PRICE CODE

HC Deb 11 October 1976 vol 917 cc171-203

10.16 p.m.

The Secretary of State for Prices and Consumer Protection (Mr. Roy Hattersley)

I beg to move, That the Counter-Inflation (Price Code) Order 1976 (S.I., 1976, No. 1170), a copy of which was laid before this House on 29th July, be approved. The Order proposes and contains a revision of the Price Code. That proposed revision has to be judged against a number of indisputable facts—not hopes or suspicions but facts—about inflation policy during the last year.

The first, and certainly the most spectacular, fact, in spite of what we have heard from the Opposition today, is the success we have achieved in cutting the annual inflation rate virtually in half—from 26.9 per cent. to 13.8 per cent. That is a remarkable achievement, almost unique in an industrialised democracy and very largely the result of the efforts and public spirit of the trade unions through the operation of the social contract. The second indisputable fact lacks the arithmetic precision of the first but is of equal importance. The reduction we have achieved is only a beginning. We have not yet moved far enough and we are not yet moving fast enough.

In August, there was an upturn in the Retail Price Index. That was the direct and demonstrable result of a number of causes—most prominent amongst them the drought and its effect on the cost of home-produced food, and the depreciation of sterling with its consequences for the price of imported raw materials. A 4 per cent. fall in the value of sterling produces an unavoidable 1 per cent. increase in the RPI, its full effects taking about a year to work through. That is why measures designed to arrest sterling depreciation, although themselves adding immediately to the cost of living, have the net effect of keeping prices down.

The arithmetic relation between the drought and food prices is less precise. But for some months it will be considerable. I give the most topical example of the drought's inescapable effects. Milk will cost a penny a pint more in January—specifically to help dairy farms sustain their herds despite the extra feeding costs the drought has imposed.

The consequence of these two adverse factors, drought and depreciation, will be with us for some months. That means that we shall not reduce our inflation rate to the level of that of our industrial competitiors as quickly as we hoped and planned. The inflation rate, on a year by year basis, seems likely to remain at or about its present level for some time—that is about half the rate of the summer of 1975. That is not good enough, and I shall never pretend that to be so. But equally certainly it is an enormous improvement on the accelerated inflation that the drought and sterling depreciation would have triggered off two or three years ago.

The Price Code whose regulations are revised by the Order we debate tonight played a substantial part in both limiting price increases and creating the climate in which a successful pay policy was possible. Over a year, the Price Commission scrutinises around 8,000 price notifications. In the 12 months covered by its last four reports, the Commission recorded that over 1,100 notifications were modified, rejected or withdrawn. The difference between the prices which firms notified to the Commission and the prices they actually took amounts to around £100 million in a year. In addition, over £20 million was secured for consumers when firms reduced or froze their prices to work off profit excesses.

The new Code which I now propose and commend to the House will continue to check inflationary price increases. The amendments are designed to facilitate investment. The latest evidence—I shall turn shorty to the effects on that evidence of the measures announced last Thursday by the Bank of England and discussed by the House today—from both the Departments of Trade and of Industry and the CBI investment intention surveys suggests that we have turned the corner in respect of investment prospects. The Department of Industry survey of investment intentions published on 4th October confirms that a new confidence exists in manufacturing industry.

That confidence has built up gradually as firms discover the benefits of pay restraint and the profitability of export markets. The recovery in profits has preceded this recovery in investment intentions and in actual investment levels. Although 1976 as a whole will still be a bad year for industrial investment—4 per cent. to 5 per cent. below the level of 1975—the reduction will be less than we feared at the beginning of the year. Indeed, the declining trend has now been arrested. Investment levels during the last six months of this year will be much higher than we originally anticipated.

It is within this context—hard won gains on the ground and declared expectations of a formidable increase in investment in 1977 over 1976—that we should consider the effects of the measures taken by the Bank of England to reinforce our control of the money supply and maintain the stabilisation path announced by the Chancellor on 22nd July.

While the higher cost of financing will certainly inhibit some investment, its effects on firms with high self-financing ratios will be minimal. I am glad to say that the reaction of many firms—the most notable example over the last week being ICI—confirms this point. Indeed, the Director General of the CBI has already said that the prospect of increasing confidence is more important to industry than a couple of percentage points on the minimum lending rate.

The recovery in profits means that firms have more internal resources for investment and the Price Code amendments, which I now commend to the House, will add to these internal resources. The Government's array of incentives for industrial investment remains unchanged. The market prospects for British goods abroad remain buoyant.

There is no reason to exaggerate the potential effect of a percentage point or so on interest rates on manufacturing investment, provided the markets are there and profits are rising and provided we as a nation can demonstrate the same confidence in our own ability to win through as Chancellor Schmidt and Secretary Simon have shown they have confidence in our position. That point was made with great force on television last week by the Director General of the CBI.

It was to enable industry to increase investment as a response to this new confidence that the Price Code was revised. My predecessor was specific on this point during the debate on 7th July: If the economy is to succeed and to sustain full employment … we have to allow a rate of return to the private sector and to the public sector which enables them to survive, to invest and to expand".—[Official Report, 7th July 1976; Vol. 914, c. 1380.] Let me at once make plain that the changes in the Price Code will, for the most part, raise the ceilings which have restrained prices and therefore profits in the past. That is necessary and that is right. It is no use any of us saying that we want a return to full employment and then preventing or inhibiting firms from raising the resources which they need to finance expansion. Our main aim must be not to prevent the improvement in profit levels but to ensure that profits are used wisely and reinvested in economic expansion. The main object of the revision of the code is to enable companies to rebuild profits as long as we can be sure that the consequent increases in profits will be used for investment purposes.

Mr. Dennis Skinner (Bolsover)

Can my right hon. Friend tell us specifically how the increased profits that will accrue from the relaxation of the Price Code will be diverted into investment? What sort of financial instrument have the Government in their possession to force firms to plough that money into the areas where my right hon. Friend feels it ought to be ploughed?

Mr. Hattersley

If my hon. Friend will bear with me for a moment, he will see that the regulations governing the Price Code revision embodied in the Order which I now offer the House insist that the relaxation be actually related to investment. In a moment or two, I shall go through in some detail the policy which I now offer and the requirements which we impose to ensure that the relaxations are literally related to new investment rather than simply used for other purposes which my hon. Friend and I would both agree were less worthy of our support and of our agreement.

The final version of the code, the Order before us tonight, developed propositions in the consultative document which we debated in the House in July, and I now single out the three most significant changes against which I hope the House will judge the merits of the new code. They are—and I list them—an additional provision for investment, which is the centre, heart and core of the proposals I now make; a change in the measurement of cost and profits which takes the code a step towards current cost accounting; and a positive incentive to cut costs.

