§ 10.15 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 1977, a copy of which was laid before this House on 28th July, in the last Session of Parliament, be approved.Tonight we are discussing a Statutory Instrument which although both shorter and simpler than orders in previous years is nevertheless long and complicated. I understand that the Select Committee on Statutory Instruments, reporting at 3 o'clock this afternoon, advocated the consolidation of prices legislation in order that such Statutory Instruments could be understood better and debated more clearly.
I fear that the first four lines in tonight's order, which refer to four Acts of Parliament, confirm the wisdom of the Select Committee's judgement. The work on consolidating prices legislation is now in hand. It is not for me to say when or, indeed, whether time can be allocated for the new consolidating Bill, but, with respect both to the Chairman of the Committee and to the Leader of the House, I confirm the need for a consolidating Bill to pass through its stages in order that we can debate these things with greater ease.
One of the problems with the complexities of orders such as this is that it encourages the weak-minded to discuss the subject in wild generalities rather than to concentrate on the contents of the order itself. I shall at least try to avoid that error by confining myself to a brief attempt to fit tonight's order into the context of the Government's inflation policy, followed by an equally brief description of the major provisions of the order itself.
The statutory prices policy, of which this Order is only a part, is only one element of the Government counter-inflation strategy. As I have repeated at the opening of every prices debate, the Government understand perfectly well that inflation cannot be abolished by Act of Parliament. That objective can only 1242 be achieved, is being achieved and will continue to be achieved, by the application of the right economic policies.
The objective of a statutory prices policy is to augment rather than implement the main thrust of our counter-inflation intentions. The principal duties of the Price Commission, whose powers are in part determined by the order we are debating tonight, are intended to impose and encourage restraint on specific companies in specific cases. The Commission is particularly supposed to do that when unreasonably high prices are the result of monopoly or quasi-monopoly situations.
Tonight, however, we can consider only one of the Price Commission's powers. Its most important functions are permanent and do not need annual renewal. The future tasks of the Price Commission after this year will not require an order of this sort to be submitted to the House. These future tasks, the principal and permanent duties of the Price Commission, come under two headings. The first is the investigation of proposed price increases, if appropriate freezing the price while the investigation is carried out, and recommendation on the basis of that investigation of a continued price freeze if that seems to be right under the terms of the Act.
The second task of the Price Commission is the examination, at the invitation of the Secretary of State of the day, of prices in whole industrial sectors and the subsequent recommendation on the basis of the examination of the appropriate price level in that sector.
These major powers are permanent but, unlike them, margin control, or controls over profits—the direct subject of our debate tonight—is temporary. Indeed, it could hardly be more temporary, because we are simply asking for its continuation for a single year. We cannot come to the House next year and ask for an extension of margin control without a new Act of Parliament, because the Price Commission Act which was passed by this House in July of this year makes provision for margin control to last only until the last day of July 1978.
The last day of July 1978, therefore, marks the end of a Price Code in the 1243 full meaning of that term, the full meaning being a formula applied universally—some would say arbitrarily—to all companies for the cost control element which has been part of the Price Code since it was introduced by the previous Conservative Government five years ago. It was not continued in the Price Commission Act. We have been anxious to move on to powers which as well as being permanent are more flexible, but the transition towards them requires a continuation of margin control for one more year.
§ Mr. Ron Thomas (Bristol, North-West)
Does not my right hon. Friend agree that under the Price Code there have been so many gateways that it has probably led to price increases rather than a restraint of prices?
§ Mr. Hattersley
I do not think that it can be described in such extreme terms, but I have agreed with my hon. Friend in the past and I agree with him today.
The sort of price policy that we want to see is best not operated according to a formula which is either operated at such a low level that companies which should be excluded are included or is operated at such a high level that companies which should be included are excluded. It is because of that that we introduced and eventually, after a little difficulty, carried the Price Commission Act.
The legacy of the old policy which comes up for one more year is margin control. This operates in two ways. The first way is that net profit margins must not exceed their reference levels—which is the margin of the best year since 1968—and gross percentage margins in a 12-month period must not be more than 90 per cent. of gross percentage margin in the last complete accounting year before April 1973. This year, in this order we have made adjustments to those two concepts of margin control to accommodate small firms, to allow for changes in direct taxes and to encourage investment.
I shall give a brief description of the five major changes in margin control which alter the position which the House confirmed a year ago. Paragraph 23 of the order allows for an increase in the immediate profit margin reference levels to the existing 12½ per cent. on return on capital and to 3 per cent. on turnover.
1244 Paragraphs 28 and 29 change the way in which companies may calculate their interest charges. In 1976, companies were able to choose whether they wished interest charges to be included in margin control calculations. They were told then that they must make that choice once and for all. Under the order, they will be able to reverse that decision and include or exclude interest charges according to their judgment.
Paragraph 34 influences the conditions and changes the position of the net profit margin safeguard for distributors. It modifies the rules to the advantage of distributors. Distributors whose net profit margins are below 85 per cent of their reference levels are permitted gross margin ceilings 15 per cent. in excess of their base levels.
There are two other changes. The first is contained in paragraph 5, which alters the number of exclusions from margin control. The second is in paragraph 44, which extends investment relief to payments made for the acquisition of existing industrial buildings, shops or warehouses.
I wish to make a final comment about a different part of the order concerning the final power which the order confers—the so-called pay sanction. The pay sanction operates in a simple and limited way. When there is a breach of established pay policy and wages are paid in excess of that policy, what is paid in those wages may be deducted from the costs which companies include in their calculation of profit margins.
I say that that is the case if there is a breach of established pay policy. By "established pay policy" I mean pay policy set out in a White Paper as is required by the parent Act. The annexe to the White Paper "The Attack on Inflation" of July 1977 is, therefore, the one item of pay policy which can be subject to the sanction in this order. It is the 12-month rule as endorsed by the TUC. That is the only area where the pay sanction can apply, and it is neither the wish nor the intention of the Government to use present policy as an extension of the sanctions within that order.
§ Mr. Norman Atkinson (Tottenham)
My right hon. Friend has now announced a statutory pay policy in relation to the 12-month rule, nothing else. That rule is the basis of a statutory policy.
§ Mr. Hattersley
That is not the case, for two reasons. First, there is no automatic sanctions to apply the 12-month rule. The sanction applies when the Secretary of State for Employment issues a certificate saying that he wishes margin control to be followed as a result of that. Secondly, there is no statute, as there was under the pay policy itself, which says that the 12-month rule must be adhered to and that anyone who breaches the rule is in some way in conflict with the law. All that can happen in those conditions is that when a company breaches the 12-month rule it may find that margin control regulations are working against it more severely than had the rule been observed.
