§ Question proposed, That the clause stand part of the Bill.4.23 pm
§ Mr. John Garrett (Norwich, South)
The debate on the question whether clause 18 shall stand part of the Bill enables us to consider the taxable capacity, the profitability and the cash liquidity of the corporate sector at a time when we are peering into an industrial abyss.
The profitability of British companies is so rapidly in decline as to cause near panic in industrial management. Every day, in every company report, we can read of the concern of company boards of directors for the future of their enterprises. Even those who in theory support the medium-term economic strategy of the Government are worried about how to get through the next six months.
The exceptions to this, of course, are the banks and the oil companies, and in discussion of a later clause we shall consider the profitability of the oil companies. I hope that during the debate on this clause some of my hon. Friends will raise the question of the taxation of bank profits.
It is said that Ministers wish to see the odd exemplary bankruptcy to frighten both sides of industry into pay restraint. Today we have had the announcement of the liquidation of Bamfords, the agricultural engineers, established for over 100 years, after the firm got its workers to accept a 4 per cent. wage increase. Already company liquidations have reached a three-year peak, and the squeeze is tightening every day.
Gross trading profits are expected to collapse from £15 billion in 1979 to £2½ 1266 billion this year. That will mean that the non-oil corporate sector will need to borrow at least £10 billion in the fiscal year 1980. We are, therefore, entering a cyclical downturn, on which has been superimposed a squeeze on companies directly due to Government fiscal and monetary policy, which will further force up the bankruptcy rate and cut investment. It has already been established that investment in manufacturing industry will fall by up to 12 per cent. this year and by the same percentage next year, thus increasing unemployment.
Already this year 123,000 redundancies have been announced. That figure is higher than at any time since 1971. Today's papers have announced a redundancy programme for a further 2,500 workers at Lucas Electrical. The theorists who always tell us that reducing the quantity of money will reduce the rate of inflation usually neglect to explain the mechanism by which this will happen.
That mechanism is simply to force companies out of business. As the New Statesman observed on 14 March:Getting at the workers by ruining a substantial number of bosses is one of those theories that does not seem so attractive in practiceor, as The Financial Weekly said in an editorial:We, and a good part of British business with us, we have seen enough.The chairman of ICI, Sir Maurice Hodgson, in an interview with The Director, said:I am afraid that some companies are so sick that the dose may be too strong—some of our own companies are being damaged in this way.The Economist summed up the situation on 29 March, saying:The object of a stern Budget is presumably to allow room for new sorts of entre-preneurship. This Budget does not allow big companies to show it Most of them face an intensification of their grinding liquidity and profit squeeze.In a later clause we shall consider the Government's aid to small companies. However, that aid to small companies is trivial compared with the crushing effect on all companies of high interest rates and a deflated home market. To small companies it is rather like throwing a small handful of fertiliser on to seedlings that will find themselves under a foot of snow in the near future.
1267 Since Second Reading, official figures have been released showing that in the first three months of this year industrial production fell by 2.2 per cent. and that the rate of fall in industrial production is accelerating. The Financial Times business opinion survey for April showed the lowest level of business confidence for six years. More than 40 per cent. of respondents expected to reduce employment to cope with the severe corporate squeeze. One-third of respondents thought that their liquidity was dangerously low. The developing recession will be the worst since 1945.
Cambridge Econometrics forecasts imply that engineering output will fall by 20 per cent. over the next three years and that industrial investment will fall by 32 per cent. between 1979 and 1982. The most comprehensive survey of business prospects was the industrial trend survey carried out by the CBI in April. Of the 1,843 companies surveyed, 47 per cent. said that they were less optimistic about business prospects than they were four months earlier. A total of 70 per cent. of respondents were already working below capacity. About 57 per cent. had below normal levels of order books and 30 per cent. said that they expected a decline in output and employment.
Companies' liquidity was under such acute pressure from high interest rates that the CBI revised upwards the £6.7 billion financial deficit that it predicted for the financial and commercial companies sector. The largest companies, employing over 5,000 workers, were faring the worst, according to the survey. That was particularly so in the metal-working industries and consumer goods-producing industries. Such companies felt that they would have to cut back sharply on stocks, investment and employment. The real profitability of companies fell from 4¾ per cent. in 1978 to 3½ per cent. in 1979. The CBI expects a fall to 2 per cent. in 1980.
That is the consequence of a Government who are pursuing a monetary policy that clearly is excessively tight and that is forcing up the value of the pound and making export orders more difficult to win. It is forcing a reduction in new investment that might be impossible to reverse. 1268 I doubt whether the agriculture machinery capacity of Bamfords, for example, will be re-created once the company goes into liquidation.
The excessive squeeze is felt at all stages of distribution and production. Retail sales have started to turn down and retailers' margins are being reduced to vanishing point. A wave of retailer bankruptcies is imminent. Industrial destocking—a classic symptom of the early stages of recession—has developed far faster than the Government forecast. The fall in stocks for the first quarter of this year was worth £570 million. A few months ago the Government forecast a £250 million drop for the first half of the year.
A recent survey by the Chemical Industries Association shows that capital spending will fall by 30 per cent. in the next three years. The chemical industry has been the biggest investor in British manufacturing and in recent years it has accounted for 90 per cent. of our trade surplus in manufacturing.
