Public Sector Borrowing Requirement (Hansard, 23 July 1981)

§ Mr. Bowen Wells (Hertford and Stevenage)

I rise as tail-end Charlie, conscious of the pressures on the time of the House and particularly on my right hon. and learned Friend the Chief Secretary to the Treasury who has been replying to debates during the night. It would perhaps be better if I began with the two conclusions that I wish to put. I should like my right hon. and learned Friend to make certain that the public sector borrowing requirement and the constraint; on borrowing do not affect profitable investment by the public sector in projects that will bring great benefit to this country in the medium and longer term in jobs and the production of machinery and plant.

I also wish to put the case of the Commonwealth Development Corporation that, if it borrows overseas and repays overseas and simply remits to this country the profit of the investment, this should not be included in the calculations of the public sector borrowing requirement. Those are my conclusions, but I must, in fairness, follow the argument through. The definition of the public sector borrowing requirement was given in a letter of 7 May 1981 that I received from my right hon. and learned Friend the Chancellor of the Exchequer. My right hon. and learned Friend said: the PSBR measures the net cash transactions or financing flows between all bodies in the public sector and all of those in the private or overseas sector. In deciding whether a transaction adds to the PSBR, the key issue is whether a body concerned is in or out of the public sector. This is determined by criteria relating to control and ownership, in that order. I accept that definition. I also accept the argument of my right hon. and learned Friend the Chief Secretary in the debate on 9 April 1981 that by fiddling around with the definition of PSBR one does not gain anything. However, there also arises the related issue of loan guarantees. These guarantees to public bodies outside the public sector such as ICL have been defined as not falling within the PSBR until such time as the guarantee may have to be honoured.

One has to examine why the public sector borrowing requirement is regarded as so important to the Government's strategy. I accept the argument that, if the public sector borrowing requirement is permitted to rise, one expects interest rates to rise by the pure laws of supply and demand. However, one must reflect, as I am sure the Government do, that last year, when the public sector borrowing requirement rose significantly above the Government's forecasts, there was a reduction in minimum lending rate. It must therefore be concluded that to allow the public sector borrowing requirement to rise in certain circumstances does not involve a mechanistic relationship with interest rates.

There is also the argument that, if one permits increased borrowing on the public sector borrowing requirement, this increases the money supply and causes us to run into dangers of increasing inflation. I share the Government's concern about inflation. I believe passionately that inflation must be brought down. That is essential to Government policy.

The other argument is that, if public sector investment is allowed to rise, this will crowd out the private sector. In that concept there is the idea that a certain amount of money is available and that, if the public sector takes it, 714 the private sector cannot. I believe that this is, to some extent, a fallacious argument. The economy is dynamic. If one invests profitably, that expands the whole of the economy.

Therefore, to take a very rigid attitude on investment by the public sector in that sense could automatically produce a reduction in the wealth of the nation. This particularly applies to British Telecom, which wishes to modernise and expand its profitable business by increasing its borrowings.

Here I give credit to my right hon. and learned Friend. The Treasury has, in spite of great difficulties, increased the amount of investment available to British Telecom, but is has not gone far enough. The chairman of British Telecom has made an eloquent appeal to the Treasury to relax matters still further and permit it to borrow further so that it can invest in profitable projects which will improve service and increase the ability of British business to service its customers and to give an efficient service to the world.

In addition, the manufacturers of plant for British Telecom will be able to increase their production, and therefore to increase employment and export opportunities. To restrict British Telecom and public sector profitable enterprises simply by reference to the public sector borrowing requirement is very short-sighted, although I can see that from a Treasury point of view an investment in current expenditure in the year that we are talking about is precisely the same in its terms.

We must think about what that investment is meant for, and I do not think that the Treasury can simply deny itself the opportunity to think about what the investment is and why the public sector borrowing requirement is increased. I welcome the intention of the Treasury to make the public sector borrowing requirement: figures clearer to show how the PSBR has risen and whether it is going into current or capital expenditure.

Having looked at those definitions, I turn to the position in which the Commonwealth Development Corporation has found itself. Here I remind the House and my right hon. and learned Friend of his speech to the House on public expenditure on 9 April 1981: There are at least two criteria which any new financing arrangement would have to meet. First, it should introduce a market discipline for the management of the industries concerned. It should also tap new sources of finance and avoid adverse effects on interest rates and to private industry. I am afraid that so far it seems to me that methods of financing which meet those criteria have yet to be found. But I assure hon. Members that the Government themselves are as anxious as anyone to find them, and we shall continue to look actively for them."—[Official Report, 19 April 1981; Vol. 2, c. 1133.] My purpose tonight is to bring it to my right hon. and learned Friend's attention that the CDC's representations to him meet those criteria. The CDC is a profitable organisation and will return to the Treasury only slightly less than it draws down this year. It is profitable and well managed and its investments increase British trade. So it meets the first of the criteria that my right hon. and learned Friend laid down in his speech. It is profitable and it produces the discipline necessary on the management to make profitable investments, quite unlike many public sector organisations which I need not mention.

