§ The Chief Secretary to the Treasury (Mr. Leon Brittan)
On a point of order, Mr. Weatherill. I am wondering whether it might be convenient—I understand that it might—if the various amendments on clause 122 could be debated together.
§ The Chairman
Would it be convenient if, in addition to the amendments listed in my selection to be taken with amendment No. 43, we also discussed amendments Nos. 50, 41 and 52? Perhaps it might also be convenient for the Committee if we held a clause stand part debate so that we could discuss the whole clause. There can be separate Divisions if required.
§ Mr. John Browne (Winchester)
I beg to move, amendment No. 43, in page 103, line 7, leave out 'base'.
§ The Chairman
With this we may take the following amendments:
No. 44, page 103, line 7, after 'period', insert `1975–80'.
No. 57, in page 103, line 7, leave out '£10' and insert `£15'.
No. 60, in page 103, line 7, leave out '£10' and insert `£150'.
No. 50, in page 103, line 10, leave out '2½ per cent.' and insert '1 ½ per cent'.
No. 41, in page 103, line 19, at end insert`and the total of corporation tax and tax chargeable under this section shall not exceed 52 per cent. of the current cost profits earned in the United Kingdom for 1980'.684 No. 52, in page 103, line 22, after 'England', insert'a Trustee Savings Bank as defined in the Trustee Savings Bank Act 1976'.
§ Mr. Browne
Before I begin, may I declare my interests as a consultant and as a director in the banking industry? The aim of my amendment is that, if, entirely against my beliefs, but if, the principle of retrospectivity proves to be acceptable to the Committee in general, I would ask that the bank levy should be applied to a whole profit cycle of the banks rather than merely to one of the two peak years in the conventional bank profit cycle. I refer, of course, to the special tax on bank deposits, now commonly known as the windfall profit tax on banks or the levy.
First, may I draw the attention of my right hon. and learned Friend to the question of the size of the bank profits in 1979 and 1980? Throughout my speech I shall refer particularly to the English clearing banks. Of course, their profits were large, certainly in absolute terms. The profits of the four of them amounted to about £1,500 million. They were also large in relation to the profits of some industrial companies and to most nationalised companies. But mere size alone does not justify a special tax. Only size, measured as a return, relative to assets or capital could possibly justify a special tax.
One must realise that the banks' profits of £1½ billion were made on assets of £120 billion and worked by 250,000 people, and that 40 per cent. of these earnings were export earnings. These large profits were based upon large assets. Furthermore, they were made perfectly legally within the legal framework of the time and of today. As I say, 40 per cent. of these profits were earned abroad, so it is a retrospective tax on overseas earnings—albeit levied on the basis of United Kingdom deposits—as much as on earnings from interest rates in Britain.
The Treasury and the Government feel that these large profits are too high—that they are excessively high; indeed, windfall profits. Yet we have companies that bought stocks of tobacco before the Budget and made windfalls, but there is no mention of this. The bank profits are in the normal line of business. I do not see the windfall element in it. I see it as a business profit rather than a windfall profit. But the Government say that the profits are too high or are excessive. Against what criteria do the Government measure these profits? Is it in relation to competitors within the banking industry internationally, or within industry as a whole in Britain? Where is the Treasury evidence for "excessive" as opposed to "large" profits? Where are the Treasury definitions of "high", "excessive" and "windfall"?
My researches show the following, at least for the four major English clearing banks. They show, first, that the profits are distinctly cyclical in nature. Measured on a current cost return on equity basis, from the trough in 1975, when the return was 4.5 per cent., it reached a peak in 1979 of 8 per cent., and in 1980 it fell back to 6.5 per cent. The average throughout this period was a return of merely 2.7 per cent. Is that excessive, high or deserving of a windfall profits tax?
§ Mr. Tristan Garel-Jones (Watford)
In describing the profits made, for example, by companies which purchased tobacco, or whatever it may have been, surely my hon. 685 Friend would recognise that those companies had taken a risk. They had risked their money and had made a judgment about the market. Therefore, any benefit accruing to them could fairly be described as a profit. Will my hon. Friend define what he regards as a profit and say why he believes that moneys that have accrued to the clearing banks as a result of high inflation and a high minimum lending rate are profits? Why does he define them as profits? Where is the risk involved or the business acumen?
§ Mr. Browne
My hon. Friend mentions risk. As I hope to show later—I hope that my hon. Friend will interrupt me again if I do not cover the point sufficiently—banking is a risk business, by its very nature. The great worry of many financial observers throughout the world at this time of mismatched petrodollar recycling is the inordinately imprudent risk that many bankers are taking. Banking is a high risk business and therefore, I believe, deserving of the retention of high profits.
§ Mr. Nick Budgen (Wolverhampton, South-West)
If the banks have been having such a difficult period, as my hon. Friend seems to be saying, will he explain how the banks seem to have been able to make very substantial acquisitions abroad?
§ Mr. Browne
My hon. Friend is not right. I did not say that the banks were experiencing great difficulty. All that I have said up to now is that the banks' profits are distinctly cyclical. All I am questioning is whether they are high, excessive or windfall. As regards acquisitions abroad, in order to offer a competitive international service to British companies the banks need to have assets and operations abroad. Whilst they are, in fact, earning great profits on those assets abroad, I find nothing contradictory in what I have said. I was not trying to say that they have had a hard time.
As I was saying, is that the average return from 1975 to 1980 for the banks measured on a current cost return on equity basis was just 2.7 per cent. A comparative measure, although not completely comparative because it is slightly different and a more conservative measure, is to use the average return on trading assets for industrial and commercial companies. Over that same period 1975 to 1980, that return was 3.4 per cent. It was distinctly higher than the average return on equity for the banks. Measured against British industry and commerce, it is 2.7 per cent. as against 3.4 per cent. Furthermore, that 3.4 per cent. is a more conservative measure but it is the only one generally available. If we measure it against the United States banks—
§ Mr. Browne
Yes, that is absolutely right. That is exactly what I am saying, to the extent of an average of 3.4 per cent. over the period 1975 to 1980, as compared with the bank figure of 2.7 per cent. over the same period. I emphasise again that those two measures were not exactly similar because one cannot obtain the identical statistics. The one relating to companies is more conservative; if it were measured on the same basis as the banks, it would give a higher figure of return.
Let us compare, for example, Barclays Bank, which is a major international bank in the United Kingdom, with 686 probably the most equivalent bank to any of the English clearing banks, the United States Bank of America. The Bank of America is Californian-based and, therefore. has a large current account deposit base,; larger than any other deposit-taking bank in the United States. Indeed, it was the largest bank in the world. In the two peak periods 1979 and 1980, the return on capital for Barclays was less than the return on capital for the Bank of America for those two years.
§ Mr. Alan Clark (Plymouth, Sutton)
It seems that by concentrating on these figures my hon. Friend has rather lost sight of the essential principle that is involved. It is no business of Governments to make abstract moral subjective judgments as to what is or is not an excess profit.