First, I take investment relief. In the previous code 20 per cent. of expenditure on new fixed investment for productive equipment could be passed on in higher prices. In the consultative document we proposed an increase in that allowance to 35 per cent. The proposal now is that investment relief should stand at 50 per cent. The object of that relief is clear, and I wish to emphasise—this is the point my hon. Friend made—that the relief will be allowed only if the Price Commission is perfectly certain that the price increases and the consequently larger profit margins are actually used for investment.

The Commission will want to receive detailed information about the expenditure involved and its relation to the proposed price increases. The new investment will have to be firmly committed and firmly budgeted; in the case of a company it will need to have had the approval of the board of directors. The actual expenditure on investment will be monitored. After six months the Commission will expect a report confirming that the allowances for new investment have been used for that purpose and for that purpose alone.

Mr. Ron Thomas (Bristol, North-West)

Is it not true that firms which already have capital investment intentions will receive this 50 per cent., and they would have invested in any case so that that, ipso facto, will mean that they are given resources which they could otherwise invest in their total investment already planned but which they can invest overseas, in property, or in anything else?

Mr. Hattersley

I understand the point that my hon. Friend is making, because I, too, have read that detailed study by the trade union research group at Ruskin College. It is a most impressive document and sets out with clarity and in detail the argument on the matter that my hon. Friend has drawn to my attention. However, I do not agree with the point that is made.

To say that we could have encouraged good investment by making an allowance on new investment is to misunderstand the powers that the Price Commission and the Price Code can confer. I assure my hon. Friend that if it had been possible, with a smaller allowance, to concentrate on new and additional investment we should have done so. But as the Price Code is only a blunt instrument, the only way in which we can create the climate in which there is new investment and more jobs is to offer incentives over a wider field than might appear appropriate were we able to concentrate it in the precise way that my hon. Friend suggests. My conclusion is that it is not within our power to apply the remedy that he suggests and Ruskin advocates.

I now turn to the second change in the Price Code—the changes that have been made to accommodate the spirit, if not at this stage exactly the letter, of the Sandilands Report. The new Code does not accommodate current cost accounting, because current cost accounting does not exist. In any case, we could not afford this year to encourage firms to bridge by a single jump the whole gap between historic and inflation accounting. But if we are to encourage companies to increase their investment—which must be our principal endeavour—the profits from which they come must be real rather than illusory. So some adjustment to accommodate more realistic accounting is essential.

The base figure from which the percentage of allowable profits is calculated can, under the new code, be calculated in one of two ways. Assets can be revalued provided that the new figure corresponds to figures in the audited accounts, or depreciation charged on the historic cost of assets can be adjusted by a factor of 1.4.

I accept that in some cases neither of these techniques allows a complete movement from historic cost to replacement cost accounting. Nor does it impose on companies—and this is the point made in part by my hon. Friend—an obligation to use completely profits that they have thus created for depreciation. But it does enable them to create a realistic and secure financial base from which the development of investment can grow. As well as including that higher sum for depreciation of assets, firms' costs will also be taken to include an allowance for stock appreciation. I believe that if that provision were not made the prospects for greater investment would be substantially worse.

Thirdly, the new code contains an additional reward for efficiency. I understand very well that the present Price Code, the original code on which it was based, and for that matter any adaptation of a code of this sort can play only a small part in the promotion of the efficiency of individual companies. A new price policy, the sort of policy that we might have after the summer of 1977, might be more effective in this regard. But even with our present code we can introduce some element which encourages efficiency within individual companies. In the previous code all productivity improvements had to be allocated to the consumer and passed on in the calculation of the eventual price.

Indeed, the rule went beyond that. The "productivity deduction" meant that firms had to pass on all productivity improvements and on top of that take a cut in their margins when their labour costs went up. As things are now, that approach could, and I believe would, have a damaging effect on employment. Therefore, we have dropped the productivity deduction. I hope that the hon. Member for Kingston upon Thames (Mr. Lamont) will explain his mirth at about twenty minutes past eleven. Indeed, the new code goes further. In certain defined cases firms will be able to retain some of the benefits of improved productivity. There is provision for the case where rising output or exports will spread the cost overheads. Where this happens, the saving may be divided between the firm and its customers. As a special incentive to economy in the use of fuel, any savings over and above the cost last July may be retained by the firm.

I believe that the beneficial effects these changes are bound to have on the prospects for industrial investment are beyond dispute. But I know that many of my right hon. and hon. Friends will be equally anxious to know the effect they will have on retail price levels. My predecessor told the House three months ago that we believed the net effect would be an increase of about 1 per cent in the Retail Price Index. I know that many other estimates have been made. I have already referred to the impressive document prepared by the Trade Union Research Unit. Much of it I agree with. But its conclusions on the price effect of the changes in the code seem to me to be wrong. In part they are wrong because we should not assume that every company will exercise every form of relief that the new code offers. The market and the pressures of market forces will prevent that from happening.

The code and those market forces between them will, on our present forecasts of economic activity, keep price increases at or about the 1 per cent. level over and above those price increases that would be occurring in any event. I believe that this is a reasonable price to pay for the industrial investment which we need, the investment which is an essential feature of improving employment. It is that investment which the revisions of the code intend to make possible. I commend the Order to the House.

10.36 p.m.

Mrs. Sally Oppenheim (Gloucester)

It would be stretching credibility too far if I were to welcome the new Secretary of State to his first debate on the Price Code. Instead, I commiserate with him quite sincerely on having to grapple with the complexities of the code in his first debate after assuming office. He did so with commendable restraint and firmly stepped in the footmarks in the sand left by his predecessor. At one point I wondered whether he would come to the code at all. We had a long peroration about the drought—no doubt the lifebelt to which he will cling during the coming months as inflation mounts. I remind the right hon. Gentleman once again that other countries that had the drought have not had our rate of inflation.

The debate on the proopsed amendments to the Price Code at one time looked like being a mere formality. As the right hon. Gentleman said, we have already had a full debate on the White Paper. However, since then further concessions have been given on the one hand and a heavy burden of National Insurance contributions has been imposed on business and industry on the other. But, much more importantly, we are now discussing the amendments against an economic background which has worsened immeasurably since that debate, with the likelihood of a further outbreak of inflation in the coming months, something which is now not a possibility but a virtual probability.