Much as I would regret it happening, if a company were to pay an increase within 12 months, as long as it were prepared to have its margin control calculations excluded, the additional payments it made before the 12 months were out could be made. There would be no law to prevent the company doing that. That is the fundamental difference between what I have described tonight and a statutory policy.
§ Mr. Giles Shaw (Pudsey)
Will the Secretary of State be more specific than the vague generalities he has quoted? Surely, the whole basis of one small part of the Remuneration, Charges and Grants Act was a specific statement that an additional wage settlement within 12 months would be contrary to statutory wages policy, and, therefore, this order would be invoked if there were an additional settlement, even if the company determined that it might sacrifice a portion of its profit margin to make that happen.
§ Mr. Hattersley
No, the sanction I have described is not an automatic sanction. It is invoked on the certification of the Secretary of State. In practice, that would be the Secretary of State for Employment, although there is the legal provision that all Secretaries of State are one and indivisible, and, therefore, in theory it could be any Secretary of State. The process, however, needs that trigger to set it off. It is not statutory in the sense that paying within 12 months is not illegal. Anybody who pays in less than 12 months may, and I hope usually will, accept that that additional payment should be disregarded 1246 when margin control is calculated. That is not at all the same as a statutory prohibition.
§ Mr. Atkinson
My right hon. Friend should be clear about this. He is saying that the Secretary of State for Employment is statutorily obliged to intervene in the event of a firm paying at an interval of less than 12 months from the previous pay award.
§ Mr. Hattersley
No, I am not saying that. I do not know how anyone could believe that I had said that. When my hon. Friend the Member for Tottenham (Mr. Atkinson) readsHansard, he will discover that I did not say that. I said that it was within the discretion of the Secretary of State to intervene. Since I share the TUC's view that the 12-month rule is important for the transition from pay policy to free collective bargaining, I would expect that if the 12-month rule is breached the Government will use the power to back up what the TUC regards as right. There is no obligation on the Secretary of State to do it automatically. If there were, there would be no need for the Secretary of State to intervene.
§ Mr. Giles Shaw
If a manufacturer so wishes, he can increase the wages of his workers several times within 12 months provided that he does not thereby incur a price increase application. Is that what the right hon. Gentleman is saying?
§ Mr. Hattersley
First of all, I am saying that this is highly unlikely because the TUC will not wish its member unions to adopt such a frivolous and irresponsible policy. Were that to happen, however, a manufacturer clearly could increase his prices within 12 months without incurring an automatic legal prohibition. Were he to do so, however, he might well find—I emphasise the words "might well find", because there is nothing automatic about this—that the Secretary of State for Employment issued a certificate saying "Since the 12-month rule has been breached, the amount of money which has gone to pay the wage increases within 12 months shall not be adjudged an appropriate cost to be set against income for margin control calculations." It is no more and no less than that. I do not think that I can be more specific about it than I have been.
§ 10.31 p.m.
§ Mrs. Sally Oppenheim (Gloucester)
I am sure that we are all very much obliged to the Secretary of State for defining so carefully the difference between a statutory sanction and a legal prohibition. I do not know whether he has found this definition in any of the law books he has studied, but he might care to take a lesson from his hon. Friend the Minister of State, who had to give him tuition throughout most of the stages of the Price Commission Bill concerning legalities.
The House will have been very interested to learn that this is very much a discretionary power as far as the Secretary of State for Employment is concerned. Therefore, as far as a company is concerned—if we are to take seriously what the right hon. Gentleman has said—it depends which side of the bed the Secretary of State for Employment gets out of that morning. If it is the right side, he probably allows the breach of the 12-month rule to go through. If it is the left side, he does not.
That is possibly a question of semantics. But now we have had the Secretary of State's own authority for the fact that this is a discretionary power on the part of the Secretary of State for Employment. I hope that the House has noted that very carefully.
We were also very interested to hear the Secretary of State say that certain weak-minded people often like to develop generalities in debates of this nature. He then went on to give us one of his ponderous pronouncements about inflation. We were very interested to see that this weekend he had been making more of these and to read in theDaily Mail of Saturday 19th November:But Mr. Hattersley said in Devizes—about the inflation figure—that this figure still reflected the troubles of last winter. Then he set out to prove that inflation was really down to single figures. He said: 'Encouraging as it is, October's figure does not indicate the low rate at which inflation is running today. A generally accepted method of measuring the current inflation rate is based on increases in the previous six months.'I find that a particularly interesting statement from the Secretary of State, because on 7th February, in answer to a Question from my hon. Friend the Member for Romford (Mr. Neubert), the right 1248 hon. Gentleman, referring to the Chairman of the Price Commission, said:If he did mention a … increase … as a result of extrapolating the six months to the end of November and the six months following that. That is a wholly unreasonable statistical exercise to enter into, and therefore invalidates the … figure."—[Official Report. 7th February 1977; Vol. 925, c. 1030.]Therefore, we can now take it that his figure has been totally invalidated.
However, to return to the narrow confines of the order, there is an inevitable air ofdéjà vu in any Price Code debate on which one embarks. The Price Code has been resurrected on so many occasions since its natural life ended. It has become a total anachronism. On several previous occasions we have been promised, as we have been promised tonight, that we were embarking on the final stages of the Price Code. Each time those promises have been rendered worthless and the code has been resurrected yet again.
The right hon. Gentleman's precedessor, as long ago as 1975, said in a debate on 16th October:we took powers under Section 2 of the Remuneration, Charges and Grants Act to extend by order price control powers to the end of July 1976 and, if absolutely necessary, to the end of July 1977."—[Official Report, 16th October, 1975; Vol. 897, c. 1670.]More, recently, on 7th July 1976, the right hon. Lady said:The House is well aware that what we are looking at is the final stage in a price code that was inherited by this Administration."—[Official Report, 7th July 1976; Vol. 914, c. 1378.]The Price Code was never intended to be anything more than a short-term measure, but it has had almost the nine lives of the proverbial cat. Successive resurrections of the code have resulted in similar arguments being advanced against it. One is driven to the conclusion that there is not anything new under the sun to say about the Price Code.
But never before have we been more entitled to express our concern. We do not think that the code should be extended another year. Earlier this year, when we were debating the Price Commission Bill in Committee, the Secretary of State made it absolutely clear that not only was the final date for the Price Code 1249 to be 1st August 1978 but that its existence between now and then was to be conditional. He said on 24th May:I am implying that the sort of margin control that we envisaged for 1st August onwards would be impossible were there not another wage round. It would be a burden on industry which it could not reasonably be expected to bear."—[Official Report, Standing Committee B, 24th May 1977; c. 564.]There are those who would argue that the Government have not got the wage round to which the Secretary of State was referring. We know from the newspaper reports that the average rate of settlement is very substantially above the Government's target levels. In some cases this has occurred because of "phoney" productivity deals, and in some cases it has occurred because the Government's 10 per cent. ceiling has become a floor.
