the Price Code in 1972, he will see that the effect of the Price Code was to knock off higher profits in the period of recovery in 1973–74, but that market pressures took over as the world recession took a hold. I suspect that the hon. Gentleman knew the answer all along.

Several Hon. Members rose—

Mr. Speaker

I shall call another two hon. Members from each side of the House but I must remind the House that the Secretary of State has said that the White Paper is to be debated in the House next week.

Mr. Ron Thomas

If a firm has plans for investment in any case and has the profits to invest—as many firms have—how can my right hon. Friend be sure that they will not be allowed increased prices and that capital will not go abroad? The amount of capital investment abroad continues to increase. Does she not agree than a 1 per cent. increase in the RPI is a substantial global sum? How much of that will go in new capital investment which would not otherwise have taken place?

Mrs. Shirley Williams

My hon. Friend has asked a question which, with the best will in the world, is very difficult to answer, because investment relief can be obtained by a firm which invests in domestic plant, equipment, factories, warehouses or commercial vehicles. Now we are extending it to shops built by companies for themselves and not leased from property companies. It would be a work of Solomon to distinguish between what might have happened anyway and what will happen as the result of investment relief. But I assure my hon. Friend that we have examples which indicate clearly that in some cases investment would not have taken place without the relief. They include investment in regions of high unemployment such as Scotland. Therefore, such relief must be worth having if we can ensure, as I strongly believe we can, that it will not leak into areas in which this country cannot afford to encourage investment. I invite my hon. Friend to see how the Price Commission monitors investment, because I believe that if he sees it, as I have, he will be assured, as I am, that it is a very effective new instrument.

Mr. Dodsworth

Will the Minister review again the level of investment relief, beating in mind that the relief now available has been taken up to the extent of only about 40 per cent? We have £800 million out of an available £2,000 million. Does she consider that the level of 35 per cent. is inadequate? Would it not be better if the level of investment relief were exactly the same as for income tax—100 per cent.? We need investment to stimulate recovery.

Mrs. Shirley Williams

I should perhaps initiate a debate between the hon. Gentleman and his hon. Friend below the Gangway, the hon. Member for Blaby (Mr. Lawson). The problem is that 100 per cent. for Price Code purposes is a totally different animal from 100 per cent. for tax purposes. What we can pass across in terms of investment relief depends a great deal on what the market will bear. My own estimate, having examined the position of many companies, was that 35 per cent. was about what the market would bear. However, this is a consultative document and we are prepared to listen to fresh propositions on it. The Government want to work within the overall figure which has approximately the impact on the RPI of which I spoke. Our view is that a much larger impact on it would be too much to ask people to accept when pay and income restraint is as tight as it is now.

Mr. Atkinson

In relation to my right hon. Friend's answer to my hon. Friend the Member for Bristol, North-West (Mr. Thomas), will she confirm once again that the policy is that there shall be investment now and that the public shall pay later? If that is so and it is measured against the criterion which my right hon. Friend set out in her statement, that the purpose of the investment is to create jobs, is she aware of leading manufacturers' comments that the investment generated by the new policy will be directed into capital-intensive areas and therefore will not result in job creation? Therefore, are we not asking the public to pay increased prices which at the end of the day will create no new jobs?

Mrs. Shirley Williams

My hon. Friend is not wrong in saying that some of the investment relief will go into firms which are capital-intensive, but the most capital-intensive firms in Britain are almost invariably the largest exporters. My hon. Friend will appreciate, because he is interested in economic matters, that we have as much strain arising from the balance of payments as from any other area. Therefore, I urge him to consider the following fact: in 1965 the return on capital in the private sector was about 10 per cent. Our latest estimates indicate that last year it was about 2 per cent. I believe that many of my hon. Friends would say that there was room for a lower return on capital, but they must seriously consider whether a return on capital of 2 per cent. is enough to sustain activity. The Government must honestly ask themselves that question in a mixed economy. We believe that some relief is necessary if the private sector is to sustain jobs.

My hon. Friend and I may take different views on many matters, but I ask him in the present circumstances of public expenditure to accept that the private sector must make a contribution to the improvement of employment. That contribution cannot be made solely by the public sector if we are to return to anything resembling full employment. I care as much about that as does my hon. Friend.

Mr. Sainsbury

Will the right hon. Lady accept that commerce as well as industry will be grateful for this modest reduction in the handicaps the Government place on increasing efficiency and improving the service to the customer? But does she agree that the deterrent to investment represented by the Price Code increases the longer one runs a Price Code, that the present code has been operating for far longer than was intended, and that for that reason the deterrent to investment steadily increases?

Mrs. Shirley Williams

There is some truth in that. What happens with a price code is that each year it erodes what is already an eroded level from the previous year. The present Price Code is not the code I should have wished to create. I inherited it. Nevertheless, on this side of the House we cannot conceive of a situation in which, in our type of economy, we could have no price controls when there must be a major battle against inflation, though I am not sure whether the present form of control is quite the one I should have accepted.

Several Hon. Members rose—

Mr. Speaker

We shall leave the matter now to the debate next week.