On top of that, industry and business have had to sustain record increases in interest rates, and there is no doubt that many of them will be bankrupted as a result. There is no doubt that many of them will have any benefits of the relaxation of the Price Code wiped out as a result. Far from tightening price controls at a time when inflation is mounting again, it is now more urgently necessary than ever to relax the code far beyond the scope of the amendments before us if we are to have any vestige of the return of investment confidence that the right hon. Gentleman seems so confident we already have. If there is to be any chance of companies being able to reinforce their cash flow or find the scope or desire to invest, there will have to be a great deal more in the way of relaxation and encouragement of profitability than we have already had and than exists in the amendments.

The right hon. Gentleman was so confident. He quoted the CBI in its most recent review about its members' confidence and their investment intentions. Yet at page 11 of that review the CBI says: these revisions have required revision of all earlier calculations of the share of profits in total income. Whereas it had appeared that that share had fallen during 1975 to the record low level … the revised figures indicate that in each of the first three quarters of last year the share was 6.6 per cent., against 5.5 per cent. in the first quarter of 1974". It continues: These revisions make the latest figures appear all the more disappointing and, indeed, disquieting. We now have before us phase 5 of the Price Code which has not, cannot, and will not in itself restrain inflation. Phase 5 of the Price Code is having little effect on prices, it is destroying profitability, preventing investment and costing jobs. It is now widely accepted that the only raison d'être for the retention of the Price Code is the political desire of trade union leaders to control profits. This Price Code is not being retained by public demand from consumers, most of whom have never heard of it, and many of whom would dispute that it was having any effect on prices, nor is it being retained without full appreciation of the former Secretary of State of the damage it has already done to industry, investment and jobs. The complexity and inflexibility of the code remains, as was acknowledged in the right hon. Lady's letter to the accounting bodies, published in the Financial Times on 6th August.

Therefore, we have a Price Code which is not wanted by the consumer, which is not having much effect on prices, and which is destroying investment, now being relaxed and resuscitated for what we have been told is positively its final year. This is being done for no other reason than to satisfy the blinkered desires of people who are the unrepresentative leadership of an unrepresentative minority—

Mr. Hattersley

To whom is the hon. Lady referring?

Mrs. Oppenheim

I am talking about the trade union leadership—the very people who, at a time of rip-roaring unemployment, should be the last to want to depress investment since that will make the creation of jobs more difficult.

The excuse for this bizarre state of affairs we have heard again tonight from the Government spokesman. We are told that it is the need to reconcile economic needs with political reality. In fact, it is the political need to ignore economic reality. That is a very dangerous maxim to which the Government have adhered far too much in the past with absolutely disastrous consequences. The whole country can see that the Price Code has not restrained inflation for all the jobs it has lost. Unemployment is still at the highest post-war level and inflation is rising. A fresh outbreak of inflation will come as soon as the devaluation of the £ and recent measures have worked themselves through. That is the reality which no Price Code can disguise.

The National Institute of Economic and Social Research conducted a special study of the Price Code and published its findings in August of this year. It revealed a number of interesting facts. For example, the main conclusions drawn from a survey of manufacturers and distributors were that it was not the Price Code that was restraining prices but market forces. Furthermore, in the case of manufacturers, current prices are below the levels which the Price Code would have permitted them to charge.

Mr. Hattersley

Will the hon. Lady make clear which argument she is choosing—namely, whether the Price Code is restraining profits and fresh investment or whether the Price Code is not restraining profits and investment? In the first ten minutes of her speech she made the point that the Price Code was having an effect on investment. She is now moving on to an argument which has nothing to do with that aspect at all. Which argument is she choosing?

Mrs. Oppenheim

That is the whole point. If the right hon. Gentleman had been more familiar with the debates on the Price Code he would know that one of the things of which we complain is the uneven effect of the code—and indeed that it is far more repressive in the case of some industries and businesses than in others. In some cases it has increased prices more than otherwise would have happened. That is one of the reasons for our criticisms.

The survey shows that while most manufacturers have not been able, under market conditions, to raise their prices to the levels that the Price Code would permit and other companies are not able to avail themselves of increases for which they already have consent, a number of companies, under the Price Code, are able to charge higher prices than they would have done without the code. A total of 20 per cent. of manufacturers fall into this category.

One of the reasons given for this is the procedures of the code, whereby companies apply for price increases sooner than they would otherwise do so. In chart 1 in the survey it is shown that, even allowing for the sharp upturn, which will not now take place, and for exploitation of the full scope of the relaxations in the code—which will certainly not take place—in two areas of sensitive family expenditure, food and drink and textiles and clothing, the removal of the code would make no difference whatever, because although current prices are substantially below the level that the code permits for some manufacturers, the average effect over all companies in these categories of the removal of the code would be price levels no higher than in the present code. This is an average and obviously some prices would be higher, some less high.

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

It is strange that the hon. Lady should have chosen the example of food, since the representations of the food manufacturers were the most cogently argued among those who expressed the view that they were adversely restrained. They were among those who most strongly urged us to make further relaxations.

Mrs. Oppenheim

I am not sure that the Under-Secretary is familiar with the chart to which I am referring. This was an average, and in the food distribution industry it would be a case of levels being slightly below what it would be able to charge in the absence of the code. This would be counter-balanced by other industries, such as textiles and clothing, so that the average effect would be almost exactly the same as if the code were not in existence.

Another article in the Financial Times of 8th September shows how the code began pushing prices up. Some companies are exporting to avoid the effects of the code. The code allows them to sell goods at higher prices abroad. Obviously, without the extra costs of exportation, these goods would be sold at a lower price at home. There are sometimes artificial shortages caused by the exportation for higher prices, and home-produced goods are replaced by more expensive imports, as I predicted a year ago they would be.

From all of this it will be seen that the code is contradictory gobbledegook. It is unfair and uneven in its effect on business and industry and it does not have very much effect on prices.

I know that other hon. Members wish to take part in what is an unduly short debate in view of the complexities of the amendments we are debating. Because of the shortage of time I will deal now with some effects of the changes we have before us on prices, investment and jobs. First and foremost, even the most welcome of the relaxations in the code in these amendments inevitably add to its complexity and generally bureaucratic nature. According to the NIESR review, the average annual expense of administering the code for three-quarters of manufacturers in the survey was £47,000.

Some of these proposals, even though they bring new flexibility, will create greater bureaucracy. I have here the CBI document giving guidance on the changes. It runs to 23 closely-printed pages and is itself a digest of the Price Commission's guidance. Two pages deal solely with one aspect of the new interest option whereby firms will have the option of having interest costs treated either under the old or the new rules.

We come to an important matter that I hope the Under-Secretary of State will clarify. As he will no doubt be aware, under the new rules, once a decision has been taken on the option regarding the treatment of interest rates it is irrevocable. I hope that the hon. Gentleman will tell the House what will happen to companies which took the decision and opted in such a way before the recent rise in interest costs. How will they be affected? Will the rise in rates wipe out all the benefits of the relaxation of the code?