We know that there has been one case in which both the 10 per cent. guidelines and the 12-month rule have been breached with the Government's blessing. The situation has predictably arisen out of the inevitable stress caused by a period of strict control. I have no intention of going into the rights and wrongs of any particular settlement. I simply make the point that the pay round envisaged in the speech of last May is seen by many not to exist at all, or to exist only to a limited extent. Therefore, we might expect the Secretary of State to be as good as his word and not impose upon industry another burden which, to use his own words, it cannot reasonably be expected to bear. He has done so, and he has extended margin control for another year.
On this occasion we can be more confident that this will be the code's last appearance, because by next August it is unlikely that the Labour Party will still be in Government.
§ Mr. Mike Thomas (Newcastle-upon-Tyne, East)
Perhaps the hon. Lady can explain whether she is glad or sorry about the breach of the pay guidelines. Do not industrialists who breach the guidelines bring it upon themselves?
§ Mrs. Oppenheim
I am sorry for the Government. They are supposed to have a pay policy, and the country can see that they have not got one. I predicted that it would come about, and my predictions have been proved right. Industrialists who breach the pay policy know 1250 what they are doing in their own companies, but perhaps they are not entirely free. There is a sanction or semi-sanction against them in this order.
The sanction of margin control is serious. We are concerned by the erosion of profitability as a result of the strict controls in 1974–75 coupled with the pay explosion and with the sort of levels of profitability existing throughout British industry today, so that we can only view a measure of this kind with very great alarm.
It is not without significance that In every investigation embarked on by the Price Commission so far an interim price rise has been allowed because otherwise the company would have fallen below the safeguarding margin. This serves both to illustrate the extent to which profitability has fallen throughout British industry and to highlight the irrelevance of the Price Commission's counter-inflation activities.
But it has to be argued on the other hand—and I like to be fair and show both sides—that, if the right hon. Gentleman's extravagant claims for the Price Commission are remotely justified, margin control automatically becomes superfluous. At a time when the Chancellor of the Exchequer is wringing his hands about lack of investment, it seems the height of folly to introduce a measure of this kind, which can only depress investment further.
In the debate on the Queen's Speech the Secretary of State for Trade acknowledged that the level of profitability in British industry was far too low, but he complained that investment was not taking place despite an adequate cash flow and adequate liquidity. What he, the Chancellor of the Exchequer and the Secretary of State are unable to grasp is that companies will not invest, no matter how much cash is available, if the return on investment is not adequate—and it certainly is not adequate now within British industry.
§ Mr. Ron Thomas
Will the hon. Lady explain why under the Tory Government, with high levels of profitability, which presumably gave British capitalists all they wanted, the level of capital investment in Britain continued to decline?
§ Mrs. Oppenheim
I can answer that with a quotation from the words of Mr. 1251 Ron Halstead of Beecham Products, speaking at the CBI conference:The effect of the Price Code on British industry has been well nigh catastrophic. Between 1972 and 1976, during the duration of the first Price Code, company profits fell 40 per cent. and the real return on capital invested dropped from 8.9 per cent. to 3.5 per cent. compared to over 10 per cent. in the mid 1960s.Would the Secretary of State invest his savings—I do not know whether he has any, but he jolly well ought to have on his salary—to see a return of only 3.5 per cent.? He would be foolish if he did. I invite him to say how much extra profitability this version of the code will allow over last year's code and how much that sum would have been if there had been no code at all.
Above all, I ask the right hon. Gentleman what possible justification there can be for the continuance of margin control when the former Chairman of the Price Commission made it crystal clear that margin control has had a negligible effect on prices in the past five years. One does not need to tell that to housewives in the shops, because they have seen it for themselves.
The continuation of the code for a further year is an expensive concession in what has the appearance of a one-sided bargain. For the next eight months we shall have a system of price controls, while any limitation on pay is highly speculative. It is not a quid pro quo we are seeing but a quid pro nihil, or, in the right hon. Gentleman's vernacular, "owt for nowt." It means that until 1st August next year companies will have the double burden of margin control and the inequities and uncertainties of the Price Commission Act. It could be claimed that this will be one of the most difficult years for industry—and it is a year when everybody realises that there is an urgent need to stimulate investment and job creation.
The right hon. Gentleman said that one of the effects of the new code will be to reduce the need for companies to conform to a rigid bureaucratic requirement. But they will still have to keep records, make regular reports and comply with pre-notification requirements. Indeed, it has been represented to me that the regulations under the Price Commission's new code are more onerous than under the old code. Because the implications are greater, 1252 more senior members of management have to become involved in the preparation of information at considerable cost.
However, it would be less than fair to allow this debate to go by without acknowledging that what we are debating is a relaxed form of the previous Price Code for manufacturers and that there has been a substantial improvement in investment relief. It is, however, manifestly unfair that distributors should be left with the full rigours of price controls. Since they are the major employers of school leavers it is absurd that they should be singled out in this way.
Perhaps the supreme irony of the debate is that it is taking place about four months after the code that we are now debating became operational. So much for the parliamentary accountability that we were promised so often during consideration of the Price Commission Act. As a result, we are debating an order with only about eight months to run, which is a futile exercise.
All hon. Members, whether in favour of the order or against it, will agree that retrospective debates of this kind are most unsatisfactory.
We do not like the measure. We do not think that it should have been extended for another year, particularly on the spurious premise on which it has been done. We believe that the continuation of price control is unfair and damaging and, above all, that it will have no effect on prices. We want our disapproval to be clearly on the record.
Even more regrettable is the fact that it is becoming more likely every day that by the end of next year prices and unemployment will be rising again fast, and measures such as this can only distort the former and exacerbate the latter.
§ 10.46 p.m.
§ Mr. Ron Thomas (Bristol, North-West)
I was waiting for the hon. Member for Gloucester (Mrs. Oppenheim) to tell us exactly what Tory Party policy was on prices. The last time the hon. Lady spoke in the House, she would have had us believe that she would like prices to be fixed in some kind of nineteenth-century open market in Gloucester. The world is not like that any more. The position is that a small number of British and multinational companies control the prices of most of the goods and services in this country. But all that the Tories 1253 can tell us is that the way to deal with that position is to have effective competition, as if we were living in the nineteenth century.