The short-term trends working party for mechanical engineering found that investment in that industry will fall by over 10 per cent. this year because of poor liquidity and the high cost of borrowing. It predicted a fall in orders in 1981 of between 10 per cent. and 20 per cent. below the 1979 level.
The construction industry is at an all-time low. The Federation of Civil Engineering Contractors says that the public sector investment in construction is now half the level of similar industries abroad. It says:A large part of the nation's vital capital structure is ageing deteriorating and not being built or enlarged.In this key industry unemployment is running at 16 per cent. and involves 200,000 workers. The Government simply cannot ignore the contrary and counter-productive effects of their monetary obsession on manufacturing industry.
I have quoted surveys and opinions from representatives in industry, but we all know the effects from our constituencies. Every day in our local papers we read of lay-offs, warnings about layoffs, or closures. The strategy is supposed to be that reducing the PSBR should lead to a fall in interest rates and an increase in business investment. However, cuts in public expenditure directly affect the 1269 private sector. As the private sector continues its heavy bank borrowing, interest rates will stay at a punitively high level for as far ahead as we can see.
Strict monetary targets mean high interest rates. Industry cannot live with both high interest rates and a high value for the pound. All that industry can look forward to is an absolute decline in gross domestic product and a shrinking home market, with intensified competition from imports.
The Treasury and Civil Service Select Committee report shows that the liquidity squeeze on companies will persist into the medium term. The Committee believes that the deficit in the non-oil sector will be a minimum of £6 billion in 1980. Some people giving evidence to the Committee made forecasts of a deficit as high as £13 billion in the corporate sector. The report states:the economic environment as described above will provide little help to the corporate sector—rather the reverse. The advice the Committee has received suggests that the cash squeeze on industry will not be a short-term phenomenon given the medium-term financial strategy. Indeed, it may well be that the corporate sector has to bear a large proportion of the overall burden of adjustment in order to meet the targets proposed in the financial strategy. In particular, the adverse corporate sector deficit likely to be experienced this year may well persist, if not grow, over the medium-term … In general, we are convinced that the Government should not only take a very active interest in what is happening to the corporate sector, but should have measures ready to relieve what could become a very damaging deficit.I hope that the Treasury Minister will tell us what measures, by taxation or otherwise, the Government have in mind to reverse that damaging situation. The Committee's advisers thought that the decline in manufacturing output this year could be between 6 per cent. and 8 per cent. After four years of this Government we shall barely recover the output lost in their first year.
There are other contradictions in the Government's policies towards companies. Trade Ministers are trying to promote a new export drive, yet cuts in official export services mean that official trade missions will be halved. The funds available to the British Overseas Trade Board have been cut by £14 million. Assistance for market research in Europe has been ended. Charges for firms exhibiting overseas have been raised. Trade 1270 associations have complained that the Government's cuts will dissuade potential exporters. The London Chamber of Commerce has said that the level of Government support for exports is minimal compared with that given by the Governments of our trading competitors.
In all, aid to industry will be cut by £1.2 billion, or 45 per cent, in the next four years. The cuts fall on sectoral schemes of assistance for modernising industry and include, for example, halving the money available to the national computer centre, our only independent centre for developing computer expertise and training. The CBI has already asked for cuts to be deferred until corporate profitability has improved.
Meanwhile, the Secretary of State for Industry told an audience in Chicago last week:I bring you good news. Britain, pioneer of the industrial revolution, is beginning the process of turning away from stagnation. The relative decline associated with the bindweed of State power, which has afflicted Britain for several decades, is being stemmed.I always thought that bindweed gave stability to otherwise shifting terrain. The Secretary of State might have got his metaphor wrong, as well as his facts. He went on:Britain is in transition. Before very long, the thousands of healthy, successful businesses will no longer be overloaded. Britain will be on its way again.One sometimes feels that one is intruding in a private dream world.
Let us examine the £2.7 billion turnaround required in the nationalised industries—from an external financing requirement of £2.3 billion in 1979–80 to a net repayment of £400 million in 1983–84. The whole medium-term strategy rests on this revolution in the financial performance of these industries, and yet they all need to plan huge new investment in gas gathering, nuclear power, new coalfields and new equipment for the benefit of their private suppliers.
The corporate sector is being bled to death by high interest rates, falling demand, rising exchange rates, cuts in Government support and cuts in public sector orders. The damage is incalculable. Our manufacturing industry will collapse in a welter of bankruptcies and unemployment. The squeeze on companies is a crude measure to frighten them into low 1271 wage settlements, and it is doomed to failure. It is a policy of unbelievable crudeness and unfairness. The debate gives the Minister the opportunity to justify the Government's actions in regard to the liquidity and cash position of the corporate sector. Before long help will be too late.
§ Mr. Tarn Dalyell (West Lothian)
I have given Treasury Ministers notice of the main topic which I wish to raise—the effect of corporation tax on sport. I rang the Minister of State's office and contact was made with lawyers attached to the Central Council of Physical Recreation. I have given notice of the detailed points that I wish to raise.
Before doing that, I wish to endorse what my hon. Friend the Member for Norwich, South (Mr. Garrett) said about the Federation of Civil Engineering Contractors. This morning Duncan Mac-Kenzie, the secretary of the Scottish section of the federation, contacted us formally and drew our attention to a statement by James Stevenson, the chairman of the Scottish section.