Is the right hon. Gentleman aware that interest charges to industry have risen by 30 per cent. since the renegotiation of the code took place last July? That will certainly wipe out a great deal of the benefit of the relaxation of the code.

I refer to an important representation that was made to the Secretary of State by the chairman of the Calor Group on 22nd September. It was a helpful and constructive letter dealing with the new measure in the code allowing prices to be increased in stages. He made the reasonable and valid point that once consent has been obtained in the first place from the Price Commission and all the data have been supplied, it seems ridiculous that companies have to create work for themselves and for the commission at each stage of the price increase by providing the data all over again. The chairman made a constructive suggestion for a minor amendment which has not been implemented. Further, he told me today during a telephone conversation that he has received no acknowledgement or reply from the Secretary of State. I thought that the right hon. Gentleman would deal with the matter this evening.

The measures in the code about which the right hon. Gentleman has spoken— for example, the increase in investment relief, the increase in the adjustment factor for depreciation and the raising of the lower limit, especially for category 3 companies, and the abolition of the productivity deduction—must receive an unreserved welcome as far as they go. However, the right hon. Gentleman did not point out that it is only the investment relief that is to be chanelled directly into investment. I hope that all the other reliefs will go in other directions, such as improving eventual dividends and, therefore, attracting equity investment.

How much scope is given by these reliefs that we have actually welcomed? They do not provide scope to recover the lost profitability of the past two and a half years. They will not, as the Chancellor has claimed, encourage investment; they will merely discourage it less. The Price Code was designed as a temporary short-lived measure. The fact that it has been allowed to continue for so long has already done serious damage.

It is not a bit of good the Prime Minister paying lip service to profitability at the Labour Party Conference and then continuing with a Price Code such as this. It is inadequately relaxed and it is not helping investment very much. When the Chancellor of the Exchequer and the Prime Minister so fulsomely praise the TUC for its belated but welcome compliance with the social contract, they might also have the grace to acknowledge that since the Price Code first started industry has faithfully obeyed every last bit of nonsense in it. It has done so voluntarily, as there are no criminal sanctions in the code as such. Out of some 20,000 companies within the code, over the past two and a half years only nine orders have been made by the Price Commission limiting price increases or rolling them back. That includes the year in which the social contract was breached and breached again. It is high time that a tribute was paid to business and industry for that record, especially when we consider the extent to which the corporate sector has been in financial deficit since the Price Code started.

Even if the increase in investment intentions for 1977 of 15 per cent. comes about—I doubt very much that it will—the actual amount of investment in that year will be lower than in 1970, 1971 and 1974. It was against that background that the former Secretary of State, in her original statement, spoke about putting back £1,000 million of profitability into the hands of industry. But that must be a theoretical figure which depends on the pace of the upturn, which will now be very much slower. It will depend on the degree of scope that companies have to obtain the required level of profits and on the will to invest. That goes to show the futility of attempting to predict with accuracy the effect on investment and jobs of the continuance of the code, especially against the present economic background.

On the basis of the former Secretary of State's calculations, the National Insurance contribution increase will add about another £1,000 million to the costs of industry and 1 per cent. to the RPI. It is still not confirmed—I am sorry that the right hon. Gentleman has not dealt with this—that all or any sectors of industry will be told to pass on the whole of the increased contribution as an allowable cost, despite assurances in the past. Manufacturers will be allowed to do so as an allowable cost, as the Chancellor has said, but only when the Government decide whether this is a rise in National Insurance contributions rather than a revenue device. If it is the latter it will need a further amendment to the Price Code, but for distributors, including retailers, who do not operate under the allowable cost regime, that is not the case. The increase in manufacturers' prices will have to be absorbed into their gross margins and can be passed on in higher prices but their own National Insurance contributions will have to come out of net profits and will partly absorb those profits without any compensatory price increases.

Clearly that is an anomalous situation which I would have thought the Secretary of State would clarify tonight. If it is true that retailers and distributors have to absorb these costs, they will lose any benefit of the relaxation of the code, and that is in an area which is labour intensive and which employs a great many school leavers. I hope that we shall have some explanation on the subject from the Under-Secretary of State when he winds up the debate.

I have repeatedly called for further relaxations in the code, and even for its abolition, and I have urged the need for extra profitability to help investment and jobs and to attract equity investment which would allow some companies to remain in business which will not otherwise do so. But that does not mean that I am not fully aware of the great concern among consumers at present about the level of prices, even during the temporary lull, let alone when they are about to rise again. Far from it. I am deeply concerned that prices, particularly food prices, are taking off again. I know the anguish that this will cause, particularly to those already suffering record falls in living standards at present.

It will not be the necessary relaxation of the Price Code or any further withdrawal of food subsidies which are to blame. It will be this Government's policies over the past two and a half years which have failed to restrain inflation adequately and which are causing this hardship. It is characteristically cruel of this Government, and characteristically misguided of the TUC, to pretend to those people that an anachronistic and irrelevant Price Code can be any substitute for the determined pursuit of the right economic policies in overcoming inflation.

10.58 p.m.

Mr. Ron Thomas (Bristol, North-West)

I would be interested to hear what the Tories' determined economic strategy is to deal with this inflationary situation as well as the deplorable level of unemployment. The worry of many hon. Members on this side of the House who are opposed to this shift of £1,000 million away from consumers to the corporate sector is basically that we do not accept that there is a correlation between increases in profits and capital investment. The hon. Lady spoke a good deal about this and about the need to increase profits in order to stimulate capital investment. We know very well that during the period of the Heath Administration profits increased considerably but that the level of capital investment has declined more or less from 1970 onwards. We do not therefore accept that simply to increase profitability will mean an increase in capital investment. It certainly did not happen in the past and we do not see any reason why it should happen in the future.

When we debated these changes in the Price Code, and the consultative document, back in July it was part of an overall economic debate and there was a good deal of thought, and a number of contributions, in respect of what caused inflation. Many were blaming trade union bargaining, although it is quite clear that trade union bargainers chase prices rather than push them up. We all know that over the past 12 months there has been a considerable cut in the standard of living of working people. We have also heard a good deal today, and in the past, about the money supply, M3 and so on. We have also heard from the hon. Lady the Member for Gloucester (Mrs. Oppenheim) about devaluation. I personally believe that the devaluation of the pound since it was floated by the Tory Government has been the main generating force in inflation. I do not think one has to look far beyond that, and the impact it has had, quite understandably, on wage bargaining in trying to catch up with the increase in prices.