There seems to be a basic contradiction in what the hon. Lady said. First, she told us that someone at the CBI had said that the Price Code had been a catastrophe and that it had been so rigid and profits had been so limited that firms had been unable to make any investment. On the other hand, we are told that the margin control was negligible over prices, One can it have it both ways. Either the code had some control over prices and, therefore, profits, or it did not. If it had no control over prices, presumably profits were much higher than they would otherwise have been. One should not quote the kind of nonsense that was trotted out at the CBI conference.
§ Mr. Tim Smith (Ashfield)
Would not the hon. Gentleman agree that as the Price Code consists of a series of arbitrary rules it could have a different effect on different companies, and that that explains how it is possible to have these two different circumstances?
§ Mr. Thomas
No doubt the gateways under the Price Code would have a different effect on different companies. Capital-intensive and labour-intensive firms were differently affected. But the CBI represents the major manufacturing firms, the bigger firms in our economy, and those are the kind of firms that have driven a coach and horses through the Price Code. Ever since the beginning of the Price Code set-up, I and some of my hon. Friends have insisted that it was has in no impact on prices. I know that in his heart of hearts my right hon. Friend the Secretary of State knows that as well. But he had to take over the policy and go along with it and try to make us believe that it had an effect on prices.
The Price Code had no real controlling effect on prices because there were so many gateways, so many ways in which firms could demand price increases. I am willing to admit that it is the larger firms—those with the skilled accountants and all the rest—that continue to look at the check list and see how they can put up prices under this or that heading, under capital investment, stock relief, inflation accounting and so on. They led to con 1254 siderable price increases right across the board. They also led to the rather interesting situation—about which hon. Members have not said enough—in which it is openly admitted that the consumer pays for investment.
The Tory economic analysis still is that it is the innovating entrepreneur who invests his savings—having worked in the coal mines and saved for 30 to 40 years—and who, with his little bit of capital, starts off a firm. The Tories say that when he wants some money he then issues some shares, and because the shareholders take certain risks they are therefore entitled to dividends. That is no longer the case.
If a firm wants to renew its capital investment or expand, it charges the cost to the consumers. They are the ones who pay for the investment. This is a major argument behind why we say that the consumers should own the companies because they are paying for the capital invested. On previous occasions the Minister has admitted that firms are allowed to increase prices for that reason—and then firms which would have invested in any case are allowed to invest their surpluses overseas. About £2,000 million is invested overseas annually.
In considering whether the Price Code is effective, one should remember that the Minister who is responsible has admitted that the last relaxation meant a transfer of £1,000 million from the consumer to the corporate sector.
No doubt several other hon. Gentlemen wish to speak, so I shall come to my final point. The Opposition spokesman tonight should tell us what is the Opposition's policy on prices. In listening to the hon. Member for Gloucester in the past, I have been able to conclude that they do not accept any form of price control whatsoever, no matter how effective. If the Opposition are opposed to any form of price control, they should stand up and say so. They should have the courage to do that. I am opposed to any kind of wage control and I say so again and again.
I now want to refer to the wage control aspect of the matter. When we debated the 12-month rule with the Secretary of State for Employment, there was, to a certain extent, a fast one pulled on us, especially in relation to the rule and the 10 per cent. guideline. It may be that I 1255 am a bit thick, but I did not imagine during that debate that the Government would use all kinds of powers to stop firms from making legitimate pay awards of over 10 per cent.
Many of my hon. Friends have said that if the Government have such powers they should use them to get planning agreements. The Government seem reticent to do that, but they are quick to use their powers to stop firms paying more than 10 per cent.
§ Mr. Nicholas Ridley (Cirencester and Tewkesbury)
Is it not strange that the Government should use their powers to grant export credit—a power that was granted by Parliament to make sure that only good risks were backed—as a discipline against firms which pay more than 10 per cent.? Is that not a misuse of powers?
§ Mr. Thomas
That may be the only point on which I shall ever agree with the hon. Member. I certainly entirely disagree with the Government using any of their powers to interfere in a freely negotiated collective bargaining arrangement.
I am still concerned about Part VIII of the document. Let us consider a firm such as ICI which is capital-intensive; the wage costs per unit of output are 1 per cent. or less. Like so many other companies, ICI is making massive profits and it could increase wages by more than 10 per cent. provided that it did not ask for a price increase to offset all or part of the cost of doing so. This clearly means that some groups of workers will be treated differently from others. Workers in labour-intensive firms will have no chance of getting increases above 10 per cent. because price increases would be needed to offset the cost. This sort of discrimination is unacceptable.
The same sort of thing applies with the 12-month rule. A certificate may be issued by the Secretary of State for Employment, but a firm which breaches this rule can get away with it if it does not seek an increase in prices to cover the cost.
There are so many gateways in the Price Code that such firms will find ways through it. This injects a level of discrimination that I find unsatisfactory. I should like a clear assurance from the Minister who replies that the Govern 1256 ment are not using the code to try to stop freely-negotiated wage increases of more than 10 per cent.
§ 10.57 p.m.
§ Mr. Tim Smith (Ashfield)
The hon. Member for Bristol, North-West (Mr. Thomas) made some interesting observations. He said that consumers would be better off if they owned some of the businesses that are putting up prices to pay for investment, but I am not sure that consumers are happy with some of the businesses they own already. British Rail, for instance, is due to increase its prices on 1st January.
I find the timing of the debate odd. The order came into operation on 1st August. There was a consultative document in July, but it would have been much better if we had had this debate four or five months ago. Our comments may be noted, but they are unlikely to be incorporated into the order as amendments.
The hon. Member for Bristol, North-West said that the Price Code had had no effect on prices. The rigid rules of the code have undoubtedly encouraged firms to increase their prices whenever "allowable costs"—a phrase from previous codes—justified an increase. Some companies applied automatically every three months.
In the debate on last year's corresponding order, the Secretary of State said that there was a difference of about £100 million in a full year between price increases notified to the Price Commission and those that were taken up subsequently. That statistic is misleading, because many companies were simply applying for price increases because they were entitled to one under the code, and for no other reason.
In last year's debate the Secretary of State said that the code which ended on 31st July this year would continue to check inflationary price increases. I contend that it has not been possible to estimate accurately how the code has operated and whether it has had that effect, but I very much doubt whether it has. I should be interested to know the Government's estimate of the effect of the last code.
The new code incorporates the same basic contradictions of profit margin control by reference to historic levels. This 1257 follows the practice of previous codes and it is this formula that has produced the uneven effect on prices that we have seen. I do not agree that the codes have had no effect on prices; they have had an uneven effect.