§ Mr. Browne
I entirely agree with my hon. Friend on that. This is exactly what I am trying to get at. I cannot find where this abstract judgment on windfall, or excessive, or high profits has come from; I do not agree with it. But may I say again, I humbly submit that the profits of the English clearing banks are, first, cyclical. Secondly, they gave rates of return below the company average over the period 1975 to 1980 and less than that of at least one comparable American bank. Thirdly, the profits are actually falling. The tax that we are to levy is based on 1980 profits, which are 7 per cent. down on 1979, measured purely in monetary terms. If adjusted for inflation, they would be 30 per cent. below the 1979 profits. If this is so, how can my right hon. and learned Friend say that these profits are excessive?
§ Mr. Garel-Jones
Will my hon. Friend tell us when the Government have said that the profits are excessive? We are not saying that the profits are excessive. Those of us who support what the Government are saying are actually disputing that these are profits at all. They are windfalls—fortuitous events.
§ Mr. Browne
I am sorry that I cannot quote exactly which Ministers have said that they are excessive, but it has been commonly stated that they are windfall profits and I think that that was the implication behind the Chancellor's proposals.
§ Mr. Keith Wickenden (Dorking)
Will my hon. Friend refer my hon. Friend the Member for Watford (Mr. Garel-Jones) to the speech made by my right hon. and learned Friend the Chancellor of the Exchequer at the Chartered Accountants Hall on Tuesday 7 April 1981, in which he referred to the high level of windfall tax?
§ 9 pm
§ Mr. Browne
I thank my hon. Friend for that helpful interjection.
Will my right hon. and learned Friend please specify how bank profits were measured when the Government and the Treasury made their judgment? I do not have the armoury of the Treasury and the Bank of England, and I find it very hard to see how these profits were measured, what they were related to and to whom they were related. Secondly, does my right hon. and learned Friend believe that the English clearing banks' profits for this period were excessive?
Taken at the near peak of the cycle, in 1979, the cost of the tax to the English clearing banks was £330 million, or 80 per cent. of their current cost profits for that year. 687 That is a staggering amount. Amendments 43 and 44 seek to spread this tax over the whole profit cycle rather than taking merely the second highest year in that profit cycle.
Capital is the raw material of the banking industry, and the free capital—that is, capital net of fixed assets and trade investments—is a well-acknowledged international measure. Banking, in essence, is a risk business; therefore, the strength of a capital base is crucial. The history books show pages of lists of banks that have collapsed. Security of bank capital is certainly of critical importance.
The massive load of petrodollar recycling has been shouldered largely by the commercial banks instead of by the development banks. The resulting mismatch of accepting massive short-term deposits and lending to high-risk, less-developed countries on a longer-term basis has increased the risk of the world's banks to a level which has made prudent men sincerely worried. They are worried about the relative levels of capital in banks in an inflationary age against these deposits and also about the quality of the deposits, which are very liquid and upon which the banks' lending is based.
For example, three or four years ago the average maturity of the whole of the Saudi Arabian assets of the Central Monetary Agency, which is the equivalent of their Central Bank, was less than one year. The deposit accepting banks were lending these funds on at seven, 12 and sometimes 15 years. This mismatch increases banking risk. Yet at this very time the Government have decided to erode the free capital of the United Kingdom clearing banks by 10 per cent.
The Chancellor has argued and, as an example, quoted that Barclays Bank free capital to deposit ratio was 4 per cent. and that it was well above that of the Bank of America in the United States, which had a free capital ratio of 2.4 per cent. I hope that my right hon. and learned Friend will understand why I question the Treasury's statistics. For, when those two ratios were measured by the same accounting method, the ratio of Barclays was not 4 per cent. but 2.8 per cent., and of the Bank of America 2.4 per cent.—a major change of emphasis. I wonder whether the free capital ratio of Barclays really had as much to spare in it as the Chancellor claimed.
This bank levy has a major effect on the lending capacity of the banks. Normally, banks lend on a rough basis of 15 to 20 times their capital base. An increase in the free capital of a bank of about £400 million should equal roughly £5 billion to £6 billion of potential lending.
I acknowledge that withdrawing that same amount—£400 million—of money from the banks in terms of a windfall profits tax does not reduce the banks' lending overnight by £6 billion, because the banks will make up that capital loss by borrowing in the short-term money markets. However, it does reduce the potential long-term lending ability of the banks. Again, not all banks will behave in the same way. It depends on the policies of the individual bank, not only its policy on how it should raise new capital by debt or convertible issue or by equity—which will change the capital base—but also upon its lending policy.
However, I believe that the erosion of the capital of the United Kingdom clearing banks in terms of potential long-term lending will effectively erode potential bank lending by roughly £3 billion. That is amazing when one considers 688 the fact that the commercial banks have done a fantastic job in propping up otherwise bankrupt and near-bankrupt British companies to such a degree that people would be more than usually worried if they knew the full tally.
We are all looking for a recovery in the economy in the future. When that recovery comes, as I believe it will, it will need equity funding and lending. However, the lending potential of the banks will have been decreased by the measure by approximately £3 billion.
Finally, from a political point of view, the banks on the high streets will start increasing bank charges to cover their lost profits. That will be very unpopular and expensive for British business and consumers alike. This inevitable result makes the tax appear slightly more amazing to me.
May I now consider the use of proceeds, in the national interest? The Government tax will take out £400 million from the banks. That was a potential £3 billion of lending and £3 billion of money which would have been lent skilfully to British industry, against commercial criteria. We are replacing it with £400 million given to the Government to finance more public expenditure which will be lent or granted against mere political criteria.
Therefore, the Government receive £400 million and withdraw £3 billion of commercial money from the economy. In short, the Government will use the £400 million to support the public sector employment cartels at a long-term cost to the private profit-earning sector of the ecomomy of approximately £3 billion in potential long-term lending.
I am sorry that the banks did not take more initiative during this limbo period, when there were hints of action against the banks. The Chancellor was fair to say that. Whether or not it was legitimate in terms of taxation is another question. I was sorry that the Government and the banks turned a deaf ear to my suggestion that they should each make a pool of capital available from their shareholders' funds—for example, 30 per cent. of their profits for 1980—purely for an injection into high-risk equity investments in this country. That would have given an enormous stimulation to encourage British industry, especially small businesses and new companies. That would have enabled us to accept the challenges and benefits of the technological revolution. However, that opportunity has passed. Now, the banks will have to pay the tax and lose all rather than accept the risks of seed equity investment.
I find it difficult to accept how my right hon. and learned Friend can justify this tax in detail. However, what is worse is that the tax, or levy, is retrospective. I believe that retrospective legislation is totally unacceptable unless it benefits the citizen.
It may be socially acceptable and, indeed, desirable to introduce retrospective legislation to give First World War widows a fair and just pension, but to impose retrospectively penal taxation on a citizen or a body of citizens in a corporation is unacceptable. In a civilised country it would be outrageous if a man in prison on a life sentence for murder, through retrospective legislation, had then to face the death sentence. The same applies when dealing with other people's property, such as the shareholders' accumulated funds in the clearing banks.