What the Conservatives are advocating in terms of cutting subsidies on housing and food will, as my right hon. Friend the Prime Minister has said, considerably increase the level of inflation. I believe that the Conservatives do a gross disservice to the country and sterling by advocating that such public expenditure cuts are necessary, since speculators will believe either that they really are necessary and take it for granted that we should cut another £5,000 million off public expenditure, or that if the Tories get back to power, they will in fact do it. I believe that this is a considerable encouragement to speculators to sell sterling and speculate against it. The Conservatives have something to answer for in that regard.

When we discussed the code in July, we were told that it would mean a shift of about £1,000 million from the consumers—the working people and others—to the corporate sector. There have been amendments since then, and I hoped that my right hon. Friend would give more up to date figures of what the shift will be. He told us that the investment reliefs are not going down from 30 per cent. to 25 per cent. but, as I understand it, that they will go up to 50 per cent. I have made the important point before that companies which in any event intended to invest £2,000 or £3,000 million of capital investment will get these reliefs whereas we should be concentrating—I do not accept that there is no mechanism by which to do it—on net capital investment. Why should we say to ICI, for example, "We are pleased that you are to invest, say, £400 million in any case, and we shall allow you to increase your prices" when that will simply release its resources for something else, probably capital investment abroad?

Then there is the question, a very important one in terms of prices, of the move from historic costs to replacement costs. Many of us have read the Sandi-lands Report, and if some had their way they would see it carried out overnight. But we have moved from the historic cost basis of accounting to current cost accounting, and that will lead to a further increase in prices.

Companies are to be allowed to disregard 70 per cent. of stock appreciation. That was contained in the consultative document. They are also to be allowed to disregard the productivity deduction, but if that deduction had any worth and utility in the past—

Mrs. Sally Oppenheim indicated dissent.

Mr. Thomas

The hon. Lady shakes her head. If the productivity deduction therefore did not have worth and utility in the past, why was it included in the first place? We were told at the time that it was essential. Now we are being told that it was practically useless and therefore companies will not have to take it into account in putting up their prices.

We are also told that there will only be—unless this has been amended as well—a half-deduction in a situation in which a company moves from a lower to a higher level of capital utilisation.

Another factor in terms of inflation is that many British firms—especially capital-intensive firms—have been working at a very low level of capacity. With low demand and a low level of production, unit costs increase, and this pushes up prices. This has been one of the main generating forces of price increases.

It has been said time and time again that there is no need to worry about that because, as the so-called resurgence in world trade for which we are all hoping takes place—some of us do not think it will ever come, but that is a matter of judgment—and as companies then move up to a higher level of capacity, they will either be made not to increase their prices as much as they may wish or, indeed, to reduce their prices.

I am sure that the hon. Lady will agree with me that there are many capital-intensive companies which, if they are working at, say, 45 per cent. of capacity, are making a massive loss, but which, if they are working at 60 per cent. of capacity, are making a massive profit. I think this is true of the British Steel Corporation, of ICI and of many capital-intensive firms.

When we debated the price codes in the past it was felt that, as companies moved up to a high level of capacity, the consumers would share in either smaller price increases or no price increases at all. I raised these matters on the previous debate and said that, as the Ruskin-TUC research document points out, and as my own trade union's research department points out, the suggestion that the code would mean only a 1 per cent. increase in prices was a nonsense. The response to that was to pick on one item. I am not picking on one item. I am talking about a company which takes advantage of each one of these possibilities, so that there is a cumulative effect. We have been told that companies will not do this because of the market. I do not understand the world in which the hon. Lady lives.

Each industry is composed in general of two or three oligopolists. We are not living in the free market economy of the nineteenth century. This is no longer an Adam Smith laissez-faire economy. What will stop ICI putting up its prices? The only competition it has is in regard to imports, and in any case it can come to arrangements with its overseas friends about those. British industry is oligopolistically controlled. Companies move their prices up together.

It is nonsense to talk about a market and competition. To imagine that when these companies examine the possibilities under the code they will say "We had better not put up our prices because some other firm might not do so" is a nonsense in terms of up-to-date economic analysis. Therefore, in my judgment, many of the companies will take advantage of each one of these things, and I put it to my right hon. Friend that the increase in prices will be much greater than he is suggesting.

At a time when working people have accepted cuts in their standard of living, and will be expected to accept further cuts over the next 12 months, I find this document unacceptable. At the same time, and running alongside this in economic terms, we were told that we had to have public expenditure cuts totalling £1,000 million. The Chancellor of the Exchequer shifts from one argument to another, and one can never pin him down to specific reasons. He shifts his ground whenever one tries to grab him. But at one stage he said we needed to shift economic resources so that we could have more capital investment in exports. So, in so far as that works, we are now talking about at least £2,000 million. But we know that there is no mechanism in the capitalist system which can shift resources out of public expenditure into capital investment. Certainly there is not one which can shift it out of profits into capital investment. The period between 1970 and 1974 taught us that, if nothing else.

I want to move from that to a question about interest. The hon. Lady the Member for Gloucester raised it, and it is a very important issue. As I understand it, paragraph 19 says: Except where an enterprise as a whole … elects … interest shall be taken into account in determining total costs". My assumption is that all companies which borrow money from the banks and have to pay more for it can put up their prices. It is the consumer who pays, and not the companies, just as the consumer will now pay for the capital investment. Prices will go up to pay for the capital investment. Consumers will be buying it. It is about time that they owned it. If they have to buy it, we think that they should own it.

What is the difference between that and, either via taxation or via any other form of public expenditure, investing in the nationalised industries which we as a community own, and doing it this way? The only difference is that the community does not own a stick of it at the end of the day. The community does not benefit from it. The shareholders benefit from it.

I want finally to ask about the banks. Clearly, under the 15 per cent., the banks will be making massive profits. What control does this document have over the banks and the financial sector? I am sure that the hon. Member for Gloucester will agree with me when I say that the banks will make massive profits if we have, as we now have, a 15 per cent. MLR. We know that with the higher bank rate—the differential between deposits and overdraft rates and lending rates—bank profits can be considerable. I should like to see the Government doing something about that by having provisions in this code to deal with the massive and increasing profits which will be made by banks and finance houses under this 15 per cent. rate.

But I am not convinced that the price increases and profit increases generated by this document will lead to the kind of increases in capital investment which we want to see. The only way that we shall get them is by a strengthened National Enterprise Board, by directing this £1,000 million via the NEB and, if firms will not take it up via the NEB, by directing this £1,000 million into the publicly-owned industries which can diversify and produce some of the finished and semi-manufactured imports now flooding into the country.