The historic level for some companies can go back nearly 10 years to 1968–69, since the formula applies to the two best years of the five years before 1973. The consequence is that it has been possible for companies that at that time had historically high profits to be protected by the code, and at the same time for companies that had historically low profits at that period—it was a matter of chance because it happened to be that period that was selected—to have been given little relief. Indeed, they are accorded little relief in the new order. The 12½ per cent. safeguard on capital employed has not been increased although the 2½; per cent. safeguard on turnover has been increased by a small amount, namely, by ½ per cent. to 3 per cent.
It seems that there is a basic inconsistency between profit margin control and the Price Commission Act 1977, which in Section 2(2)(c) refers to theneed to earnprofitswhich provide a return on the capital … to defray the cost of the capital … and to encourage the promotion of, innovations and technical improvements in and the expansion in the United Kingdom of the enterprises …In other words, there is a conflict between the need to encourage investment and the continuing controls under the order.
The net profit margin control has been the subject of considerable relief in previous orders, especially the 1976 order, which introduced stock relief and relief for depreciation. However, when comments were invited on the consultative document a number of accountants felt that the multiple of 1.4 was was sufficient to counter the substantial effect of inflation on the replacement cost of capital equipment. It was suggested by the consultative committee of accountancy bodies that it should be 1.7. The 100 Group accountants, accountants working in industry who have a better knowledge of these matters thought that the factor should be 2.1. I am sorry that there was no room for improvement in that respect.
1258 Gross profit margins are still the subject of control. There has been little relief for distributors. They were subjected originally to a situation in which they had not merely to comply with 100 per cent. of their historical margin but to bring their margins down to 90 per cent. The only relief that they have been granted since then is the introduction of stock relief provision. The effect of the control can still be vicious. I am sorry that there is not more scope in the order to deal with that problem.
§ 11.4 p.m.
§ Mr. Mike Thomas (Newcastle upon Tyne, East)
As usual, the hon. Member for Gloucester (Mrs. Oppenheim) contrives to have it both ways. As my hon. Friend the Member for Bristol, North-West (Mr. Thomas) drew to our attention, the hon. Lady says that the code is strict and imposes a damaging control, yet in the same breath she says that it has no effect on prices. That is the sort of argument to which we have become accustomed in these late-night debates. The hon. Lady has now been riding these two horses for so long that she is in great danger of doing herself permanent damage. I counsel her against taking that course permanently.
I must tell the hon. Lady and the hon. Member for Ashfield (Mr. Smith) that they let the devil's tail slip out from underneath the cloak or blanket. If on a three-monthly timetable a company is to be permitted to apply immediately for an increase under the code and to increase its prices on the basis that its allowable costs have increased, that does not say much for the much-vaunted competition that in Tory ideology is supposed to take the code's place.
Anyone would think after listening to Conservative Members that they had nothing to do with any Price Code at any time. One would think that they would like nothing more than to have no form of price control. As my hon. Friend the Member for Bristol, North-West said, it was the Conservatives who thought out the most disreputable parts of the idea. It is the belief of many Labour Members, myself included, that had we come to power in 1974 and devised our own Price Code, we should have devised a rather better instrument than the one we were left with by the Conservatives when they went out of office. Every change 1259 in the Price Code—from October 1974 I have participated, or at least sat through, or endured, every one of these debates—has been beneficial, a positive change away from what the Conservatives left us with.
While my hon. Friend the Member for Bristol, North-West may have doubts about where some of the money has gone, the fact is that there is no room for complaint from the Conservative Benches. Every change has been positive and helpful. The Conservatives invented this system. Either it works or it does not. Either it is strict and damaging or it has no effect on prices. It cannot be both, no matter what excuses may be scraped up for the differences between different companies.
However, my hon. Friend the Member for Bristol, North-West cannot have it both ways, either. He cannot deny that wage levels have some impact on prices. Therefore, the effect of wage levels on costs must be reflected in some way through the code. I share my hon. Friend's doubts about the uneven application. This is the area in which I have the most concern.
It would be churlish to let this debate pass without acknowledging that the changes in relief for the retail sector on buildings, warehouses and so on, for which we have argued for so long and which are, at last, included, are very much welcomed. I will not say that they are overdue, but on behalf of the cooperative movement in particular and the distributive sector in general I say that we should not let the evening pass without saying that we are pleased that the changes are there.
§ 11.7 p.m.
§ Mr. Giles Shaw (Pudsey)
I do not know whether it would cause embarrassment either on the Conservative Front Bench or to the hon. Member for Newcastle upon Tyne, East (Mr. Thomas) if I were to allow myself the rare privilege of saying that I am disappointed that we are all here. I am disappointed that we are having to debate the continuation of a codified price control structure which I suspect everyone would willingly see abolished if that would make a significant contribution to the generation of more jobs, and more investment and lead to an improvement in the economy.
1260 Although the hon. Member for Newcastle upon Tyne, East rightly said that we were dealing with the legacy of a previous economic policy of a previous Conservative Government, there are those of us—I think I take him with me on this—who are equally concerned that what has been carried forward from the past in terms of codified control on prices should now still be continued. If we had our time again, I suspect that most Labour Members would disagree fundamentally with the proposition that there should be separate codified systems for prices and wages.
We know that the present position is that the Labour Party would in no sense wish to have a codified wages policy. The only reason we have a codified prices control is that it was a concomitant of those twin policies introduced at that time. The discussion of a codified prices policy now as a separate instrument of economic management when, by all accounts, a codified wages policy has been abandoned is at the guts of the reason why the argument still persists, even as late as November 1977, at five minutes past eleven at night.
This order is, I trust—and I think that the Secretary of State has given us some encouragement here—the last of the orders under this Act which will be continuing some of the provisions of the original prices policy. We all agree that it is an improvement on its predecessor, just as its predecessor was an improvement on the one before that. Every moment has been gradually argued out to demonstrate to Government that it is best to allow the pricing sector to operate according to cost and not according to political decisions. What we are really talking about is political decision-making intervening in the argument whether costs should be reflected in prices.
I know of no other argument in the formula. If costs are not to be reflected in prices something has to intervene—either taxation to recover the cost of subsidising, if subsidy is the order of the day, or unemployment benefit paid to those put out of work if employers cannot run their businesses, or some kind of payment to the consumers so that they may be given additional supplements to income to afford natural prices.
But in the general equation no one can escape the fact that the basic costs of 1261 production have to be reflected in the basis price offered to the consumer. We have the one sector of margin control with which this code still deals, and here we have to say that, despite the modest movement that the right hon. Gentleman has made, he has remained steady on a 12½ per cent. return on capital but has moved half a percentage point from 2½ to 3 per cent. on turnover.