It also aids British exports, but possibly the most important thing for the Treasury is that it is proposed to find a totally new method of financing its expenditure that will not have the adverse consequences on the public 715 sector borrowing requirement that are so feared. The reason for this is that the CDC is unique, in that it operates exclusively overseas, it would be borrowing overseas, and it would be investing overseas. Having said that, it therefore cannot, within the public service borrowing requirement definitions that I read out to the House at the beginning, be brought within the public sector borrowing requirement definitions by any ordinary method of argument.

I ask my right hon. and learned Friend carefully to consider the CDC proposals for investment and try to exclude from his mind the normal arguments connected with public sector borrowing requirement restraints about the CDC, which is proposing to borrow overseas, repay overseas and not involve this country. Therefore, it will not squeeze out the private sector or increase the money supply. It will not tend to increase interest rates in this country.

The CDC has found a unique way of financing itself which will not affect those matters that the Minister and I fear—which in other circumstances I should not for one moment advocate—that we might damage the prospects of Government's prospects for decreasing inflation.

I ask the Minister to consider this matter afresh and to make certain that the CDC can expand itself and expand British exports and profitable investment overseas. I ask him to take those matters into account.

§ The Chief Secretary to the Treasury (Mr. Leon Brittan)

I readily accept what my hon. Friend the Member for Hertford and Stevenage (Mr. Wells) has said about there not being a mechanical relationship between the public sector borrowing requirement and the money supply, but I differ from his view that the consequence of investment, because it is likely to be profitable, is almost irrelevant to the PSBR. The PSBR need not be taken into account if that is so.

That is not how I would put it. Within the concept of the borrowing that can be allowed in the public sector one accepts that one is trying to borrow money for an investment that will be profitable, but one cannot allow for the effect of its profitability until after that has taken place.

For that reason, I am not prepared to accept the analysis that my hon. Friend has put forward. Rather than take the time of the House in repeating material relating to the general definition of the PSBR and its role in the regulation of our affairs, it would be most useful if I dealt with the two cases about which my hon. Friend was concerned—British Telecommunications and the Commonwealth Development Corporation.

We are aware of the problems posed by an industry such as BT which has a large and profitable investment programme. As my hon. Friend was good enough to mention, we have taken steps to alleviate the position but the scale of those steps is not appreciated. We have incorporated into the White Paper a sizeable increase in the industry's fixed asset expenditure from £1.3 billion in 1980–81 at 1980 survey prices to £1.6 billion in the current year.

That increase accounts for over half the increase for all nationalised industries. It is in that one way that one accommodates such matters. One takes into account the factors mentioned by my hon. Friend, but within the 716 context of the global total that can properly be allotted to the nationalised industries—as nationalised industries they cannot compete with the private sector on equal terms because they have the advantage of an express or implicit Government guarantee—some marshalling process must be carried out just as it is in other countries with different systems.

Quite apart from the increase to which I have referred, since the White Paper we have agreed to a £200 million increase in the corporation's external financing limit for 1981 and 1982 despite the difficult general circumstances. We are currently looking at the industry's medium-term investment in financing plans and will treat its needs as sympathetically as the difficult public expenditure position allows. It would be unrealistic not to regard it as being within the public sector, as it plainly is.

As for the Commonwealth Development Corporation, my right hon. Friend the Minister for Overseas Development has made it clear when the House has discussed the CDC on previous occasions that the Government are aware of the corporation's work over the years to promote economic development in the poorer countries through its investments on concessional terms in many economic sectors, especially in agriculture.

I was asked about the future financing of the CDC and whether the corporation would be allowed to borrow abroad at full commercial rates for relending abroad, mixed with other funds, at less than full commercial rates to what often were less than fully commercial projects. At the moment, the practicality of this scheme might be questioned, given the high level of interest rates on many foreign currencies. But, because such transactions fall outside the United Kingdom economy and would not effect our money supply or interest rates, it is argued that they should be defined out of the PSBR.

I cannot agree that they are unique in this respect, but I cannot agree, either, that to tinker arbitrarily with the measurement of the PSBR purely as a matter of presentation and with no effect on the realities of the proposal is justified. Borrowing by any corporation in the public sector is public sector borrowing by definition and in reality.

If the CDC were to borrow commercially, it would be borrowing on the credit of Her Majesty's Government. It is not a question of definition, but one of reality. In addition, it is Government policy to reduce and not to increase the size of Britain's official overseas debt. An increase would occur if the course envisaged was pursued.

I emphasise that no decision has been taken, but the matter raises issues which go well beyond definitional changes. It is for that reason that I cannot readily acquiesce in what my hon. Friend suggests, although I am grateful to him for giving us the opportunity to consider it afresh.