11.14 p.m.

Mr. A. G. F. Hall-Davis (Morecambe and Lonsdale)

In the tradition of this House, perhaps I might make one or two comments on the remarks of the hon. Member for Bristol, North-West (Mr. Thomas).

The hon. Gentleman asked why investment in this country was so slow to respond to specific Government measures in the private sector. One answer is that private investment projects in modern technology probably take two, three or even five years to plan, assess and bring to execution. Unless industry is convinced that there will be a continuing political climate sympathetic to the private sector, it will be extremely cautious about committing itself so far ahead.

I hope that the hon. Member for Bristol, North-West will not think that I am being unnecessarily controversial when I say that his speech tonight and those of some of his colleagues at his party conference, although reasoned and intellectually well supported, are not likely to stimulate investment in the private sector.

The hon. Member for Bristol, North-West asked what would encourage investment. One element which is regularly missing in discussions on this matter is technological innovation. Great leaps forward in investment have usually been stimulated by technological innovation in conditions of competition and in circumstances where investors may expect a fairly substantial early return on risk capital in a new industrial situation.

In fairness to other hon. Members who wish to speak, I shall not develop my views at length. They are simple: the continued existence of the Price Code, on balance, makes price levels higher than they would have been were there no Price Code and investment lower.

The arguments on the prices front have been deployed in a balanced way by my hon. Friend the Member for Gloucester (Mrs. Oppenheim). It is one of the Government's claims that direct exports are exempt from price controls, but very few industries or firms can undertake investment with the sole object of selling in the export markets. There may be a few highly specialised or giant industries which can invest with only the export market in mind, but most companies want to know that if the export markets are temporarily adverse, they can turn to the home market and get an adequate return on investment. Many come within the scope of the Price Code because they do not know or cannot show whether their goods are exported. Component manufacturers are one example. Prices would be lower, industry more efficient and competitive and investment higher if the Price Code were abandoned now.

I call in aid experience. Which country has had a 27 per cent. inflation rate? The answer is the United Kingdom. No wonder we have cut our rate of inflation. We were starting from a level which was double that of almost any other advanced industrial country and we reached that level with the Price Code in operation.

May I make a plea for a new explanatory document for the code? Paragraph 80 (1), which I suspect is of some importance, says: Prices should be determined so as to secure that net profit margins, as defined in paragraph 81, do not in any period of 12 months exceed the reference level. Paragraph 80(2) looks simple enough until one sees that sub-paragraph (3) reads: For the purposes of sub-paragraph (2)(b) there shall be left out of account any excess of the net profit margin over the reference level determined under the code in force at the time. I read that several times and got nowhere. I turned to the CBI guidances notes and read in relation to paragraphs 80 and 81 of the code: There will be an option for profit margin units to replace the lower of the two base years used to calculate their present reference level, by a base year taken from a year of account ending after 30 April 1973 and before 31 July 1976. However—and here conies the crunch: if the profit margin in the latter base year is over the present reference level, then the excess should be left out of account. I think that I know what that means, but I would not like to be the manager of a medium-sized business with no specialised accounting services at his disposal who had to try to interpret that. I hope that the Minister will elucidate it and do so tonight rather than in a letter in three or four weeks' time.

Mr. Norman Lamont (Kingston upon Thames)

rose—

Mr. Ian Gow (Eastbourne)

On a point of order, Mr. Deputy Speaker. If I interpret your selection correctly, it will mean that in this short debate we shall have had four speakers from the Front Benches and only two from the Back Benches. May I ask whether you could exercise your discretion to protect the rights of Back Benchers in this matter?

Mr. Deputy Speaker (Mr. Bryant Godman Irvine)

The wishes of the Front Bench are generally accepted.

Mr. Hall-Davis

Further to that point of order, Mr. Deputy Speaker. Is it not in your power in a matter of importance—no one could say that this was not a matter of importance—where there has not been sufficient opportunity to discuss an Order, to say that the matter be carried forward to another day?

Mr. Deputy Speaker

This is a matter which the usual channels discuss. If the usual channels give some indications as to what is required by the Minister, it is not contrary to the usual principles if I accept them. Mr. Lamont.

Mr. Gow

Further to that point of order, Mr. Deputy Speaker. Is it not happening too often that the usual channels get together and deprive Back Benchers of their rights in this House? I respectfully ask that you consider further the representations which I made and do not allow things to be fixed between the usual channels.

Mr. Deputy Speaker

I have noted what the hon. Gentleman said, and I will report the matter to Mr. Speaker. Mr. Lamont.

11.21 p.m.

Mr. Norman Lamont (Kingston upon Thames)

I apologise to my hon. Friend the Member for Eastbourne (Mr. Gow). I must say that if he feels he is being stifled in this House, it is the first time that I have ever noticed it.

I should like to associate myself with my hon. Friend's complaint at least to the extent that this is an unsatisfactory way of dealing with these Orders. They are extremely complex, as has been pointed out by my hon. Friend the Member for Gloucester (Mrs. Oppenheim). This document is almost as long and complex as a Finance Bill, and it is being considered very late at night for an hour and a half.

There is widespread agreement that there is a problem with secondary legislation coming before this House and not being properly considered. Nowhere is it worse than in the business of amendments to the Price Code which are repeatedly brought before the House. They are vital to the economy, they are of immense importance to industry, and they are inadequately considered in too, short a time.

I welcome some of the changes announced by the Secretary of State. I welcome particularly changes which ease the administrative burdens on companies. What is not perhaps as widely appreciated as it should be is the amount of time that is taken by companies in trying to comply with the Price Code.

One interesting figure which came crust of the report of the National Institute of Economic and Social Research was that the average cost to companies of seeing whether they were conforming to the Price Code worked out at about £27,000 per company. Indeed, the administration costs to ICI of complying with the Price Code go up to £500,000. Therefore, anything which could simplify these Orders would be extremely welcome.

For that reason, I am pleased that the category thresholds are to be raised. However, that does not help companies which will remain within the code and which will have to continue to supply information. In fact, life for them will become even more complicated, because the alterations in the code are additionally complicated.

The code is very complex. I notice that a number of firms have now come into existence specifically for the purpose of trying to help companies to understand the Price Code. Indeed, one of the gentlemen involved with these firms is a member of the Price Commission. Good luck to him. It is rare to find the toast buttered on both sides, but in his case it certainly is.

I also welcome the reliefs which have been given: the abolition of the productivity deduction, the concessions on unit costs when they fall in response to increases in volume, the changes in the depreciation provisions, and, of course, the investment relief provisions.