I do not wish to detain the Committee by reading at length from the statement However, it is a serious statement, which should be drawn to the attention of the Government. It states:Finally, the other great problem to which I must refer and which haunts many of our smaller members is that of Government's insistence on firm price tendering for public contracts of up to one year's duration. It is quite inconceivable to me how it can seriously be thought by people who should understand our industry that this policy is in the national interest and anti-inflationary. In my view, nothing could be further from reality.I gave that quotation to support the point that was made so eloquently by my hon. Friend the Member for Norwich, South.
I wish to support my hon. Friend on one other issue, namely, the question of bank profits. There is great resentment in all our constituencies about the level of profits made by the Bank of Scotland, the Royal Bank of Scotland, the Clydesdale Bank or, south of the border, any bank that one might choose. At the same time, industry is faced with high interest rates and a home market that is so deflated that it is causing more worry than I have ever known during my public lifetime. It is no good saying that we go through ritual worries and ritual groans. 1272 We are faced with far more than a ritual worry. Indeed, some of us would not confess to having ever indulged in ritual worries.
I wish to return to the specific issue of taxation of sport, of which I gave the Minister notice. Whether a body is corporate, perhaps as a company limited by guarantee, or an unincorporated association, it makes no difference for tax purposes. For income and corporation tax purposes, a company means a body corporate or unincorporated association. A company resident in the United Kingdom is subject to corporation tax on its total worldwide profits, which comprise both income and gains. A company is resident in the United Kingdom if that is the place where the central management and control of the company is exercised, regardless of the place where it is incorporated or legally constituted. To ascertain where the central management and control of an association is exercised, the Inland Revenue would have regard to where management meetings were held, and the residence of those who would be regarded as directors if the association were a corporate body.
There are no special rules or concessions for bodies that promote sport or recreation unless they are charities. Sports bodies may, therefore, receive Government grants from the Sports Council and at the same time pay corporation tax on their income. Is not that a classic case of robbing Peter to pay Paul? It is a question of swings and roundabouts. Given the serious financial condition of many sports bodies in an inflationary position, it is a little rough that they must pay corporation tax.
Foreign income is taxed as it arises in a similar way to United Kingdom income, but a credit against corporation tax payable is allowed for foreign income taxes paid limited to the United Kingdom tax actually charged on that foreign income. Corporation tax is charged at the rate of 42 per cent. for profits of up to £60,000, with marginal relief for profits between that figure and £100,000, above which level the full rate of 52 per cent. applies. A deduction of 11/26ths is allowed from capital gains, and the balance is charged to corporation tax at the full rate of 52 per cent., producing an effective rate of tax on gains of 30 per cent. The effective rate of tax on gains is 30 per cent., 1273 whether or not the lower corporation tax rate applies to other profits.
Corporation tax is normally payable nine months after the end of the accounting period or, if later, 30 days after the issue of an assessment. Associations established prior to 1965 may have a longer interval between the end of their accounting period and the normal corporation tax due date of payment. Interest on overdue tax is currently charged at 12 per cent. per annum, and the interest is not tax-deductible.
Associations that carry on trades to finance other activities are liable to corporation tax on the profits from trading. They are also liable to tax on interest and investment income. Dividends from United Kingdom companies are not subject to corporation tax, because they are paid out of income that has already been charged to corporation tax. Income from land is also assessable, as are gains on disposals of investments and other chargeable assets.
That has a considerable consequence for sport. In normal circumstances, if I had just risen to my feet I would not ask the Minister to reply to these complex matters. But as he has had at least two weeks' warning, and as the Treasury Ministers have contacted the Central Council for Physical Recreation lawyers, I think that I am justified in asking for some comment from the Minister about corporation tax on sport.
§ Mr. Denzil Davies (Llanelli)
My hon. Friend the Member for Norwich, South (Mr. Garrett) mentioned the problem of profits in relation to corporation tax. I wish to raise the problem of bank profits. In his Budget Statement the Chancellor of the Exchequer acknowledged that there was such a problem. He said:In recent weeks there has been a good deal of comment about the profits declared by the clearing banks. Some represent a ' windfall ' to the banks, which arises from the combination of high interest rates and the fact that interest is not paid on current accounts."—[Official Report, 26 March 1980; Vol. 980, c. 1466.]He went on to say that some people would argue that, in principle, the profits should be subjected to an excess profits tax. 1274 When the Financial Secretary replies, will he say what the Government are doing about that matter? We have been told that some research is being carried out by the Treasury into the question of bank profits. I hope that the hon. Gentleman will be able to enlighten the Committee about the Government's attitude towards bank profits.
I remind the Committee that bank profits over the past year have been enormous. For the year ending 31 December 1979, the National Westminster Bank declared a profit of £441 million; Barclays Bank a profit of £529 million; the Midland Bank a profit of £330 million; Lloyds Bank a profit if £280 million, and the Scottish clearing banks correspondingly high profits.
We do not know what part of the profits are United Kingdom profits and what part are world profits. That often depends on the accounting procedure that is adopted. However, the United Kingdom profits of two of the clearing banks have been increased by 90 per cent. in one case and 70 per cent. in the other. We are talking about large increases in profits both by the London clearing banks and by the Scottish clearing banks.