Do the Government seriously believe that that is an adequate change, bearing in mind the historic changes on which these costs have been calculated? We are talking here of a five-year period of inflation—in double figures for the last three and a half years. We are saying that we agree that it is desirable to move from 2½ per cent. to 3 per cent. on turnover. That is peanuts in the generality of seeking to get the economy moving and a gross travesty of economic management. If we really want to believe the Government's attempt to generate more jobs and investment, a move from 2½ per cent. to 3 per cent. on turnover is pathetic.
The hon. Member for Newcastle upon Tyne, East has, quite rightly, drawn attention to the benefit to the distributive trade in considering whether the code makes a sufficient improvement in other things, such as investment allowances. But what has happened in the case of commercial vehicles, for example? As far as I can see, they are not treated like other forms of in vestment generally used by most manufacturing and distributive companies, and are not allowed the preferential treatment given to other forms of investment.
I question whether the effect will be beneficial to employment. We spent a long time in Committee on the Price Commission Bill, when there was an argument for saying that the Price Code could be used to help industry to take on more people. One of the anxieties expressed, certainly by the hon. Member for Bristol, North-West (Mr. Thomas) has been about the possibly damaging effect of using the code as a vehicle for keeping wages low in industries which could well increase their wage offers.
This is neither the time nor the opportunity to discuss wages policy, but one can say that if there is agreement that an increase in profit margin allows an increase in employment—I suspect that 1262 there is a clear relationship between increased profits and increased employment—one cannot view the present situation other than as one of discouraging employment. There are specific allowances on plant and machinery; there are not specific allowances for increasing employment.
Labour costs are a large proportion of any manufacturer's costs. It could be argued that the general effect of the code is to make marginal changes in areas where, by and large, industry has been asking for changes. Yet, as a positive gesture, these changes seem to me to have no benefit whatever.
There is plenty of evidence from previous Price Commission reports to show that the competitive nature of most industries, certainly the food industry, is such that prices would not have risen by as much as they have, given a general free market in prices. I am clear that, where a codified system exists, it is incumbent on any management to optimise every target under the code, and it is not surprising, therefore, that that is resulting in a general upward movement of prices within the limits of what is allowed.
§ Mr. Ron Thomas
I cannot see the logic of the hon. Gentleman's argument. The fact that under the code, firms can, get price increases does not stop the market mechanism from operating. The firm which wants to remain competitive does not increase its prices—it does not go to the code. According to the hon. Gentleman's philosophy, British industry is dominated by a small number of oligopolies which determine prices.
§ Mr. Shaw
We can talk about oligopoly as regards average wages and, indeed, wage negotiations. The point is that when a codified system provides that one is allowed to increase prices by a certain amount in relation to costs, everybody who incurs those costs will seek to pass them on. I suggest to the hon. Member for Bristol, North-West and, indeed, to the keen and erudite Member for Newcastle upon Tyne, East that when we had a discussion about gas prices recently there was very clear evidence of that—that even though if the market had been allowed to operate the price of gas would not have been increased, the Government ensured that the price 1263 was increased. This thinking operates throughout the sector where prices are controlled by codes.
§ Mr. Mike Thomas
The hon. Gentleman degenerates from buffoonery to nonsense. The fact is that if the forces of competition are operating—I presume that the hon. Gentleman shares the view of his right hon. and hon. Friends that in some magical way they are—this process of allowable costs and inevitable increase will happen. If it happens, that in itself is a case for control. As regards the price of gas, gas in itself is a monopoly. Even taken within the broad sector of fuel prices generally, increasing the price of gas to what the market would bear at present would probably double or treble it. The hon. Gentleman is talking nonsense.
§ Mr. Shaw
The hon. Gentleman must recognise that if the Gas Corporation did not wish to increase the price of gas or argue that it was necessary for it to do so and was perfectly happy with the return it received on the product, the consumer, in whom the hon. Gentleman always expresses a substantial interest, was very content.
When it comes to the question of pricing in the private sector, under a codified system the question that all managers, manufacturers and those who set prices must determine is what they can operate under the code. That determines the ceiling on what is permissible. The Government in their management of pricing have encouraged the belief that what is important is to ensure that within the code the optimum is obtained. That is the way in which pricing has been conducted in the past three or four years.
That is one of the big differences between having a codified system and having a non-codified system. There are systems in the free market economy which will allow other factors to operate. With a modified system one is bound to have the optimum return under the code. That is the situation at the moment.
§ Mr. Mike Thomas
Is the hon. Gentleman aware of what a shameful commentary that is upon the behaviour of British industry? If what he says is true, industry pays no regard to competition—there is not any genuine competition. 1264 Firms rig their prices in concert. They all increase their prices whenever they have the least excuse for doing so. Is this what he is really saying to us? I do not believe it.
§ Mr. Shaw
The hon. Gentleman knows full well, because he has raised this point on many occasions, just why the prices in various sectors of British industry rise in such a way. He knows full well—the Price Code has provided for it—that three-months by three-months costs can be reviewed and applications made. If he thinks that sitting round a board room table a director of a firm can justify the attitude "We will ignore this sector's next increase. We will let the next six months or nine months pass without putting in a price application.", he is deceiving himself and the House. The pressures on industry are such that it must operate as I have said, given the generation of inflation over the past three years, which has made nonsense of profit forecasting. The hon. Gentleman knows full well that when inflation is running at 12 per cent., 13 per cent., 14 per cent. or 15 per cent. per annum, one must keep moving in terms of prices if one is to survive.
I turn from that substantial interpolation to the question of the Price Commission Act and the code which is operating. I should like to ask the Under Secretary whether he has evidence that under the new Act the investigatory procedure is working satisfactorily. There is some ground for believing that the deterrent involved in the potential freezing of prices at present when an investigation is conducted is such that it will actually prevent price increases from being applied for and, consequently, that firms will put themselves at risk rather than incur the 28-day period of freeze.
Before hon. Members say that they have nothing to fear if their price is correct, I suggest to the Minister that the main concern companies will have is the fact that they will have their prices frozen in any event. They will be able to recover, possibly up to 100 per cent. That is allowed for in the Bill. But the fact that prices will be frozen for a period will be a deterrent against making applications. If that is so, if could seriously put smaller companies at risk, if not larger ones.
In discussing what I hope is a final amendment to the Counter-Inflation Act 1265 and Price Code, I think it right that we should debate the order very late at night. It is a sorry measure in a sorry history of price control, and the sooner we bury it, the better we shall all be.
§ 11.21 p.m.
§ Mr. Nicholas Ridley (Cirencester and Tewkesbury)
I apologise for missing the beginning of the debate: I had to be elsewhere. However, I cannot resist making a very short speech in fond farewell to this Price Code, if it is indeed the last Price Code.