I believe that the Chancellor has similar views. Let me quote briefly from his speech on 12 July 1978 on the then 689 Finance Bill. It was a long speech and I hope that he will forgive me if the quotation is slightly out of context. He stated:First, warning must have been given to the taxpayer of the intention to legislate in this way and the warning must have been precise in form." —[Official Report, 12 July 1978; Vol. 953, c. 1641.]I entirely agree. Later my right hon. and learned Friend quoted Mr. Heathcoat Amory, the Chancellor in 1958, as a guide to retrospective tax:In my opinion, one essential pre-requisite, if retrospective legislation is to be used, is that those concerned should have every reason to be aware of the taxation consequences of their specific actions and, therefore, have a chance of avoiding them if they wish".—[Official Report, 18 June 1958; Vol. 589, c. 1132.]The banks were given only a vague hint that something was in the air and that they had made too much money. They had no means of adjusting to face that taxation, although every other individual and company can normally adjust to meet forthcoming taxation rates.
Furthermore, the Financial Secretary in a debate on the 1980 Finance Bill said that to introduce a discriminatory tax on profits legitimately earned in one sector of the economy required a very strong case to be made. In his judgment, that case had not been made in the instance of the banks that year. Neither, I submit, has such a case been made in 1981. This tax is discriminatory. It is levied only against the big banks with deposits of over £10 million. Building societies competing in the high streets for deposits are not affected. It is retrospective, and yet no clear and precise advance warning was given to the banks.
I am even more concerned that the Bill contains further restrospectivity. On page 186, in schedule 15, paragraph 3(5), there is a 42 days' retrospection on foreign exchange and on the next page there is room for further discrimination on inward foreign exchange controls.
In summary, the bank levy is discriminatory, retrospective and has yet to be justified. If, with the power of the Government and the support of other hon. Members, my right hon. and learned Friend insists on pursuing this tax, on a retrospective basis, I ask him please to consider and accept my amendment, which seeks to mitigate the application by basing the tax upon the profit cycle rather than merely the peak profits of a cyclical profit industry.
§ Mr. David Steel (Roxburgh, Selkirk and Peebles)
The hon. Member for Winchester (Mr. Browne) has treated the Committee to a delightfully muddled speech. At times he touched on matters with which I agree. I remember in March 1980 arguing that the banks should create the kind of fund he advocated in order to provide risk equity for the private sector. But none of that has happened.
The hon. Gentleman was skating on thin ice when he argued that there was something wrong with the proposition that these windfall profits should be taxed. The point that he has overlooked, and which one of his hon. Friends was trying to draw to his attention, was that these profits were occasioned not by the efforts of the eleven directors of the banks but by the policies of Her Majesty's Government.
I remember in the spring of last year, when some of the banks were reporting their profits before the Budget, that various press reports suggested that the profits were an embarrassment to some of the banks and were paper profits only. I suggested in response that a tax would subdue those feelings of self-consciousness and return wealth to the community whence it came. I am therefore on record as 690 having advocated the principle of recognising that these profits arose simply and only from the fiscal policy of the Government of the day and were therefore a proper subject to come within the Chancellor's purview.
§ Mr. John Browne
I have never admitted that these were windfall profits. I said that they were large, not windfall. They were based on a relative rate of return—we are dealing here with a large animal.
The hon. Gentleman discussed the origin of the profits. I do not wish to be rude and say that he is guilty of an error of judgment, but he should realise that 40 per cent. of the profits came from abroad and had nothing to do with the interest rate policies in the domestic economy. The profits were therefore not entirely due to the British interest rate structure.
§ Mr. Steel
I shall not get into a detailed argument about how the profits arose. I am not making a moral judgment. I am saying that the banks could not help making those profits. The profits simply arose from the conditions that prevailed at the time. I do not condemn them or say that they were excessive—the word "excessive" implies a moral judgment. They were windfall profits, and as such they were ripe for taxation.
The hon. Member for Winchester referred to retrospection. However, his amendment seeks to make the tax even more retrospective by going back to 1975 or 1976. So in that respect his argument was fairly muddled.
As this is a general debate, I wish to examine the general effect of the clause with its proposition to impose a tax of 2½ per cent. on the banks' current account deposits calculated over the last three months of 1980—three to six months after the event. The exemption of the first £10 million of such deposits means that 90 per cent. of the revenue yield of about £400 million will be borne by the London and Scottish clearing banks.
Approximately £330 million will be borne by the big four banks. That amounts to nearly 80 per cent. of their real profits from last year after tax. This exceeds their domestic profits alone, but the effect will be cushioned by their enormous international profits.
For that reason, banks that do not have large international profits, such as the Co-operative Bank and the National Giro, will be particularly badly hit. That is why my colleagues and I will support the amendment that is to be moved by our Social Democratic friends—[Interruption.] I do not propose to trespass on the wish of the hon. Member for Thornaby (Mr. Wrigglesworth) to deal with that amendment and, therefore, I shall deal with another point. For obvious reasons, the proposed tax is retrospective.
§ Mr. Michael Shersby (Uxbridge)
Before the right hon. Gentleman moves off that interesting topic—I do not refer to the right hon. Gentleman's friends below the Gangway—will he explain his point about National Giro and the Co-operative Bank? Does the right hon. Gentleman distinguish between them and the joint stock banks? If so, why?
§ Mr. Tim Eggar (Enfield, North)
I understand that the Government's case for imposing a tax is that a windfall profit has accrued to the banks on their domestic profits. If the right hon. Gentleman is arguing that the tax is too high, why does he support the tax on the clearers?
§ Mr. Steel
If the Chief Secretary wishes to intervene, I shall give way to him. The tax is retrospective in concept because the Government's assessment of the last two years' profits has inspired it, even if its base is technically to operate on the last three-month figure.
We should pause and consider the occasions when the House of Commons has contemplated retrospective legislation. The two most recent examples are the War Damage Act 1965 concerning the Burmah Oil Co. and the Finance Bill 1978, when the Labour Government attempted to make illegal retrospectively certain dealings in commodity futures that were pure tax evasions. For different reasons, but on both occasions, my party moved amendments of some substance and received considerable support from hon. Members. It is important to look at the record because an issue of principle runs through all three cases.
In 1965, the House of Lords, in its judicial capacity, determined that the Burmah Oil Co. had a claim for compensation against the Crown for the destruction of its assets in Burma during the Second World War. While that litigation was in progress, the Labour Government enacted the War Damage Act 1965, which ensured that the company had no claim. That occurred a few weeks before I became a Member of the House, but my colleague, Lord Avebury—then Eric Lubbock—tabled an amendment that received considerable support from hon. Members, including the right hon. and learned Member for Surrey, East (Sir G. Howe) who is now Chancellor of the Exchequer. He voted in favour of the amendment. Nevertheless, it was defeated and the Bill became law.