The point is put very clearly in a recent editorial in The Scotsman. I deliberately choose The Scotsman because we are talking not only about the London clearing banks but about the Scottish clearing banks. The Scotsman states:For the most part profits made by our leading banks are a function of Government policy. The higher interest rates are set then the better off become the banks. There is no question that the yearly reports recently published illustrate this relationship, with bank profits leaping by up to 90 per cent and more … Basically, the banks did nothing to earn such bonuses but carry on business as usual. They must be the envy of many a vexed entrepreneur "——and the Government who apparently favour entrepreneurs are killing them off rapidly——borrowing money from them at over 20 per cent to attempt to raise his company's efficiency. They are also a source of potential embarrassment to the Government.They are indeed a source of embarrassment to the Government.
That sums up the problem clearly and well. The banks are benefiting—I do not criticise them, because it is not their fault—from a monetary policy which is a consequence of the rate of inflation. 1275 The Government having set the rate of interest at 17 per cent., the banks are lending at that level, or higher, and making vast profits at the expense of industry, especially manufacturing industry.
The reasons for increased bank profits are clear. The first is the high interest rate. We understand from what the Chief Secretary said last night that high interest rates will continue for some time. The Financial Secretary shakes his head. That means that they will not continue for some time.
§ The Financial Secretary to the Treasury (Mr. Nigel Lawson)
I am confident that my right hon. Friend the Chief Secretary was not so unwise as to offer a prediction of either nature.
§ Mr. Davies
He was very melancholy. He is always melancholy, except when he is aggressive, and he got aggressive towards the end of his speech. That led me to think that perhaps he was not on very firm ground. He was very melancholy at the beginning about interest rates. If one reads the newspapers, as I do, one finds that the gilt market has fallen this morning. People who understand these matters obviously do not see much chance of interest rates falling, despite the £750 million from the EEC. This is nothing to do with the borrowing requirement; it is all to do with bank lending and interest rates. Therefore, we shall not see a fall in interest rates for some time. Indeed, over the whole period of this Government's tenure of office we shall not see much of a fall in interest rates. Even in four years they will not get inflation down much below 15 per cent. Therefore, we shall have very high interest rates for the next two or three years.
This is a problem not only of interest rates but of the banks not paying interest on current account deposits. The banks try to tell us that it costs them about 8 per cent. to collect money on deposits. That is because they are terribly inefficient. They have not even bothered to make themselves efficient. I think that they could probably reduce that cost well below 8 per cent. But let us take the figure at 8 per cent. It is costing the banks about 8 per cent. or 8½ per cent. to borrow this money and now they are lending it at 20 per cent. They are involved 1276 in a marvellous business. They are making enormous profits and showing very little expertise for it. The high interest rates are the result of the Government's monetary policy.
§ Mr. James Dempsey (Coatbridge and Airdrie)
I am interested in the point that my right hon. Friend has made. I have had discussions with industrialists in my constituency. The banks close their eyes to any possible extension of industry in the hardest-hit unemployment area on the mainland of Scotland because the interest rate being demanded from industrialists is 22 per cent. Of course, 22 per cent. on a trading account year after year until the premium has been repaid is an extremely exorbitant charge for industry to survive. In consequence, unemployment is unfortunately roaring in my constituency.
§ Mr. Davies
My hon. Friend is quite right. If industrialists have to pay 22 per cent., why should they invest in plant and machinery? What sense does it make to build up a business when an industrialist can get 17 per cent. or 18 per cent. by leaving his money on bank deposit? Industry is borrowing not to expand or to invest but to stand still or to stop itself from going downwards and backwards. We are talking about lending at more than 17 per cent.—20 per cent., 21 per cent. and 22 per cent.
The problem is partly high interest rates, caused by the Government's neglect of inflation, and partly because the banks do not pay interest on current account. The combination of the two has created these vast profits. As I said, current account deposits cost the banks only 8 per cent., so they make a vast profit on the difference.
If interest were paid on current account, we would not have this problem. If interest were paid on current account, people would get that interest and presumably it would be subject to tax. The root of the problem is not only that high interest rates are afflicting the economy but that the banks are not prepared to pay interest on current account.
The Financial Secretary gave an interesting answer during Treasury Question Time recently which I thought was sympathetic. He admitted that the banks 1277 were making a windfall profit. I accept his answer; it was very sensible. But what are the Government doing? The Chancellor of the Exchequer said that they were looking at it in some kind of way.
I do not suggest that it is easy to bring in an excess profits tax. The Financial Secretary is not a tax expert, but he is an expert on many other things. However, the Minister of State is a great tax expert. I do not know what Lord Cockfield is doing in this non-interventionist Government, but I am sure that he is doing something. [Interruption.] If not, I do not understand what five Ministers are doing in this non-interventionist Department. On the other hand, he is sitting in the House of Lords, no doubt thinking about these things Buddha-like and working out these schemes.
I am sure that it is possible for Treasury Ministers—the Minister of State with his great expertise, the Financial Secretary with his feeling for the financial sector from his background in financial journalism, and Lord Cockfield with his great expertise, having been in the Inland Revenue, Boots and everywhere else—to work out some kind of taxation system. The Financial Secretary should tell us how the Government intend to tax the profits of the banks. It will not happen just for this year; it will happen next year and the year after, as I shall discuss later.
