HC Deb 18 March 1976 vol 907 cc1762-72

2.32 a.m.

Mr. Michael Neubert (Romford)

This is an advanced hour of the night to be discussing the familiar subject of food subsidies. Had I not known that the Minister was a restless sleeper and would welcome the opportunity to exercise his mind on parliamentary business, I would have hesitated to raise the subject.

The sum of £11,200,000 is an important amount. The Government are borrowing at the rate of £1 million a month and such a sum might seem to be a mere pepper corn of public expenditure, but to ordinary people it is an enormous sum of money which is well worth scrutiny even in the small hours.

I am concerned not so much about the increases themselves as about the reasons for them. They cover five of the six subsidised foods. In four cases they relate to increased consumption. An increase in estimated consumption is mentioned in one case and in three others an increased estimate in consumption is mentioned. There may be some semantic nicety in that, the full significance of which I do not appreciate, but no doubt the Minister will enlighten me. We are considering an increased Vote to take account of consumption in excess of that which was expected. We warned the Government that food subsidies would encourage an increase in consumption.

There has also been an increase in consumption of cheese, the other subsidised food. The Secretary of State had to act on 1st February to reduce the subsidy by 2p in the pound to achieve a saving of about £11 million—approximately the sum that we are discussing tonight. It must have been a recurrent nightmare for Ministers at the Department to think of fat business men at expense account lunches gorging themselves on subsidised cheese boards. But that was pointed out to be an inevitable consequence of indiscriminate subsidies on basic foods.

There are other side effects, such as the adverse effect on our balance of payments, particularly with the other countries of the European Community, a matter about which the Minister's hon. Friends complain vociferously. I have no doubt that there will have been an increase in the consumption of Edam and Gouda cheeses, for example. It would not surprise me if a bouquet of tulips is delivered to the Secretary of State daily by the grateful burghers of Amsterdam. I am sure that each night in the Danish villages of Samsoe, Elbo, Danbo, Maribo, Tybo and Fynbo—always assuming that they are place names and not the Danish equivalents of Crackerbarrel—cheese makers tell their children to say a prayer for the kind lady across the sea who contributes £4½ million a year to promote the sale of their fathers' products.

There has also been an increase in the consumption of tea, and no doubt tea planters in the foothills of India and Ceylon are grateful that the Secretary of State decided to subsidise the English practice of tea drinking. It had been declining until then. We face these sums of money directly as a result of encouraging increased consumption by subsidising foods.

It is also an unfortunate fact that, despite expenditure now totalling no less than £537,700,000, this support is insignificant to the people of this country in the fight against inflation. The effect on food prices has been calculated as 1.3 points on the retail price index, or 0.9 per cent. We have come through a year in which inflation reached its peak in August at 26.9 per cent. Therefore, to achieve a moderating effect of 0.9 per cent. is as pitiful as a pea on a drum.

That is not to say that the subsidy has not been welcome where it has been of support, and no doubt the Minister will make his case that it is intended to be discriminating. But I contend that it is far from that. The Under-Secretary of State for Employment has just made plain, and claimed credit for, the success of the £6 pay limit. If we see that as a factor in the fall that is gradually de- veloping in the rate of inflation, we must also recognise that the lack of such a policy last year was instrumental in causing an unprecedentedly high rate of inflation.

In all the other countries of the Community the rate of inflation increased less in the year to last December than in the previous year. We are the exception, and the reason is clear. It is that despite the offering of food subsidies to the trade unions as part of their pact, that pact was not honoured. The Government were a jilted partner in the social contract. The unions took the dowry of the food subsidies and went on a wage spree which led to average wage rises of 35 per cent. That is why we had such a high level of inflation.

The food subsidy is also insignificant in the fight against inflation by comparison with rises in the prices of other foods. For example, the cost of potatoes has added about 3½ per cent. to the food index. That compares closely with the total effect of subsidised foods on the food index, which is calculated at 4 per cent. Potatoes are not the only basic food rapidly increasing in price. The rise in the food price index, as opposed to the retail price index, must be a matter of great concern to the Minister. Bacon, for example, has gone through the £1,000 a ton barrier. Beef is running at very high levels and so is instant coffee—68p now for a 4 oz. jar.