The next occasion was the Labour Government's Finance Bill which dealt with an especially invidious form of tax evasion based on commodity futures dealing. The then Chief Secretary claimed that it was illegal, but he still found it necessary to introduce a clause in the Finance Bill 1978 to ensure that it was illegal right back to April 1976. The aim of retrospective legislation is not simply to make one scheme retrospectively illegal but to set a precedent. That is why this case is so important because it sets a precedent and frightens those who might seek other marginal schemes in future.
In November 1977, the Government, in answer to a parliamentary question, gave clear warning that they would introduce such legislation. In Committee on the Finance Bill, despite the fact that the Lib-Lab pact was operating, we made it clear that we could not accept the principle of restrospectivity involved. A debate took place on Report, whose effect on the Liberal amendment was to remove the retrospective nature of the Bill's provisions.
At that time, the Conservative Party was in Opposition. It accepted the validity of the Government's 1977 warning. It sought to amend the provisions—accepting that tax evasion loopholes should be closed—and to apply it from the time that the warning was given. In Committee, 692 the present Minister of State, Treasury laid down what he called clear guidelines to be followed in retrospective legislation. They were further endorsed on Report by the present Chancellor.
The present Minister of State, Treasury said:apparently this type of measure is to be regarded as a regular weapon in a Labour Administration's fiscal armoury, because, as I said, this is clearly the Chancellor's underlying motive. The signal has been hoisted to all those who are rash enough or bold enough to embark on schemes of tax avoidance that they may find that the arrangements which they have made, perfectly legitimately and within the law, are going to attract quite different legal consequences by a legislative measure introduced one, two, three, four, who knows how many years after the event. Speaking for myself, I believe that this is entirely destructive of civilised life in this country.When he said that, there were murmurings all round and it was thought that he was exaggerating. He responded to the interruptions and said:Why I say that this is destructive of civilised life is because in an ordered society we are all surely entitled to proceed in the certitude that the law is as it is declared at the present moment of time and that it is not going to be altered, capriciously and retrospectively, to attach to our actions a consequence which we could not have foreseen."—[Official Report, Standing Committee A, 6 June 1978; c. 717–8.]I could not produce a better definition of a firm and fair guideline. It was endorsed by the present Chancellor on Report, and a sentence from his speech has already been quoted. That was why the Conservative Party accepted the warning as clear and precise. It was given and that was what the Chancellor said had to happen.
If the guidelines of the Conservative Party in Opposition were to be applied to legislation concerning tax evasion schemes, they should apply even more to the ordinary burden of taxation when no immorality on the part of the taxpayer is suggested. It should be emphasised that the Liberal Party has never regarded a warning as sufficient. The present windfall profits tax falls foul of the Conservative Party's guidelines. The nearest one came to a warning was in the Chancellor's Budget Statement in March 1980 when he said:There could, of course, be a case in principle for a special tax related to the windfall element in these profits, and I shall be considering that further. However, it has not yet been established that such a tax is either practical or entirely desirable in today's conditions."—[Official Report, 26 March 1980; Vol. 980, c. 1466.]That cannot constitute a warning of the kind that two Treasury Ministers have outlined to be necessary. Any value that it had as a warning must have been lost when the Financial Secretary, in the Finance Bill debates, defended bank profits and said that a strong case would have to be made for a tax on profits legitimately earned.
We should think carefully before allowing what Conservative Party spokesmen in Opposition said was to be a vehicle for a future Labour Administration to be used as a vehicle by a Conservative Administration. Nothing demeans politics more than when political parties and politicians move from Opposition to Government and trample over everything that they said in Opposition.
§ Mr. Straw
The leader of the Liberal Party begged the forgiveness of the hon. Member for Winchester (Mr. Browne) and said that his speech was a muddle. I beg the right hon. Gentleman's forgiveness. The speech by the hon. Member for Winchester was a paradigm of clarity compared with the muddle from the Liberal Party.
The Chief Secretary can speak for himself, but I understand that the provision is about taxing banks' 693 domestic profits—not overseas profits—as they have arisen through high interest rates in the last two years. It is not clear whether the Liberal Party intends to support the clause.
§ Mr. Ian Wrigglesworth (Thornaby)
Does the hon. Member for Blackburn (Mr. Straw) accept that a bank has only one pool of profits from which the tax will be drawn?
§ Mr. Straw
I accept that, but the argument is whether there is any justification for the tax. The justification is that the banks made windfall profits on their domestic banking business primarily from current account in Britain in the last two years. Of course we want the tax to be fair between large and small banks. We shall listen carefully to the arguments on behalf of the smaller banks, such as the TSB, the Co-operative Bank and Giro. We shall not judge until we have listened to all the arguments.
§ Mr. Straw
I do not accept that. No figures that I have seen suggest that to be so. If it is so, it is a case for relaxation for the small banks. We shall examine that carefully.
Three key issues are involved in the clause. The first is whether the banks have made windfall profits. The second is, if they have, whether the profits should be taxed. The third is, if they are taxed, whether industry and the economy will suffer as the banks claim?
Many figures were given by the hon. Member for Winchester about the cyclical nature of banks' profits. Some of his figures suggested that the British banks were doing less well than foreign banks. I do not know where he got his figures from. I got my figures from the same source as the Chancellor and the Chief Secretary—The Economist's survey of international banking, published earlier this year. It shows clearly that not only were the four major British banks—Barclays, National Westminster, Lloyds and the Midland—the most profitable banks in the world in 1979, when they had the part benefit of the windfall, but the most profitable banks on the basis of the ratio of net income to assets in 1977, before the windfall element arrived in their profits.
On this table, which I shall be happy to show the hon. Member for Winchester, the Bank of America is about nine down. Its ratio of net income to assets is 0.49 per cent., compared with 0.70 per cent. for Barclays—at the top—in 1977. The figures for 1979 are 0.58 per cent. for the Bank of America and 1.21 per cent. for Barclays—almost twice the income.
§ Viscount Cranborne (Dorset, South)
Is the hon. Gentleman confident that the basis of computation of profits of American banks and British clearing banks are identical? If so, how does he explain the difference in the profit element of the financial statements made by Barclays, when it had to issue a prospectus recently in the United States?
§ Mr. Straw
International comparisons are always difficult. We know that. However, The Economist is a serious journal, which has much expertise available to it. In drawing up its survey it took a lot of trouble to make the comparisons as true as possible. It is incontrovertible, 694 not only in this survey but in other surveys, that the four British clearing banks are among the most profitable in the world, and have been so for a considerable time. They are so profitable not because they are the best banks in the world and the most competitive but because they enjoy the most effective cartel in the world for their domestic business. In the words of a leader in the Financial Times—no less—they enjoy "monopoly income" from their domestic business. Those words were published soon after the Chancellor made his Budget Statement announcing the introduction of this tax.
The banks' profits were substantial, even in 1977. In that year they made total profits of £887 million, and that was in a period when the minimum lending rate was about 7 per cent. By 1979 their profits had risen to £1,600 million, and in that year the minimum lending rate rose to 14 per cent. in June and to 17 per cent. in November. Last year, 1980, the banks' reported profits were £1,500 million, and during that period the minimum lending rate stayed at 17 per cent. Until June and then dropped to 16 per cent. in October and 14 per cent. in November. The £100 million drop in bank profits led the hon. Member for Winchester to claim that there had been a significant drop in the profitability of banks in those two years.