Perhaps I may give the Financial Secretary a few suggestions. The Opposition do not have the expertise and learning that he has, but perhaps we may throw out a few suggestions. Why not start with an excess profits tax? It is not unknown in British Revenue law procedure to have an excess profits tax. No doubt it would have to be related to some kind of formula—deposits on current account, the amount lent by banks and the cost of collecting money. A formula could be devised.
I believe that the British Gas Corporation is now contributing to the Treasury's coffers some kind of tax on its profits. It is a kind of excess profits tax. If the British Gas Corporation has to pay an excess profits tax, partly as a result of Government policy because the Government have put up the price of gas to a greater extent than the level of inflation 1278 for reasons best known to themselves, why should not the banks pay an excess profits tax? There is the example of the Independent Broadcasting Authority and the levy that is placed on independent television companies. Governments of both parties recognised that profits were made in excess of a certain level and a specific levy was placed on the Independent Broadcasting Authority.
I suggest that the Financial Secretary should also look at the petroleum revenue tax, because that is an excess profits tax. I know that the Inland Revenue will not agree. It gets upset if it is described as an excess profits tax, but it is one. It is an attempt to isolate a sector of the economy—the North Sea—and to say that over and above corporation tax it shall pay extra tax in respect of profits.
I know that this is a complicated tax to administer—I do not suggest that it would be easy—but why not isolate the profits from the banking community and subject them to a tax over and above corporation tax in the same way as profits from North Sea oil are subjected to a tax over and above the level of corporation tax?
It is possible to draw a ring fence round British banking. I do not mean British companies; I mean banking receipts in this country. I might include foreign banks as well. However, the Bank of England would get very upset. It does not like to do anything to upset foreign banks. But, leaving that aside, it is possible to use the analogy of the petroleum revenue tax to tax the banks.
My next suggestion might not appeal to the Government or, indeed, to the Labour Party, but why not tax lending? The Government are concerned about bank lending. That seems to suggest that bank lending—the credit supply—is now the real problem. Apparently, we have got the money supply under control, although some people do not believe it; but the Government believe it. The banks are lending money and the Government cannot reduce the interest rate, so why not tax lending? Paul Volcker, of the Federal Reserve Bank, has done so. He has imposed a tax on lending by banks which subscribe to the Federal Reserve Bank. Lending money at an interest rate of 22 per cent. and collecting money at 8 per cent. makes the profits. Why, then, 1279 not kill two birds with one stone? The Chief Secretary to the Treasury is interested——
§ 5 pm
§ The Chief Secretary to the Treasury (Mr. John Biffen)
I am interested only because such an argument is being deployed from the Opposition Front Bench. Will the right hon. Gentleman share with the Committee his thoughts one degree further? In suggesting a tax on bank lending, would he vary the tax according to the designation of the lending?
§ Mr. Davies
Yes. Lending in the personal sector and lending through credit cards could be taxed. That would release a certain amount of money at a lower rate of interest to manufacturing industry. I am surprised that the Government have not considered that possibility. One reason why the Government are failing with their monetary policy is that they do not have a monetary policy. They have a credit policy. They raise interest rates to 17, 18 or 19 per cent. regardless of the borrower. Why not restrict personal lending? Bill Simon, the former United States Secretary of the Treasury, said that he would take away his wife's credit card so that she could not borrow money on it. Why not restrict personal lending so that there is money available at lower rates for manufacturing industry? Manufacturing industry is suffering from the Government's policies.
Let there be direct control over bank lending. The Chief Secretary should not appear as frivolous as he tried to appear when he intervened. There is a distinction to be drawn. The Government should look again at the question of credit cards. The people who will suffer from any restrictions on credit cards will be those who voted for the present Government. They are not suffering from the present monetary squeeze because they are borrowing at 17, 18, 19 per cent. or more on their American Express, Access or other credit cards. They are benefiting from the tax deductions and the tax reductions. Industry is suffering. The Government should shift their emphasis, control lending in the personal sector, and allow industry to borrow at lower interest rates.
There should be a tax on lending in those areas of the economy which are not 1280 productive. The Federal Reserve Bank taxed lending, and interest rates have been brought down in the United States. The Bank of England will not like a tax on personal lending. The Governor will be very upset, and he will argue against it because he will not wish to upset the banks, and he tries to keep the Government and the banks happy. But the Government should look at this suggestion.
The reason why we feel that bank profits should be taxed on an excess basis, whether through a petroleum revenue tax or excess profits tax, is that we are entering an era in which banks and the financial sector will make a lot of money. Manufacturing industry will decline and there will be massive profits in the financial sector. That will probably not upset Conservative Members, because some would like to see this country as a sort of mini- or maxi-Switzerland. They would like the financial sector to expand, and they would not be too unhappy if the manufacturing sector declined.
The Government wish to reduce the public sector borrowing requirement. The Chief Secretary said recently that the Government's policy was to bring down the PSBR. But where will all that money go? It will not go to British industry. It will be invested in the financial sector. That means that over the years major profits will be made by the financial sector, and the manufacturing sector will decline more and more. As part of a larger issue, the Government should look at the development and increase in profits in the financial sector, and perhaps they should tax those profits at a higher level and use some of the money to try to save manufacturing industry. If they do not do so, it will go to the wall.