In these respects the beneficial effect of these subsidies, is highly limited to say the least. If the Minister is going to argue that these increases will benefit those less well off more than the average public then he must recognise that there are compensating and offsetting disadvantages for these people. For example, there was the introduction of VAT on food, which will have had some effect, and the increase in the cost of basic commodities to pensioners, such as beer and tobacco. When one considers that the total effect of all these subsidies is calculated at 41p for a pensioner couple a week, then very quickly the food subsidy benefit evaporates. Likewise, we see an increase in the cost of school meals in September 1976. It is calculated that the effect of food subsidies on an average family with two children is about 71 p. If school meals are to be increased in price by 5p in September that means, if those two children are at school, an increase of 50p, virtually wiping out the effect of the benefits from subsidised foods.

In this respect these seemingly large sums are very small in their impact on the people the Government are seeking to help. We take issue, not on the principle, but on the method by which the Government are increasing food subsidies at a time when it seems that their significance is very much in doubt.

Next comes the question of the ineffectiveness of this method. The point of subsidies is said to be that although they are blanket in their approach, they reach a considerable number of needy people because they are concentrated on basic foods in the low income earners' budgets. But that must be set against the background of the way in which these very people have been hit by Government policy in recent months. The burden of taxation now weighs very heavily on them—in some ways more harshly than on those who are better off. The recent White Paper on Public Expenditure has made it clear that income tax is now being imposed on people whose income is below social security benefit level. We have an example where the Government are on the one hand seeking to give more of the public purse to those people and, at the same time, are taking it away. Income tax now, for the first time, provides more than half the total tax revenue.

The Minister may not yet have seen a report published yesterday by the Institute of Community Studies which says that even where these low earning families have received the £6 pay award, they are substantially worse off as a result of these and other factors. He should seriously consider whether this immense apparatus of control is appropriate to the need he wishes to see met amongst those families, particularly families with children, at this time of high inflation. I hope he will not argue, as he has argued in the past, that either the Opposition do not wish to see a reduction in the rate of inflation or any alleviation of the present situation or that we are totally and doctrinarily opposed to subsidies. It would be folly to sustain such an argument when our way of life is riddled with subsidies of one sort or another. Cross-subsidisation exists in commerce. It would be a very dull and neutral place it everything were carefully costed and the exact price put on every product or service. That is not the case, and we are not suggesting that it should be. But we are suggesting that this effort and expenditure is misapplied, that there are ways—they may be crude, but not so crude as this—in which those who need help can be given it, for the same amount of money or less.

The Christmas bonus of £10 to pensioners is also open to the charge that it goes to all pensioners regardless of their resources, but it is a direct help to a category of people who are normally assumed to be less well off than the general community. This is borne out by the Minister's own references to the pensioner index. So it would be a rather more refined means of assisting the needy than the present blanket approach—which includes him, and me and you, Mr. Deputy Speaker, and the public at large. The beef tokens which enjoyed a short currency were also given to pensioners who no doubt needed them, but they also went to many old-age pensioners who did not need them.

Although the Minister can argue that food subsidies like this are less costly to distribute, it would cost much less to direct this expenditure to those who really need it. We should aim for a reduction rather than an increase in food subsidies. I have taken some encouragement in the past from the Government's declared undertaking that that was their intention. These increased Estimates seem a faltering in the Government's purpose.

Last July, in order to secure wage restraint, the Government committed themselves to another £70 million in food subsidies over what they had planned for the next financial year. When the next round of negotiations with the unions starts, with the object of even more severe wage restraint, who can say that food subsidies will not yet again be one of the prices that the Government have to pay? I hope not. I think that the Minister would agree—he would probably think of the longer term, whereas I would want it accomplished much more rapidly—that food subsidies should be removed in favour of a much more discriminatory system of social assistance to those who need help. They are not getting adequate help by this means.