What needs to be taken into account in assessing the size of banks' profits is that in 1980 the banks introduced into their accounts a provision for bad debts—a provision that was four times the size of the provision for bad debts in 1979. In 1979 the provision for bad debts was £63 million and in 1980 it was £271 million. Part of that might be justified on account of the substantial increase in bankruptcies, but there is a strong suspicion, not only on the Labour Benches but in the financial press, that part of the reason for the substantial fourfold increase in provision for bad debts was to massage their profits downwards and show that profits as between those two years had reduced rather than increased.
It is also incontrovertible that a major part of the additional profits of banks have come from the chance of higher interest rates introduced by the Government. It is also incontrovertible that the cost of those higher interest rates and, therefore, the higher profits of the banks have, on the whole, been paid for by manufacturing industry in this country.
Each 1 per cent. rise in MLR costs industry about £350 million in a full year. It is no coincidence that the cost to industry of the rise in interest rates in 1979 worked out at about £700 million and that the rise in bank profits between 1977 and 1979 was slightly more than that. In 1980 the cost of the rise in interest rates was again about £700 million. There is no question but that there is a close relationship between the cost to industry of the additional and high interest rates that were introduced not for reasons that we accept but for reasons of Government policy and the benefits received by the banks. The banks do not seriously dispute that they have benefited in that gratuitious manner.
In a speech at the Chartered Accountants' Hall on 7 April 1981, the Chancellor said:As one of the clearing bank chairmen has noted, this recession is different from those in the past when bankers generally suffered with industry. On this occasion high interest rates have ensured that the tribulations of industry were not shared by the banks.The banks know in their hearts that in this recession, because of the way in which the Government handled their 695 interest rates policy in stark contrast to previous recessions, they have benefited in a wholly gratuitous manner.
If it is established that they are windfall profits, the second question is whether they should be taxed. In the Opposition's judgment they should be taxed, and it would be fair to tax them. We have pressed for taxation not only of the profits that the banks are announcing this year but of the profits that they announced last year. Had that been done there would have been at least another £400 million of revenue available to the Government. I hope that when Treasury Ministers start totting up the total effect of the amendments that we have moved to cut back the tax increases that the Government have imposed they will bear in mind that the rules of the House prevent the Opposition from proposing increases in taxation—otherwise, last year we would have proposed a substantial tax on the windfall profits for 1979 in the way that the Government are proposing them for this year.
§ Mr. Peter Tapsell (Horncastle)
Am I right in thinking that the hon. Gentleman has come to the crux of the matter? Is he saying that the Labour Party, faced with any sector of industry or business that is making large profits, will press for an excess profits tax on it and, if necessary, support a retrospective excess profits tax? Is that not a serious warning for the whole country, not only in respect of the present proposals, so inadvisedly being put forward by the Government, but for the future consequences if we should ever again have the misfortune to have a Labour Government?
§ Mr. Straw
I note the hon. Gentleman's remarks. [HON. MEMBERS: "Answer the question."] I am about to do so. If the Government had accepted our advice about taxing banks there would have been no need for retrospection. They could have introduced a tax that was prospective in its force. We are not accepting responsibility for the fact that the Government, by their own actions, have had to make the tax retrospective. If the Government had accepted our advice about the way to run the economy there would have been no need for the tax.
It was our belief, and it remains so, that the imposition of high interest rates was perverse in the extreme. It hit manufacturing industry and failed, as we all now know, even in its ostensible purpose of controlling the money supply. While interest rates shot up to 17 per cent. the money supply shot up to more than 22 per cent.—three times the target set by the Chancellor.
One prime reason for taxing these windfall profits, apart from the size of the profits, is that the imposition of high interest rates has meant a substantial and enforced transfer of money and resources from manufacturing industry to the banks and, as it happens, from the North to the South. Of course, Conservative Members dispute that. There has been a general drop in demand and deflation in the economy. If one asks why one manufacturing company after another has reported low profits or no profits the answer in every instance is the high interest charges that they have had to bear.
§ Mr. Straw
I suggest that the hon. Gentleman says that to the chairman of ICI. The hon. Gentleman should read 696 his report. He should say that to the chairmen of textile companies who have seen their companies go out of business because of the imposition of high interest rates. High interest charges have been far more significant as a factor in industrial costs than local authority rates, about which the Government are making so much fuss.
§ Mr. Straw
One reason for introducing the tax is to enable the Government to redress the effect of their policy, which has harmed industry so much, and to use the benefits of the policy to assist industry. In his Budget Statement the Chancellor of the Exchequer, in announcing the imposition of the tax, said:this revenue will make it possible for me to give some help to the rest of industry this year which I otherwise could not afford."—[Official Report, 10 March 1981; Vol. 1,000, c. 772.]When the Chief Secretary to the Treasury replies I hope that he will tell us how and where that help is to be applied, how the £400 million is to be used to help industry, and whether it will be used to reintroduce the regional assistance that the North, the North-West and the Midlands lost in July 1979, when unemployment in those regions was running at between 6 per cent. and 8 per cent. Those regions lost that assistance and they will continue to lose as unemployment runs at double those rates.
Thirdly, having established that it is right to impose the tax in principle, will industry suffer if it is imposed? That is the contention of the chairmen of the banks. The chairman of Lloyds Bank, Sir Jeremy Morse, attacked the proposed windfall tax in a special insert in his annual report. On 19 March he said:it will deplete our resources just when industry needs most our support.That sentiment was reflected in a banking information service notice that was sent out to all hon. Members. Under the heading "The Damaging Effects on Industry and the Banks" it stated:The levy is damaging most of all because it strikes at the very basis of the banks' ability to support industry through the recession.The banks are saying that apart from the unfairness of the tax—we do not accept that premise—it will undermine their ability to assist industry out of the recession if it is introduced now. As part of that case the hon. Member for Winchester said that the banks have done a fantastic job in supporting industry.
In our view, and on the basis of the evidence in the Wilson report, the banks' record in assisting industry has been not fantastic but dismal.
§ Mr. Straw
I am coming to that. As the banks have grown richer they have come to serve industry less and less effectively. The proof of that is in the way in which industry has voted with its feet and has transferred its accounts from British clearing banks to foreign clearing banks.
We have heard a great deal about the failure of private car companies over the past 10 years. We have been told that the actions of their managements and trade unions 697 have led to phenomenal import penetration by foreign car companies. The import penetration of those companies 10 years ago was about 15 per cent. and it is now over 55 per cent. We have heard repeatedly from Conservative Members and from their colleagues and friends in the City that that is a commentary on the effectiveness of management and trade unions in the British car industry. We have heard less about the equally dramatic import penetration in British banking.