The National Westminster Bank now has so much money that it has decided to invest in the North Sea. It is to buy North Sea licences. Under the previous Conservative Government, the National Westminster Bank brought properties and got into terrible difficulties, and it had to be bailed out by the Bank of England. Now it has so much money that it cannot lend—because the Government do not wish it to do so—that it is investing in the North Sea. Perhaps the North Sea is not as speculative as property, but that is not the proper function of the bank, and that is why there is distortion 1281 in the financial sector—caused by the high interest rates and by the fact that banks do not pay interest on current accounts. I ask the Government to look at the question of the banks. I hope that the Chief Secretary will tell us what the Government intend to do.
The stockbrokers' reports talk about mergers and more activity in the financial sector in the next few years because more money is being put into the financial sector. The split between the manufacturing sector and the financial sector is important, because not only is it a split between two sectors of industry; it is a split between one half of the country and the other half. In the main, the financial sector is concentrated in the South-East and the manufacturing sector is in the West Midlands, the North, Scotland and in Wales. This is a real problem.
§ Mr. Davies
Indeed, there are a few banks in Scotland. I accept that Edinburgh is a sort of secondary banking area. But in the main—and the Financial Secretary knows it—the financial sector of industry is in the South-East of England, and the manufacturing sector is in the North. Manufacturing industry will suffer while profits are being piled up in the financial sector.
The problem goes deeper than the question of the banks, and I hope that the Government will say what they intend to do. Some of the profits from the financial sector should be channelled to the manufacturing sector. The Bank of England did so in the case of Stone Piatt Industries. In its wisdom, it decided to use some of its money to rescue manufacturing industry.
I say to the Government " Tax the banks. Look at the financial sector. Use that money to save our manufacturing industry. Otherwise, we shall destroy our manufacturing industry, and we cannot live on banks, insurances and financial services."
§ Mr. Lawson
The right hon. Member for Llanelli (Mr. Davies) got a little carried away towards the end of his speech, as he usually does. I was particularly interested, and I am sure the whole Comittee 1282 will be interested, to learn that the official Opposition are now committed both to a tax on bank profits and to a discriminatory tax on bank lending.
§ Mr. Denzil Davies
I am familiar with the hon. Gentleman's style. It is not the first time that we have met across the Dispatch Box. I am prepared to give him suggestions. One suggestion was a tax on bank lending. However, my main point was that there should be an attempt to tax bank profits. Does he intend to do that?
§ Mr. Lawson
Perhaps, having sat down, the right hon. Gentleman is having second thoughts. Perhaps the Opposition should try to come together—in the spirit of Wembley, or in any other spirit—to decide whether they are in favour of a discriminatory tax on bank lending. When they have made up their minds, perhaps they will be kind enough to tell the Committee so that we all may know where we stand.
The right hon. Gentleman asked me a straight question about where the Government stand on bank profits. I shall deal with that. Discussion of this question—and I know that it has aroused a great deal of interest on both sides of the House of Commons and of this Committee—has tended to focus on the profits of the big four clearing banks. This is almost inevitable, given both their size and the fact that their profits tend to be more cyclical than those of the banking sector as a whole because of their large numbers of current accounts, on which, as the right hon. Gentleman pointed out, no interest is paid.
The fact that last year, 1979, the four big banks together made total profits of £1½ billion before tax has inevitably caused a great deal of comment. But this must be seen in perspective. The clearing banks are very large businesses indeed, with world-wide deposits of over £70 billion, and employing—[Interruption.] I hope that the right hon. Member for Llanelli will listen, following his absurd remarks about these banks being only in the South-East. They employ a quarter of a million people throughout Britain. It is easy, therefore, to be mesmerised by their profits figure of £1½ billion and to see them out of the context of the huge scale of their operations as a whole.
1283 Moreover, if the clearers' profits are adjusted for inflation, the picture becomes somewhat different. Historic cost accounting conventions in this respect inevitably give a misleading picture, as I am sure the hon. Member for Norwich, South (Mr. Garrett) will acknowledge, of profitability in an inflationary environment—particularly for banks, whose assets are very largely fixed in money terms. On a current cost basis, the big four clearing banks' profits were around £1 billion in 1979, which is less than two-thirds of the historic cost figure and, incidentally, represents a rate of increase substantially less than was achieved by them in any of the three previous years, when the right hon. Gentleman's party was in office. Moreover, the pre-tax current cost profit, expressed in real terms, was lower in 1979 than in 1973. The Labour Government, when they came to office in 1974, did not see fit to impose a special tax on bank profits.
So the big four banks' profits for 1979 need to be seen both against the size of their businesses and after making a proper allowance for inflation. At the same time, as I mentioned earlier, the cyclical nature of bank profits must not be overlooked. The peaks and troughs of the clearers' profits seldom if ever coincide with those of industrial and commercial activity as a whole.
When seen in perspective, therefore, the profits of the clearers are not as large as they seem at first sight. There is no doubt, however, that they remain substantial. I assure the right hon. Gentleman that I am not trying, and would not wish to try, to pretend otherwise. Nor do I come to this Committee as an apologist for the banks. There is no doubt, as I have said in answer to Treasury questions, to which the right hon. Gentleman referred, that part of the profits represents a windfall for the banks—arising from the fact that interest is not paid on current accounts, and, therefore, the high interest rates mean that the clearers can employ their current account balances much more profitably. This windfall element is not a sign of the clearers' enterprise or of their efficiency. Nor, of course, on the other hand, is it a sign of exploitation. It is merely adventitious.