I hope that the Minister will reassure us that, despite these increases, it remains the Government's intention to phase out food subsidies in the foreseeable future. The sooner this country is shot of these indiscriminate subsidies the better.

2.49 a.m.

The Under-Secretary of State for Prices and Consumer Protection (Mr. Robert Maclennan)

I am grateful to the hon. Member for Romford (Mr. Neubert) for initiating this debate. I had wondered what line he might take, since he has not so far evinced a great interest in this subject in the House. He asked a Question back in December 1974 when he gave figures to show that earnings were rising more rapidly than prices and asked for the fulfilment of the social contract. I had hoped, perhaps vainly, that he might take this opportunity of congratulating the Government on the success of the social contract and their pay policy. As the hon. Gentleman will have noticed, the increase in earnings over the most recent 12 months has decreased to about 20 per cent., and the increase in prices to 23 per cent.

Mr. Neubert

I am astonished that the Minister should think I have shown no interest in food subsidies. I was a member of the Committee that considered the Prices Bill and I spoke on that Bill on Second Reading. Modesty forbade me from mentioning that what I was saying more than 12 months ago has come to pass.

Mr. Maclennan

Perhaps I was less than fair to the hon. Gentleman. If so, I withdraw. Perhaps he has been less persistent than some of his colleagues in hounding myself and my Department on this subject. For that I had better express my gratitude.

I should be the first to confess that in our battle against inflation we still have a long way to go, but I think that the House must recognise that the trends are encouraging and in the right direction. In the past six months the increase in prices has been under 7 per cent. Perhaps it was too much to hope that the hon. Gentleman would welcome that progress.

The present situation is very different from that which we faced when taking office two years ago. Prices were then rising sharply and causing considerable concern to the poorer families in the community, who necessarily spend a larger proportion of their income on food and other basic essentials. New and effective schemes of social assistance take time to prepare, and we therefore developed a food subsidy programme during the course of 1974 with the primary object of shielding low income groups from the worst effects of inflation. We significantly increased the subsidies paid on milk and butter, which had earlier been introduced by the previous Conservative Administration, and we brought in new subsidies on bread, cheese, tea and flour.

At present we estimate that the food subsidy programme is saving a typical family of two adults and two children about 70p on its weekly food bill, and that an old-age pensioner couple is saving about 42p. These are not small sums for poor families. I accept some of the hon. Gentleman's points about other costs that have to be borne apart from increased food prices, but that is not to belittle the impact of the food subsidy benefit. Without the subsidy programme the food index would be some 5¾ points higher than it is at present, and the RPI about 1.3 points higher.

We have long made it clear that the food subsidy programme was intended as a temporary measure due to extremely high inflation rates. We earlier announced our commitment to improve schemes of social assistance. These improvements are now coming on stream. Last year there were two increases in pensions and other social security benefits. In November 1975 we introduced a non-contributory invalidity pension. Next month we shall begin paying the special benefit for one-parent families prior to the introduction of child benefits in April 1977. Furthermore, benefits will be regularly reviewed in the light of the general level of earnings and prices. All this is no mean social achievement. It must be set against some of the hon. Gentleman's strictures.

On the counter-inflation front, we are on course towards our target of reducing the rate of inflation to single figures by the end of the year. It is against that background of real and tangible progress in our counter-inflation programme that during the next financial year we shall review the food subsidy programme.

The hon. Member made what have become familiar criticisms of the subsidy programme. He claimed that we had no control over expenditure, because we are seeking some extra financial provision over and above that sought in the originally published Estimates. When one looks into those carefuly, however, the charge of open-endedness is simply not borne out. The original Vote for my Department was for £505 million. Subsequent supplementaries, including those under discussion tonight, have brought the total to £545.5 million. Of the increase, £16 million is the result of an increase in the rate of subsidy for butter which took place before the beginning of the financial year but after the publication of the original Estimates. There is also a substantial increase on milk, where the guaranteed price to producers has been increased following devaluations of the Green Pound which hon. Members opposite have welcomed. If we exclude these elements, the excess expenditure is no more than about 2 per cent. of the original forecast. We never suggested there would be inelasticity of demand for subsidised foods, but given the uncertainties of forecasting levels of consumption, this constitutes only the smallest margin of error. Certainly it does not sustain the charge of open-endedness or lack of control.