I hope that the Secretary of State will not expect too much from the investment relief provisions, because in the present climate they will make very little difference indeed. Time after time Ministers come to this House and quote investment intention statistics. We should forget them. They are just factories and machinery in the air, and there is very little chance at all of them becoming reality.

The National Institute report showed that very few firms took up the investment reliefs which are already available. That is because they find the extremely complex monitoring arrangements very difficult to comply with and very time-consuming. When the Secretary of State says that he is imposing more monitoring arrangements, I wonder whether he realises that the more of these he makes, the less likely it is that investment reliefs will be taken up. The Government must understand that people cannot be forced to invest. Water cannot be driven uphill. If the economic conditions are such that people do not have confidence, investment will not take place.

The Secretary of State said that the 15 per cent. minimum lending rate would not make much difference to investment intentions. They may believe that in the Department of Prices and Consumer Protection, and even in the Treasury, but in the real world that is just not the case, and there is little doubt that investment will be very badly damaged by the increase in interest rates.

But if investment relief amounts to 50 per cent. where are the firms meant to get the rest of the money? From he stock market which has slumped? Borrow it from the banks at 20 per cent. for prime companies, or from retained profits when return on capital has slid down to 3 per cent. and is threatening to disappear completely?

I do not believe that the Government understand the psychology of investment at all. If they did they would not attach any importance to the letter from the CBI chairman to member companies. No company will invest just because it has or has not received a letter from the head of the CBI. Any firm which would pay attention to such a letter must be a very peculiar firm indeed. It is a better level of profitability which will bring back the return to increased levels of investment.

I was very disturbed about the way in which the Secretary of State talked threateningly about allowing firms to increase prices only if they used the money to invest. There are firms which, far from considering investment, are struggling hard to survive because of the sorry state of affairs brought about by the Price Code.

As far as points in the Code itself are concerned, the Secretary of State has, in many areas in his document, conceded the principle but not gone the whole way on the question of unit costs falling because of volume increases. Firms will get 50 per cent. of such reductions in unit costs. Why will they not get the whole benefit?

Then there is the problem of allocation of overheads between exports and domestic sales. As the Secretary of State may or may not be aware, considerable problems have arisen because the depreciation of sterling has meant that many firms have had to alter the allocation of overheads between foreign and domestic markets because of the alterations in exchange rates. For that reason alone, the return on capital domestically has been overestimated. The document half recognises that problem and half allows firms to take account of it. But why does it not go the whole way?

Only one thing matters about the Price Code—whether it does enough to restore the profitability of industry. That is the only thing which matters. All the talk about 1 per cent. or 2 per cent. on RPI does not amount to a row of beans compared with whether the private sector is allowed to survive. Every trade unionist and every unemployed person should be concerned that what happens in the Price Code amendments should be sufficient to restore profitability to industry.

First we are told that the Government are making one set of concessions, then they alter them to slightly more favourable concessions. Then at the last minute there is an increase in the National Insurance contributions which is outside the scope of the negotiations and which is made without a word to those who participated in the negotiations.

The Secretary of State asked for our view. He asked whether we thought the Price Code was irrelevant because market forces were holding down prices, or whether the Price Code was actually damaging the return on capital and profits to industry. Surely the answer is that the code has done both in different sectors at different times. In the initial period the Price Code certainly damaged profitability.

Today, as we know from the National Institute report, about 70 per cent. of companies regard market forces as the dominant factor in restraining prices. But even in that changed situation there still remains the problem whether there is sufficient headroom to enable firms to take advantage of an upturn if it came. That, of course, is an academic discussion because we know that there is no prospect of an upturn. If it came, however, we would find the noose very quickly tightening around industry's neck. Very quickly industry would be squeezed hard and the Government would be slow to recognise the changed situation. That is the reality and the danger of the Price Code. To judge from the expression on the Secretary of State's face he does not understand, and we can only hope that after a few weeks, with more time to study the matter, he will understand it.

The proposals in the code are insufficient and we must move either radically to alter the code or abolish it at some time in the future.

11.33 p.m.

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

Perhaps I may begin by dealing with the constructive question put by the hon. Member for Morecambe and Lonsdale (Mr. Hall-Davis) and at the same time demonstrate the desire of myself and my colleagues in the Department to explain what I admit is sometimes a difficult matter to understand. The question concerns paragraph 83 of the Price Code.

As a small concession firms may use their most recent three years as well as five previous years to calculate their reference levels. They then average out the best two years. Paragraph 83 says that a firm can only set a profit level which is consistent with the Price Code as it is in force at the time. If the firm earns a profit in breach of the code it must not build that into its ceiling for the future.

It is a pity that the Opposition have chosen to make tonight's debate one of their usual knockabout affairs and have sought to have the best of both arguments about the code. The hon. Lady Member for Gloucester (Mrs. Oppenheim) seemed quite incapable of deciding whether the effect of the code was to hold down prices or whether it was ineffective in that respect. She cannot have it both ways. If the code is holding down prices, further relaxations would undoubtedly affect the rate of inflation. If it is not holding them down, the hon. Lady's remarks were pointless. But that is an experience with which we have been familiar before in this House.

The events of the last two weeks, which are the background to this debate and serve to give it some sharp point, have underlined the importance to industry of modifications on which we are embarked and which we are now debating. The important need for industry is that the immediate crisis should be met by determined Government action so that our economic recovery can proceed.

The Government are well aware that the increase in the Minimum Lending Rate may adversely affect—indeed, will adversely affect in certain cases—industrial investment. But further depreciation of sterling would put up industry's costs just as surely as does a rise in interest rates. If as a result of the MLR increase the use of borrowed funds for investment has become more expensive, it is all the more important that companies should be able to generate a substantial proportion of their investment funds from retained profits. In 1975 retained profits accounted for 68 per cent. of the sources of all capital funds whilst bank borrowings accounted for only 9 per cent.

In the amendment to the code we have raised the rate of investment relief in the Price Code from 20 per cent. to 50 per cent. This means that companies may increase prices and profit margins to obtain additional revenue equal to half their firmly budgeted investment expenditure for the year ahead. This is in addition to the cash they are able to generate not only from their existing margins but also through the higher depreciation charges which are now allowed in the code on existing assets.

Mr. Giles Shaw (Pudsey)

Will the hon. Gentleman give way?

Mr. Maclennan

No. I am afraid that this is a short debate as has been pointed out.

The last Price Commission quarterly report showed that investment relief worth £589 million had already been claimed in the period December 1974 to May 1976. This is substantially more than the £1 million a day which the CBI estimated as the cost of higher interest rates. Moreover, the figures I have given take no account of the subsequent increase in the rate of relief from 20 per cent. to 50 per cent.