1284 5.15 pm
In part, these windfall profits reflect the cyclical nature of the clearers' profits. When interest rates are high, they make larger profits, which fall as interest rates fall. The right hon. Gentleman's confidence that interest rates will remain high for some time is not one that I share. I have confidence that they will come down.
These windfall profits can, however, be regarded in part as a by-product of the Government's determination to root out inflation by monetary policy, which necessarily involves high interest rates for the time being. As my right hon. and learned Friend the Chancellor said in his Budget Statement, there could, therefore, be a case in principle for a special tax related to the windfall element in the banks' profits. But a number of practical considerations have to be borne in mind. One of them is the enormous complexity of any attempt to define the windfall element.
The right hon. Gentleman said that there have previously been excess profits levies in British history. Indeed, there have been. The first of these in recent times was that introduced by the Conservative Government in 1952, which took no fewer than 35 pages of legislation. It is not a matter of a simple amendment to a Finance Bill. The right hon. Gentleman also referred to the petroleum revenue tax. That could not be embodied in a Finance Bill. It was a highly complex, technical, lengthy piece of legislation on its own.
§ Mr. Lawson
Another factor which must be borne in mind is that the prime use that the clearers have made of their profits is to strengthen their reserves. Nearly £900 million—almost three-fifths of total pre-tax profits—has been transferred to reserves. A sound banking system, as even Opposition Members will, I hope, acknowledge, is essential to a healthy economy. There is no doubt that by 1973–74 the clearers' reserves had fallen to dangerously low levels. Since then, they have slowly been rebuilding their reserves to satisfactory levels. With the additions to reserves for 1979, the clearing banks have achieved a ratio of free capital to deposits of around 1:20. 1285 While this is relatively high by recent historical standards, banks are facing increased domestic and international risks in current turbulent economic conditions. This points to a need for the banks to maintain higher capital reserves. It is entirely desirable that bank's reserves should be built up now—in the phase of their cycle suitable for such a build-up.
Moreover, the banks have sustained a large and fast-growing volume of leasing business, which has done a great deal to support investment in manufacturing industry, especially in the large number of cases in which companies have insufficient taxable capacity to enable them to take immediate advantage directly of first-year allowances designed to support their investment in plant and machinery.
Overseas, too, the increased risks of international banking business are apparent, perhaps especially in the Eurocurrency markets. The huge OPEC surpluses are a further potential destabilising factor on world financial markets, and the banks inevitably need strengthened reserves to assist in the recycling of these surpluses, which is of the first importance.
All these developments, in their different ways, are likely to provide calls on the banks' reserves, which have been significantly strengthened by the 1979 profits.
Last, but not least, I should like to mention the contribution to the economy which is made directly by the banking system. It has been one of the most successful industries in terms of invisible earnings. Its strengthened reserves should enable this success to be maintained and, indeed, expanded and its contribution to the economy to be increased.
But, as I have said before, and as I say again now, I accept in principle that there could be a case for the special taxation of the part of bank profits resulting from high interest rates. It is undoubtedly true that there is an element of quasi-monopoly in the clearers' position. Against this, there is the fact, as I have already explained, that clearing bank profits, are not as high as they appear when adjusted for inflation. The clearers have used these profits to strengthen their reserves, which is in the interests of the economy as a whole—enabling them to support domestic business, including their leasing operations, 1286 to compete internationally, to invest in future technology, and to cope with the increasing risks of both international and domestic business.
The present Government's policies are directed to getting inflation down and getting Government borrowing down, and thus getting interest rates down, so that the immediate cause of the exceptionally high clearing banks' profits will be removed. To introduce a discriminatory tax on the profits, legitimately earned, of one particular sector of the economy requires a very strong case to be made. In my judgment, that case has not been made in the case of the banks this year.
We have had two other contributions to the debate. The hon. Member for West Lothian (Mr. Dalyell) raised the question of sporting bodies and their tax. I think that he has been in correspondence with my hon. and learned Friend the Minister of State about this matter. The hon. Gentleman is a member of the Standing Committee on the Finance Bill and I understand that he intends to raise this matter on numerous occasions throughout the course of the Bill both in Standing Committee and on the Floor of the House. I am sure that he will get a fuller answer from my hon. and learned Friend.
However, let me say this relatively briefly. I accept that there is a problem. Indeed, this was accepted right at the beginning of the introduction of corporation tax. The Select Committee on Corporation Tax recognised that there was a problem and that some way of alleviating it should be sought. But there is a serious difficulty of definition. A consultative document was issued in August 1972. There were discussions with all sorts of representative bodies at that time, and the matter was raised in Parliament then and has been raised on a number of subsequent occasions.
No formula has yet been devised to discriminate satisfactorily between those cases that deserve tax relief and those that do not. The position remains that charities get concessions which bodies that are not charities, such as the sporting organisations to which the hon. Member for West Lothian referred, do not. I admit that there is a problem; he was right to refer to it Since 1972 successive 1287 Governments have faced that problem, but no answer has been found.