During the debate a large number of hon. Members have said that other hon. Members could not have it both ways, whatever that means. I remember the Counter-Inflation Act, under which this code is made, when hon. Members or their predecessors, myself, and my hon. Friend the Member for Oswestry (Mr. Biffen) opposed it. Those hon. Members are having it both ways themselves. They are now all in favour of price control, but they were not when in opposition. It is a strange thing about wage and price controls—all Governments are in favour of them and no Oppositions.
I must claim exception for myself because, unlike my hon. Friend the Member for Pudsey (Mr. Shaw), I actually believe that prices in the economy are controlled by competition. Labour Members laugh, but when these Draconian powers came into force in the first Price Code in 1973–74, every price went up—with one exception. The only price that fell dramatically was the price of houses, and that was the only price outside the Price Code. That is a point for hon. Members to ponder.
Having studied the order before us I should like to ask the Minister where publicity about a notification will be laid against the firm that makes it. I can see no such mention in this Statutory Instrument. I ask that question because in an article inThe Times last Saturday Mr. Charles Williams, Chairman of the Price Commission, said:The commission disapproves of notification being aired in public. Who can say in the future whether publicity will modify the commission's attitude to a notification?".Where is the legal justification for Mr. Williams to say that? Is he really saying that he alone is allowed to approve or disapprove of what firms do or do not do? He is the servant of this House to 1266 administer the legislation. He is not a person who has discretion about of whom he approves or disapproves. Furthermore, are we really allowing a bureaucrat to say who may engage in publicity and who may not?
I understood that free speech was still available in this country, even to firms which put in price increase notifications. Upon what does Mr. Williams base his authority for this outrageous statement?
§ Mr. J. W. Rooker (Birmingham, Perry Barr)
I hope the hon. Gentleman will put the record straight for posterity. Mr. Charles Williams is not the servant of this House. He is not responsible to this House. He was not appointed by this House. His appointment was not approved by this House. This needs to be laid on the line. Mr. Williams is the appointee of my right hon. Friend, who sought no one's approval. He is not required to seek anyone's approval let alone the approval of this House, to appoint Mr. Charles Williams. Whether one agrees or disagrees, the fact is that the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) uttered a false notion about the accountability of Mr. Charles Williams to this House.
§ Mr. Ridley
Absolutely not. I am happy to send for Mr. Williams to come before my Sub-Committee of the Expenditure Committee. I should be happy if the members of the Public Accounts Committee required his attendance to explain any matter. He is accountable to this House. The idea that the Government have the power to appoint and dismiss these people, irrespective of the wishes of the House, is wrong.
§ Mr. Ridley
In view of what Mr. Williams said inThe Times last Saturday, I shall have a jolly good try.
§ 11.26 p.m.
§ Mr. Michael Neubert (Romford)
It is a sad commentary on the lack of improvement in the human condition that we are debating yet another prices order late at night. The original Price Code has been changed, modified and otherwise amended so often that it baffles comprehension. The previous Secretary of State retired defeated on this issue, and yet we still consider these orders time after time.
1267 This time the order is the subject of stricture from the Joint Committee on Statutory Instruments. It would be helpful for the House to know exactly what the Committee said. It stated:The Committee consider that the multiplicity of these powers and of the amendments to earlier Acts makes it difficult to determine whether this order … is in fact within the statutory powers under which it purports to be made. They consider that there is a need for the consolidation of prices legislation.I shall attempt to paraphrase what the Committee says. In plain language it seems to mean that legislation has been altered so many times that it is now of bewildering complexity. It does not understand it and nor does anyone else. The Secretary of State may not have the powers that he thinks he has and he may be breaking the law without knowing it, yet the House appears to be ready to pass the order without challenge.
Despite the Committee's view, the Secretary of State asks us to argue not on the generalities but on the merits of the order itself. If that is what he wants, he will have to persuade the Lord President of the Council that 90 minutes is not sufficient time in which to discuss obscure technicalities and that he will have to allow a full day's debate in future.
§ Mr. Mike Thomas
Is the hon. Member for Romford (Mr. Neubert) saying that these changes are so crippling that he will not vote against them?
§ Mr. Neubert
Our attitude to the Price Code is clear. We have a simple solution—scrap the code now.
My remarks must be considerably truncated in order to allow the Under-Secretary of State time to sum up the debate. This is an order of complexity which the Secretary of State claims to understand. If put to the test, I doubt whether he could prove that he understands it, but I do not propose to do that tonight.
We are opposed to the order not only because of its complexity but because we believe that the effect of the Price Code has been insignificant. When one considers the background of rapid inflation, how can one claim that stringent price control has been anything other than insignificant? By next spring it is likely that prices will have doubled. The notion of stringent price control over the last 1268 four years will then appear laughable. Buttonhole the average person in the street and he will frankly greet one with downright disbelief on that score.
It does not carry much conviction with the Tribune Members below the Gangway, either. Even its most respected apologist, the recently retired Chairman of the Price Commission, Sir Arthur Cockfield—this was his dedicated work for four years—could claim only thatlooking at all the evidence available, the best estimate we can make is that, at the peak, price control probably reduced prices by about 3 or 4 per cent. compared with what they otherwise would have been.Against a background of the peak of inflation at 26.9 per cent. in August 1975, the fact that in that calendar year inflation ran at 25 per cent. and that even now it is still 14 per cent., with the result that the real rate of inflation—because there were direct consumer subsidies which would have added a few points—was even higher, we can see that the credibility of stringent price control in these circumstances is something less than negligible.
That is not to say that it has not had some effect on prices. It has, but in other areas it has been restrictive. It is a failure of Labour Members that they have to see everything in straightforward terms. They cannot conceive of different circumstances affecting different companies in different ways. They cannot see that one rigid set of rules will bear differently on one company from another, that those companies that go for growth will find it oppressive and that those finding the market slack will not be affected by it.
They completely fail to understand these factors. We would perhaps welcome the slight relief that such a reduction in prices has managed to achieve as something to set against the ravages of inflation under this Government but for the great damage done to industrial productivity and the prospects for employment.
My hon. Friend the Member for Pudsey (Mr. Shaw) made one point very well and I should like to support him by quoting two cases of the lack of profitability in British industry. First, the Government's White Paper "The Attack on Inflation The Second Year" states:During the 1960s, the rate of return, after taking account of the need to replace fixed investment and stocks, was typically over 10 1269 per cent. By 1974 it was down to 2.2 per crent. This has contributed to the recent slump in new productive investment and consequent loss of jobs. The downward trend in profitability must be reversed.The Bank of England Quarterly Bulletin for June of this year takes the story on. It statesBy past standards, the real pre-tax rate of return was already very low in 1974, at only 41 per cent; but it fell even further in 1975, to 3½ per cent., and widespread expectations of a recovery in 1976 were not fulfilled … But for the introduction of stock relief in 1974, post-tax seal rates of return in the last three years would have been virtually nil.For many companies there would have been a minus factor.