Mr. Giles Shaw

Will the hon. Gentleman give way?

Mr. Maclennan

I am considering a point that has been put to me.

I should add that the new code in any case gives manufacturing and service companies the option to continue to treat interest charges as allowable costs for Price Code purposes. This was inserted into the code at the behest of the CBI. It means that they are free to reflect higher interest charges in their prices in so far as the market allows.

The hon Lady the Member for Gloucester specifically asked about the position on the National Insurance surcharge as it affects distributors. The allowable cost rules do not affect distributors. For them the rule is that they should operate within gross and net margin ceilings under the normal rules of the code. Distributors will be free to offset the cost of the National Insurance surcharge out of net profits. I do not have in mind any change in the Price Code rules as they affect distributors. However, if distributors wish to make representations, we shall naturally consider them.

The present crisis therefore underlines the part which the Price Code plays in our industrial policy and the extent to which we have recognised industry's needs in the modifications which we have introduced in August. Far from negating our relaxations of the Price Code, recent events have emphasised their importance.

When we debated these proposed changes shortly after publication of the consultative document, on 7th July, we were in a situation that was in some respects different from the present situation. However, the hon. Lady has drawn attention to the further changes which were made in the light of representations that we received and which I believe have met with a very widespread welcome. Now that hon. Members have had time to absorb the contents of the new code and the further modifications that we have made, I think that these will be seen to have done much to achieve the objective that we set ourselves of removing impediments to investment.

I want to deal, however, with a couple of criticisms that were made after the changes were announced—that the Government had not gone far enough to meet the needs of industry and commerce. Distributors argued at the time that not enough had been done for them because the safeguard level which triggers increases in gross margins to compensate for erosion of their net profit margins had not been raised from 80 per cent. to 85 per cent. of net profit margin reference levels. But we have in other respects done a great deal to ease the difficulties of the relatively few distributors who are close to their Price Code ceilings. The rate of investment relief has been increased to 50 per cent. and the relief has been extended to cover distributors' expenditure on the construction of shops; the new stock relief will enable distributors to deduct 70 per cent. of the increase in the value of their stocks from both gross and net margins when comparing these with reference levels. The special safeguard has been improved by raising the absolute limit on increasing gross margins, so that they can be increased to 110 per cent. rather than 105 per cent. of their base levels, and the Price Commission has for the first time been given powers to raise individual firms' gross margin ceilings if it considers a modification is justified.

The other criticism is one that I referred to in a short intervention when the hon. Lady the Member for Gloucester was speaking. It was made by representatives of the food manufacturing industry. Now that they have had time to study the potential impact of these matters, I think that they will be reassured. The 50 per cent. investment relief, the raising of historic depreciation charges by a factor of 1.4, the abolition of the productivity deduction and the improvement of the safeguards in paragraphs 49 and 51 which permit price increases in order to achieve certain minimum profit margins on individual products or product ranges, are all of particular relevance to food manufacturers.

Previous codes—and it has to be remembered that this code is the product of the Conservative Party, which seems ready to wash its hands of it—may have constrained particular firms at profit levels which are not adequate for longer-term viability, but I hope that there are sufficient options in the package of reliefs for these firms to ensure that the code does not inhibit recovery of investment in the future.

In the debate on 7th July the hon. Lady seriously underestimated the benefit to company profitability flowing from the changes. She took the figure of £1,000 million which we had estimated as the effect on company profits in the coming year and reduced it to £400 million to allow for the limited take-up which might have been assumed from experience under the previous code—for example, in respect of the 20 per cent. investment relief. Our estimate had already allowed for take up. It was an estimate of the actual effects of the new code as compared with the old in the market conditions foreseen over the following 12 months. That does not mean that we expect company profits next year to be about £1,000 million higher than they will be this year. Profits are affected by many factors. All we are saying is that we expect profits to be about £1,000 million higher next year than they would have been if the old code had been maintained.

My answer to my hon. Friend the Member for Bristol, North-West (Mr. Thomas) is that our estimates on this have not changed since July, because we believe that market factors will prevail to restrict the take-up of reliefs, and it is wrong, as my right hon. Friend emphasised, to assume that companies will avail themselves of every relief that is open to them. That has not been the case in the past, and I do not believe it will be in the future. We see no reason to change our original estimate.

Before concluding I think it would be right to say a few words about the future, because this is an opportunity to put forward some constructive thoughts. Over the next few months there will be opportunities to consider what sort of policies for prices make most sense in the economic environment to be expected over the next few years and which will make the most effective contribution to our social and economic objectives.

It is a pity that the Opposition did not take the opportunity tonight to state clearly and constructively what would be their approach. Their recent, stylishly-produced policy document "The Right Approach" is glib but unrevealing. It speaks of further substantive relaxations of the code being urgently required, as did the hon. Lady, but industry recognises that to go further than the Government have gone is not only unnecessary for most firms—which could not get more out of the market in any case over the next year—but would risk damaging the pay policy which is one of the cornerstones of our strategy. Similarly—and it was demonstrated again tonight—the Opposition appear unwilling to say whether they think there should be a total removal of the Code. [Interruption.] That is not what the hon. Lady's document states.

Mrs. Sally Oppenheim

rose—

Mr. Maclennan

It says that if total removal of the code is not yet possible the present system must give way to something else. It is far from saying that the present code should be abolished. The hon. Lady must square herself with her own Back Benchers, not me.

Mrs. Sally Oppenheim

Will the hon. Gentleman give way?

Mr. Maclennan

No, I have a minute left.

Mrs. Sally Oppenheim

I gave way to the hon. Gentleman.

Mr. Maclennan

Prices policy may be seen primarily as part of a policy to reduce the rate of inflation. In particular, it is possible for a control like the present Price Code to be tightened to the point where it cuts back profit margins across the board so as to exercise a macro-economic effect on the general price level and the rate of increase of the RPI.

That is how the Price Code has operated at certain periods. I think that, as the White Paper made clear, the squeeze on profits can be carried to the point where it is counter-productive. Next year, particularly in the second half, that is the last thing we shall want.

My right hon. Friend said that the options for the next phase of price policy were open. We shall discuss this with all interested organisations. There will be an opportunity to consider the pros and cons of moving towards a more selective approach to prices. I do not want to suggest that the need for close—

It being One and a half hours after the commencement of Proceedings on the Motion, Mr. DEPUTY SPEAKER put the Question, pursuant to Standing Order No. 3 (Exempted Business).

Question agreed to.

Resolved, That the Counter-Inflation (Price Code) Order 1976 (S.I., 1976, No. 1170), a copy of which was laid before this House on 29th July, be approved.