§ Mr. Dalyell
That is a fairly reasonable reply. It is a pity that, apart from our discussions on the Finance Bill, the House has not had an opportunity, as was promised, to debate the Goodman report on charities and to go into the definition of a charity. Let us leave out of this debate the special needs of the British Olympic Association. When discussing tax on the sporting bodies, I hope that we shall not delve too deeply into the differences of opinion now revolving round the British Olympic Association. An argument can be made for designating bona fide sporting organisations as charities. In Committee upstairs, I shall ask why the Government's lawyers are reluctant to do that. I recognise that there are problems, but they are not insurmountable. At present the situation of the sporting bodies is parlous.
§ Mr. Lawson
The hon. Member for West Lothian has made that point several times. As he is a persistent parliamentarian, I know that he will continue to make it in Committee. If he succeeds in catching your eye, Mr. Weatherill, he may be able to discuss charities when we debate clause 53. I wish him the best of British luck.
It is not for the Treasury to define a charity. Still less is it for the Treasury to decide whether a debate should be held on the Goodman report. I am sure that my right hon Friend the Leader of the House will read in Hansard the hon. Gentleman's request. He will then decide whether time can be given for a debate.
The hon. Member for Norwich, South went over the top when he spoke about the plight of the corporate sector. I am sorry that he did so, because there are genuine difficulties. There was no need to exaggerate those difficulties. It is absurd to suggest that the problems are new and that they are solely the present Government's responsibility. He knows that the profitability of British industry has been declining steadily for the past 20 years. If he wishes to make party points, I could point out that the biggest decline occurred under the previous Labour Government. During their period of office profitability—in percentage terms—was halved compared with the period of office 1288 of the previous Conservative Administration. The fall will be much less now.
The problem of the corporate sector is inevitable if we are to cure inflation. There must be a period of squeeze, when interest rates are high. That period should not last any longer than is necessary. The United States Government have been trying to cure inflation, and they have had to allow their economy to go into recession. Similarly, the British economy is going into recession. No one wants a recession, but it is inevitable if inflation is to be squeezed out of the system. It is an illusion to think that the war against inflation can be won without any casualties. We hope that there will be as few casualties as possible. To ensure that that is achieved, wage negotiations must lead to results that are as moderate as possible. Rising wage bills, more than any other factor, are squeezing profitability out of British industry.
The gloom that the hon. Member for Norwich, South seemed to exude from every pore should not be shared by the Committee. Our policies will succeed. Many people outside this Chamber hold that view. I shall refer to a more acceptable source than the section of the report by the Treasury and Civil Service Select Committee, to which the hon. Member alluded. I should like to quote from an article in the current issue of Barclays Review, written by Professor Harold Rose. He states:The deceleration of wage increases is likely to be only slow in 1980. But from now on rising unemployment is likely to be accompanied by a falling inflation rate; the effect of the switch from direct taxation to VAT will pass, and, because of the high level of interest rates throughout the world, commodity prices are at last declining. The result, if the Government holds to its course, should be a sharp downwards revision of price expectations in Britain from 1981, thus laying the foundation for renewed economic growth. The Government's second Budget will then have proved to have been a turning point ".I believe that judgment to be correct.
I commend the clause to the Committee.
§ Mr. John Garrett
I have been disappointed. The Financial Secretary has done no more than read badly a press handout from the Association of Clearing Banks. He had notice that we intended to raise this question. It is clear that no action is being taken on bank profits. It is also clear to all hon. Members that the windfall profits of banks are so great that they do not know 1289 what to do with them. The Financial Secretary did not answer the questions that I raised on corporate liquidity. This is the first time that he has attended or spoken in Committee. Perhaps he should get together with the Chief Secretary and the Minister. We have become accustomed to fuller and more detailed answers.
The Financial Secretary said that the corporate squeeze would continue, because it was necessary. He said that casualties were inevitable. He does not seem to realise that the casualties of the war being fought by the Treasury are deprived families. There have been over 123,000 redundancies this year and each redundancy means misery to a family somewhere. I thought that his final point was the height of arrogance. He found the review of Barclays Bank more acceptable than the report of the Treasury and Civil Service Committee, under his right hon. and most distinguished Friend the Member for Taunton (Mr. du Cann). No doubt the Treasury and Civil Service Committee will bear that in mind when it cross-examines the hon. Gentleman during its future deliberations.
§ Mr. Dalyell
With a smile, the Financial Secretary wished me the best of British luck. Am I to interpret that as meaning that he knows that the sporting organisations have a just case? It was not much use asking him to do anything. However, I understand his predicament. Some of my hon. Friends and I, together with the right hon. Member for Worthing (Mr. Higgins), have asked the Leader of the House time after time for a debate on this issue. We know that the definition of a charity is not the responsibility of the Treasury. The Home Office is responsible. However, there is a hybrid situation in which various responsibilities straddle Government Departments. It is high time that the House of Commons sorted out this issue. The sporting organisations are desperate for a solution. Heaven knows when it is proper to raise the question of corporation tax on sport.
The Financial Secretary airily said that I would have several opportunities to raise this issue in Committee. I shall ask his advice as to when one might properly raise this question during discussion of the Finance Bill. I ask the Chief Secretary and the Financial Secretary to talk 1290 seriously to the Leader of the House. Before we get round to the Finance Bill next year, let us have behind us, out of season, a proper discussion of charity provisions.
§ Question put and agreed to.
§ Clause 18 ordered to stand part of the Bill.