From literally nowhere 10 years ago, foreign banks now account for 31 per cent. of the deposits of British manufacturing industry. That is the extent of the import penetration which British banks have suffered because they have failed to provide the right product at the right price to British industry.
§ Mr. Peter Hordern (Horsham and Crawley)
Is not the hon. Gentleman aware that one of the reasons why so many American banks are now operating here is that they service American companies which manufacture in Britain? If he looks at the figures, he will see that about 30 per cent. of manufacturing service industries are composed of international companies, many of them American.
§ Mr. Budgen
Does not the hon. Gentleman agree that the general thrust of the Wilson report is that because the tax system has been distorted in favour of various forms of investment, which the politicians have decided ought to be given preferential treatment, the effect has been to deny a liberal system of investment to those who want funds?
§ Mr. Straw
I do not accept that. There are many reasons why British banks and British industry have done less well than foreign companies and foreign banks. Unquestionably, one of the reasons is that British banks tend to be far more cautious and conservative in their lending policy. There is overwhelming evidence of that in the Wilson report as well as in The Sunday Times series on the British banking system.
On the same asset base, German banks lend German companies twice the amount that British banks lend; French banks lend three times the amount; and Japanese banks seven times the amount. The foreign banks have achieved that import penetration not because they are more profitable than British banks—as the Economist report shows, on the whole they are less profitable—but because they have been able to offer a better product that is more attuned to the needs of the companies concerned. In addition, they are more willing to lend on prospective cash flow projections than on the narrow asset bases upon which the British banks so often rely.
§ Mr. John Browne
There is a historic reason for the difference between the long-term lending of British banks and the long-term lending of German banks. Britain had a capital market that was highly developed. It had a good equity market and a good long-term debt market. Therefore, the banks simply had to fulfil their rightful role, 698 which was short-term lending for working capital. That was not true in France or Germany, where the banks had to take up the slack. That is the reason behind that historic precedent.
§ Mr. Straw
The hon. Gentleman is right in saying that there are historic reasons for the difference. However, for historic and other reasons, British banks have been far less supportive of British industry than German banks have been of German industry and French banks of French industry
If we are concerned about regenerating British industry, as I hope we all are, we should try to ensure a much closer relationship between British banks and British industry and far more support from British banks than they have been willing to give in the past.
Even after the payment of this £400 million tax on a one-off basis, the British banks will still be highly profitable and will easily be able to meet the needs of industry if they are disposed so to do. However, the chairman of Lloyds has said:it will deplete our resources just when industry needs most, our supportIf the banks retaliate against the imposition of this tax by failing to assist British companies, the case for making them properly accountable to the nation and for publicly regulating their effective monopoly position will become even greater. This tax will not only produce a windfall for the Government; it has produced a windfall for the Labour Party. The hon. Gentleman is exactly right. We have a windfall of wonderful quotations which we shall certainly bear in mind when we decide upon the future policy for the banking sector. After all, it was the Sunday Express which said:If it is now legitimate to cream off bank profits in a good year, the case against strict Government control of the banks, the ease against bank nationalisation even is diminished".Quite so. A letter to the Financial Times said:So a Tory Government has had the incredible temerity to introduce a tax on bank profits which amounts to a confiscation of a shareholder's asset, without compensation".That may be true, and Conservative Members should think very carefully about the precedent which the Government have set. They should also think on the fact that if the Government had accepted our advice on the running of the economy generally they would not be in this sorry mess. Even if they had accepted our advice on the imposition of this tax last year, they would not be in all the difficulties that they are in today over this retrospective element. We support this tax. We look forward with great interest to what the Chief Secretary has to say.
§ Mr. Brittan
I thought it might be convenient if at this stage I covered some of the main points of criticism relating to the bank tax generally and indicated the Government's general position, while, perhaps, I might at a later stage in the debate, deal with some of the points arising from some of the amendments. It seemed to me that to fail to give a general account at this stage would be less than fair to the Committee in considering the amendments.
Can I first of all say a word about the spirit in which this provision is to be read in this Finance Bill? I want to make it quite clear at the outset that that spirit is very different from that just reflected by the hon. Gentleman the Member for Blackburn (Mr. Straw). I find it quite impossible to share his enthusiasm and zeal for this tax and I am not going to pretend that I do. The Government as a whole gave the matter a great deal of thought and it was 699 only with a considerable degree of reluctance that we concluded that the financial circumstances this year and, in particular, the fiscal requirements necessary to achieve the public sector borrowing requirement that we judged necessary for the maintenance of our anti-inflationary policy meant that the introduction of a tax of this kind was unavoidable. Let me remind the Committee that the tax is a single tax on a single occasion and is not put forward as a general introduction to the system.
I start by explaining the position last year. Reference has already been made to it by a number of speakers. Last year Ministers accepted—and we have had some of the quotations—that there could be a case in principle for special taxation of banks in certain circumstances on the grounds that high interest rates for which the banks were not themselves responsible enabled them to make particularly high profits. I will not use the word "excess" profits because that has a derogatory connotation and I do not accept for one moment the strictures of the British banks that fell from the lips of the hon. Member for Blackburn. I am not in any way criticising the banks for making profits of that kind on that basis in circumstances in which they were enabled to do so, but what Ministers last year said was that the existence of those high interest rates did, as a matter of fact, enable banks to make profits which were of an endowment or windfall character in the sense that they had not done anything which led to those profits.
That is not a criticism of them. It is a fact. But the Government felt last year that to introduce a discriminatory tax of this kind on banks was something which required a very strong case to be made, and they were not persuaded last year that this was so.
I think that different considerations apply this year. First, interest rates have continued at an exceptionally high level throughout 1980. The average base rate in 1980 of 16.3 per cent. was two and a half percentage points higher than that in 1979, when it was 13.7 per cent.
§ Mr. Brittan
Perhaps I could develop this matter. My hon. Friend will remember that I said that at a later stage of the debate I would be dealing with points arising from it. I think that it is convenient at this stage to set out the Government's basic position on these matters.
The banks have continued to benefit from exceptionally high interest rates for an unprecedented period and for much longer than could have been expected in the first quarter of 1980, when the Chancellor was putting together his 1980 Budget. The effect of these high interest rates has been to increase the endowment element in bank profits. The endowment factor arises because banks can attract and hold deposits from the public at a cost, after allowing for services provided, substantially less than the yield at which they can invest the funds when interest rates are high. That windfall arises because the level of interest rates is the result of economic circumstances or Government policy, and not of any particular effort or action by the banks.
It is generally thought that it now costs the clearing banks about 9 per cent. to provide current accounts with the normal associated facilities. Over the past two years, 700 they have been able to invest funds deposited on current account in advances or other ways at much higher rates of interest.
Given the present levels of current account balances, every one percentage point rise in the general interest rate level increases the potential return from investing current account funds, on which this tax is to be levied, by about £170 million for the banks as a whole. The special tax has the effect of securing the benefit of two and a half percentage points of these higher interest rates for the Exchequer.