It has been a deception of the public to suggest that by reducing prices to this modest degree, with levels of profitability of that order, anything significant has been done to remove the source of inflation. British industry needs profits as a stimulant to investment, and investment is the essential key to jobs. It has taken all of three or four years for Labour Members to discover this. The result is record levels of unemployment, no doubt running for a record period of time.
Pay policy is now limited only to the 12-month rule. The Government devised their own voluntary guidelines and, although they started with the idea that pay increases should be of the order of 10 per cent., they failed to make it clear that that was the aggregate and that basic increases should be 5 or 6 per cent. Ten per cent. has become at best the average and at worst the minimum. Tonight the CBI reports that of 700,000 who have had wage increases, no fewer than 112,000 were within the 10 per cent. figure. Hesitant at first, the Government are now ham-fistedly trying to recover the position.
For all those reasons, we should like to see an end to the Price Code. I have a word of warning for the House and for my hon. Friends. It is that this need not be the end of price control as we know it in this form. Although the order lasts only until 31st July, there is nothing to stop this Government from coming forward at that time with legislation to renew the Price Code in this form. [HON. ME MBE RS: "Where will you be?"] We may well be here. because the Government lack the courage to face the electorate. We are told "Back 1270 us or sack us", but we are not given any chance to choose.
I hope that, if he does nothing else, the Minister will make a clear, unequivocal and forthright statement that price control in this form of the bureaucratic Price Code will be abandoned altogether next August. Better still, let us have the chance at a General Election to return a Conservative Government who will restore the damage of the last four years.
§ 11.36 p.m.
§ The Under-Secretary of State for Prices and Consumer Protection (Mr. Robert Maclennan)
I hope that right hon. and hon. Members opposite will not think it an impertinence of me to suggest that before they launch into a debate of this kind they ought to clear their lines with each other in order to determine how long they think the Government will go on. Perhaps I may quote my right hon. Friend who said on a famous occasion "I know what is going on; we are going on".
The hon. Lady the Member for Gloucester (Mrs. Oppenheim) drew attention to the sense ofdéjà vu which these debates on the Price Code stimulated in her. One of the reasons is that she pulls out the speech she made on the previous occasion and refurbishes it, regardless of how circumstances have changed since the last occasion. It is rather bizarre that she peddled the line that she has used in every other debate about the burdens that industry has faced under the Price Code without mentioning that the Price Code which we are discussing tonight is markedly different from previous Prices Codes in that this is dismantling cost-related controls. There was not a word from her about that.
My hon. Friends have made merry with her internal contradictions about the burdensome effects of the Price Code and its negligible effect on prices, as she sees it. That was unsupported by any evidence as to the negligible effect on prices or the burdensome effect on companies, save that she cited the evidence of Mr. Halstead of Beechams at the CBI Conference. He produced figures relating not to the Price Code before us but to that introduced by the hon. Lady's right hon. Friends when they were the Government.
The hon. Lady gave figures relating to the decline in profitability over the period 1271 up to 1976. The order is part of a wider prices policy which the House debated at some length during the summer, a policy which the hon. Lady wished to dismantle but which the House in its wisdom decided to enact.
The order is admittedly a transitional measure, a measure intended to run only until July of this forthcoming year. The House will not be able to discuss a new code as the Price Commission Act does not empower us to bring forward such a code again.
My hon. Friend the Member for Bristol, North-West (Mr. Thomas) raised one of the specific questions of the debate—whether this Price Code could be used to stop wage increases which fell outside the wage guideline of 10 per cent. I can give the categorical answer that it cannot. The only part of the pay sanction which can be backed by the provisions of this code is that part which is contained in the annex to the White Paper published in July which relates to the 12-month rule, as my right hon. Friend has described. It is not open to the Price Commission to act in the way that my hon. Friend feared.
The hon. Member for Ashfield (Mr. Smith) spoke particularly of the effect of the new code on distribution. He did not draw attention—perhaps I may briefly do so in passing—to the modifications of the code, particularly the improvement in the safeguard for net profit margins to allow distributors to set gross margins up to 115 per cent of base level margins in order to obtain 85 per cent of net profit margin reference levels. There has also been a modification in the definition of small distributors exempted from the 10 per cent cut in gross margins. Therefore, the distribution sector has not been excluded from our consideration, as the hon. Gentleman suggested.
My hon. Friend the Member for Newcastle upon Tyne, East (Mr. Thomas) was quite right to emphasise that in any prices policy one cannot leave out of account consideration of the effect of wages upon wage costs. However, I must say to the hon. Member for Pudsey (Mr. Shaw) that he enunciated a philosophy of industry which is, perhaps, at root one of the troubles with British industry today, when 1272 he suggested that the pricing policy should be operated according to costs. I think that I have his words as he said them. He said that basic costs of production have to be reflected in price increases.
That may be the hon. Gentleman's philosophy, but it is certainly not the philosophy that inspires the present Government, who appear both to be more wedded to competition policy than the Conservative Party and to believe that it is possible and, indeed, desirable that improvements in efficiency should lead to price savings to be passed on to the consumer. The Government also believe that it must be a purpose of prices policy, as of competition policy, to ensure that there is incentive to achieve such productivity gains and efficiency gains, so that the rather harmful dictum to which the hon. Gentleman gave pronouncement, that basic costs of production must be reflected in increased prices, no longer characterises the way in which British industry operates. We shall certainly lose out in the international competition which we as a country face if that kind of philosophy is to be embodied in British industrial practice.
It is not for me to answer the points made by the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) about the remarks of the Chairman of the Price Commission. They are for him and not for me.
The hon. Member for Romford (Mr. Neubert) spoke of the effect of the Price Code being different on different companies. I only wish that that view had been so clearly expressed during our debates on the Price Commission Bill, because it was very much with that in mind that the present Government brought forward that Bill. It was to enable our prices policy to be very selective and more designed to hit companies which were unreasonably raising prices and unreasonably acting against consumers' interests. It is a policy more flexible and more effective and, I believe, for that reason, one that is here to stay.
§ Question put and agreed to.
That the Counter-Inflation (Price Code) Order 1977, a copy of which was laid before this House on 28th July, in the last Session of Parliament, be approved.