The hon. Member also complained that the Government might not eliminate subsidies quickly enough. The Opposition have made a great point of their wish to eliminate the subsidies, although they have not ventured to say how quickly they would choose to do so. We have set out in the White Paper on Public Expenditure a considered timetable for the reduction of subsidies. That timetable is the fastest that would be reasonable, bearing in mind above all the effect on prices and the need for an orderly transition.

I have of course noted the view shared by many of my hon. Friends and by the TUC that we should re-order our priorities so as to allow more money to be spent on the subsidy programme. I have considerable sympathy with this reaction. In view of our advances on the social front, and towards achieving our counter- inflation targets, the need for food subsidies will be less pressing than when we introduced them. None the less, I would certainly recognise their continued importance in the immediate future in helping to hold down food prices and their especial value to those with low incomes and those with large families. It was with this in mind that in the summer we introduced a special additional payment of £70 million, as a part of the Government's programme for the attack on inflation.

Food subsidies have played an essential role in the Government's social policies, but because of our successes on other fronts we can now begin to give them a less important part to play. We must therefore seek a balance at each stage between the conflicting need to control public expenditure, on the one hand, and the need to do everything possible, on the other, to hold down food prices.

The hon. Gentleman complained that food subsidies are indiscriminate in their nature and wasteful. We accept that the best course is to improve social security benefits, and this we are doing. In the meantime, it is indisputable that food subsidies are of real assistance to poorer families. Analyses of household income and expenditure indicate that the benefit of food subsidies is proportionately three to four times greater for the lowest income households compared with the high income households. It should also be borne in mind that although the better off families benefit from subsidies, it is they who pay the greater part of the taxation which ultimately goes to pay for the subsidies.

Hon. Gentlemen opposite are in no position to complain about the indiscriminate nature of food subsidies. The last Conservative Government's subsidies to the nationalised industries cost far more than the food subsidy programme and benefited the higher income groups in the ratio of two to one.

Finally, there are the criticisms which have been made—and again tonight—of the bureaucracy needed to run the scheme. Of course we need civil servants to pay out the subsidies and we should be subject to severe and proper criticism, in my judgment, if we did not ensure that the money was properly spent and accounted for. But we do not have to have an elaborate apparatus for the purpose. This is one of the attractions of the whole method of seeking to assist the less well off.

The administrative costs are less than 0.2 per cent. of subsidy expenditure, and we are doing our best continually to streamline the procedures still further. I remind the hon. Gentleman that his Government, too, needed civil servants to run the butter subsidy scheme which they introduced in May 1973. The administrative costs are much the same whether the subsidy rate is 2p per lb., as it was then, or 11p per lb., as it is now. What is more, the administrative costs under the social butter subsidy, which we discontinued, were equivalent to about 25 per cent. of the payments made. In fact, the so-called indiscriminate subsidies are substantially cheaper to administer. The Opposition have certainly set us no good example in this.

I hope that the hon. Gentleman will feel that this has been a useful debate. From my point of view, it has shown again the Opposition's ability to create policy in a vacuum, isolated from the real world. They have little concept of the needs of ordinary men and women, especially the less well off, to be able to adapt gradually to changing circumstances.

We introduced food subsidies as a short-term measure to protect people from the whirlwind of inflation. I am sure that that was right. But it would be a mistake to dismantle them all at once, as the Opposition would apparently wish. We must act in an orderly way, avoiding disruption in the market or sudden price increases for those least able to bear them. Our future plans for the subsidies are based on these needs. We shall, of course, keep a close watch on developments as time moves on, and we shall take decisions on the subsidies as the need arises, taking full account, above all, of the interests of consumers.

Question put and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

Committee this day.