Secondly, as the results of the big four clearing banks indicate, banks have generally enjoyed, overall, another successful year, with their profits not being far different from those achieved in 1979. As has been mentioned, however, there has been—I am trying to present a balanced picture—a switch in emphasis, with the overseas profits generally moving ahead and domestic profits declining. The reasons for that are twofold. First, there is the provision for bad debts, to which the hon. Member for Blackburn referred. But there have also been increased staff costs, arising in part from pay increases—an average increase of 30 per cent. in 1980 over 1979 levels. The net result, however, has been good. Three of the four banks have been able to increase their dividends by 20 per cent.
Thirdly, the banks' experience with profits contrasts sharply with the reduced profits of industrial companies.
Fourthly, as the sharp increase in indirect taxation and the failure to index personal allowances clearly show, the Government have needed substantial additional revenue in 1981–82 to contain the public sector borrowing requirement, and, above all, to set a financial.framework—as so many of us have said from this Dispatch Box—in which it would be possible for interest rates to come down and for industry to begin the advance from the trough of the recession.
In a very broad sense, therefore, this tax can be seen as a measure to recycle back to industry some part of the substantial bank profits which have been provided by industry through its payment of high interest rates. Reference was made by the hon. Gentleman to the retiring chairman of Barclays. I would like to quote at only slightly greater length what Sir Anthony Tuke said:In the past … where a country has suffered a major recession its bankers have suffered also but this recession is different, with high interest rates ensuring that the tribulations of industry are not shared by the banks. Indeed, it would not be altogether unreasonable for our borrowing customers to go further and observe that some of their profits are being absorbed by high interest rates which find their way into the profit and loss accounts of the banks; but these high interest rates are not of our making as they are part of the Government's policy".Those were not the words of a politician. They were the words of a chairman of one of our major clearing banks.
I accept that even if that general case is made out, and even if the basic reasons why the Government have felt it necessary to put these proposals before the Committee are respected if not shared, nonetheless my hon. Friends and others in the Committee, although not apparently the official Opposition, have grave reservations on grounds of principle about certain features of this tax. I want now to deal with these.
The suggestion has been made that the tax is reprehensible on grounds of its retrospective character, and quotations to that effect were prayed in aid. I dealt with this in part in my speech on Second Reading, but, I 701 fear, not altogether clearly. What I sought to say then was this. The reasons for objecting at retrospective legislation are the consequences that such legislation can have, often has, indeed perhaps usually has, in relation to the conduct of affairs—
§ Mr. Brittan
In one moment, but I want to develop this argument before giving way to my hon. Friend because I gave way to him perhaps prematurely on the last occasion we debated these matters. The objectionable features of retrospective legislation are the consequences that it has on expectations; the consequence it has on the way people behave; the harmful effect in leading actions of one kind to have consequences of another kind which would have been avoided if the people taking those actions had realised what the consequences of those actions were going to be when they took them. The consequences have changed as a result of the retrospective legislation. The rules of the game are altered but the objection is not just that the rules of the game are altered but that they are altered in a way that harms the individuals who had a right to expect that they would not be harmed.
Therefore, considering whether this principle applies here and in considering whether the disagreeable and objectionable consequences of retrospection apply in this case, it is not enough, I suggest to the Committee, to say that the tax is introduced now, it applies in relation to a date last autumn, and therefore it is objectionable. One has to probe a little deeper and ask what the circumstances in which the tax came to be imposed were and what are the consequences for those on whom it is imposed. Above all, it is necessary to ask: if they had known that this tax was to be imposed, would they have behaved differently? That is the principal objection on the ground of retrospection.
§ Mr. Budgen
For the second time, may I ask my right hon. and learned Friend to define for the Committee what is retrospective legislation?
§ Mr. Brittan
What I have tried to do is to explain that it is not a question that is susceptible to a simplistic definition of the kind my hon. Friend seeks.
§ Mr. Brittan
My hon. Friend must bear with me. I shall not agree to a definition which does less than justice to real problems in law. It is perfectly possible to say that retrospective legislation is legislation which is introduced and which bites adversely on an individual or company in respect of something that that individual or company has done before its introduction.
That is an off-the-cuff definition which may or may not satisfy my hon. Friend. It may do well for the dictionary, but it does not answer the question whether it is always objectionable. The essential reason why retrospective legislation is rightly regarded with abhorrence and as something to be avoided is that it leads people to order their affairs in a way which they would have been able to avoid and which they reasonably might be expected to avoid if they had known that the legislation would have the consequences which it turns out to have.
§ Mr. Brittan
I am not saying that. I am saying that if my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) wants a dictionary definition of "retrospection" I have given him one. In the context of consideration of what is objectionable and what is not objectionable it does not suffice merely to apply that definition without looking at the consequences and without looking at whether it has harmed and is likely to harm individuals.
§ Mr. Tim Renton (Mid-Sussex)
Might I suggest to my right hon. and learned Friend that there are two instances in which it can be argued that this retrospective legislation has specifically harmed individuals? The small shareholder who bought shares in a clearing bank at the end of last summer on the basis of the high profit made by one clearing bank in the 1979 financial year now finds that a retrospective tax is being introduced because of the profits made in that year and therefore he bought his shares on a false premise.
Secondly, I ask my right hon. and learned Friend to consider the future effect of this retrospective legislation. The Minister of State, Treasury, the hon. and learned Member for Dover and Deal (Mr. Rees) served or the Finance Bill Committee in 1978, as I did, so we feel rather strongly about this question. In future years, when clearing banks make high profits because of high interest rates—it will happen again—they will be tempted to put up their charges substantially because they will believe, after this example, that there is a strong possibility of the profits being taxed away from them. Those are two examples of the way in which retrospective legislation is damaging.
§ Mr. Brittan
The second example is not one of retrospection; it is an illustration of what people may do in the future. It may be a harmful consequence, but it does not concern the issue of retrospection. My hon. Friend referred to the purchase of shares by shareholders. That is not an example of retrospection either, because any shareholder buying in any company cannot expect a tax regime to continue for a specific period. The example of petroleum duties is a clear illustration that that is so.
I should like to deal with the facts about this tax because I have more to say about retrospection. I hope that if am allowed to do so my hon. Friends will again see that the question of retrospection is not as simple as is made out by my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen). I do not seek to put the tax in one definition or another; I merely seek to make it clear. In his 1980 Budget Statement the Chancellor of the Exchequer said that the Government were considering a special banking tax. Numerous statements have been made to that effect since then. The circumstances that might lead to the introduction of such a tax were made clear.
However, it is also relevant, particularly when one is comparing the situation with the 1978 type of discussion, that the tax applies only to concerns that were carrying on banking business on Budget day. We are not talking about raking up some transactions from years ago and penalising them.
The most important point of all, which relates to the fundamental analysis that I made of the essential mischief of retrospection rather than just whether it fell within a 703 narrow category, is that it cannot seriously be argued that the banks would not have earned their endowment profits if they had known that they would be taxed. Various profits arose as part of their normal business activities. They were carrying on normally. The profits arose out of the extra earnings that could be derived from the investment of current accounts, which were able to earn a higher return than would have been possible if there had not been high interest rates.
§ Mr. David Steel
Surely the right hon. and learned Gentleman is not seriously arguing that the banks would not have made a different judgment if they had known that this level of tax would apply in the last quarter of 1980. Surely many of the banks would have decided to accelerate improvement investment programmes on their buildings—for example, the installation of cash dispensing machines. Any normal prudent business man would have taken action.
§ Mr. Brittan
The right hon. Gentleman is misconceived. That is not what I said. [HoN. MEMBERS: "Mistaken."] That is right. I should have said mistaken. I am misconceived and the right hon. Gentleman is mistaken.
The right hon. Gentleman is wrong, because I did not say what he implied I said. I said that it cannot seriously be argued that the banks would not have earned their endowment profits if they had known that they would be taxed. The point about the tax is—
§ Mr. Brittan
I shall not give way.
The point is that the tax is a percentage of current account non-interest earning accounts. Therefore, taking the action that the right hon. Gentleman suggested would not be relevant in its impact on the matter.
§ Mr. Brittan
I wish to carry on a little further, as I know that a number of my hon. Friends and other hon. Members wish to speak on specific amendments. I should like to confine my remarks on general points to a reasonable compass.
The new tax is a tax for the current year, applicable to current businesses. The measure of liability will be by reference to deposits held in the last quarter of 1980, which is significant. Only in that respect is it a retrospective tax. That is, however, inescapable with a tax of that kind. The reason is obvious. If the tax were based on deposits at some future date it could easily be avoided by paying nominal rates of interest on the deposits at the crucial times, or even arranging for some of them to be transferred. Given that the tax is being imposed essentially because of the level of banking profits in the past two years, it is entirely appropriate to use a base period in 1980.
The real point of significance in the argument is that if the liability were based on current deposits, leaving aside action taken to prevent avoidance, its amount and distribution would have been similar to what it will be using the last quarter of 1980 as the base period. Indeed, 704 to the extent that there has been further growth in deposits meanwhile, a current base would mean a higher degree of liability.
For those reasons, although, applying the mechanistic test wrung out of me, the tax can be regarded as retrospective, in reality, when looking at the actual nature of what the tax has done and the reasons for the particular form of tax, it does not have the disadvantages in principle that a retrospective tax would apply normally be rightly denounced as having.
In business taxation it is not unusual for there to be an element of retrospection. For example, the self-employed are generally taxed on the preceding year basis, whereby the liability of the current year is determined by the profits of the previous year and the corporation tax rate is always determined in arrears, which is considered fair. However, I have placed that argument last because I do not attach great weight to it.
§ Mr. Brittan
The hon. Gentleman is mistaken if he believes that it is meant as a climax. I am merely seeking to go through the various aspects in which the tax does not have the features of retrospectivity when looked at in reality as opposed to being looked at in form.
§ Mr. Douglas
Will the hon. and learned Gentleman address his mind to the question of retrospection? One of the arguments for accepting a retrospective tax is that everyone within its ambit would be treated equitably. The Chief Secretary has used the vague term, which I do not understand, of "endowment profits". He might care to define it. The proportion of the endowment profits of the individuals, companies or banks that come within this bracket should be similar. From the Co-operative Bank's point of view that is the case.
§ Mr. Brittan
There is no mystery about that, because the endowment profit is simply the profit caused by the increase in interest rates, for which the bank was not responsible. The tax is in the proposed form because by taxing a percentage on non-interest bearing current accounts we shall achieve exactly the effect that the hon. Gentleman describes.
§ Mr. John Browne
Is my hon. and learned Friend aware that at Barclays, which I know better than any of the other banks, only 11.5 or 11.6 per cent. of the total deposit base is accounted for by current accounts. A lot of the other deposits are bid for in the short-term market. My hon. and learned Friend's argument for the morality of retrospection concerned the question whether the target could have rearranged its affairs to avoid the tax. People who are bidding in the market for deposits upon which they lend can rearrange their affairs. I submit, therefore, that even under my hon. and learned Friend's argument this is still a retrospective and immoral tax.
§ Mr. Brittan
I do not think that that is right, because the tax is levied only in relation to the current account. Of course, if the banks had known that the tax was coming they could have taken evasive action by paying, for example, nominal rates of interest on the current accounts. In that sense they would have been able to alter their liability. Leaving aside specific evasive action to avoid the tax, the potential size of their current accounts was unlikely to be affected by this tax and its incidence. That is why we have chosen this way of levying the tax.
705 Another argument of principle that was advanced by some of my hon. Friends—and I should sympathise considerably with it if it were to be true—was the suggestion that by introducing a bank tax of this kind we were providing a precedent and an argument for the Labour Party to do worse. I do not share the optimistic, sanguine and cheerful view of Labour Members that my hon. Friends hold that in its present frame of mind the Labour Party requires any kind of precedent to take action of that nature. It is wildly unrealistic and extraordinarily naive to suggest that confiscatory or other deplorable action by a Labour Government would be more likely if we provided them with a few quotations that they could pray in aid in the event of their seeking such action. In its present frame of mind the Labour Party does not require any such precedent—
§ Mr. Brittan
I do not believe that Labour Members need any encouragement. We Conservatives are being extraordinarily optimistic if we believe that by an act of self-denial and self-restraint we will mitigate, remove or reduce by one jot or tittle the extent of a Socialist programme introduced by a Government headed by the right hon. Member for Ebbw Vale (Mr. Foot), if he still holds that position.
§ Mr. Tapsell
Notwithstanding what my right hon. and learned Friend has just said, is it not profoundly unwise to withdraw the moral basis on which we would have to found our opposition to retrospective taxation if we ever again found ourselves in Opposition?
§ Mr. Brittan
I obviously do not think that, because I have sought to explain—I appreciate that I have not done so to my hon. Friend's satisfaction—why this legislation does not contain the undesirable features of retrospection. I should have no hesitation in attacking legislation that had such features. I can see the argument put forward, but I do not share its conclusion. The precedent that I fear relates not to retrospection but to the singling out of a sector of the economy on the basis of its apparent success. My hon. Friend could put forward that argument. However we fool ourselves if we think that this measure will encourage them to do more, or if we think that our failure to undertake such a measure will discourage the Opposition from taking such action.
I turn to the conclusion of my general remarks—[HON. MEMBERS: "Hear, hear".] I should have been happy to finish my remarks a long time ago. However, many hon. Members seemed to be interested in what I might say in response to their interventions. That, and nothing else, has prolonged my speech. I shall turn to two general points of substance that are not related to particular arguments in relation to amendments. It has been suggested that the tax is excessive in relation to total bank profits. As the Chancellor of the Exchequer indicated in his Budget Statement, it is estimated that about 90 per cent. of the tax will be paid by the clearing banks. It is they who have enjoyed the bulk of endowment profits. Therefore, it is fair to look at the profits of the big four banks in 1979 and 1980.
The additional tax amounts, on average, to above 11 per cent. off the 1979 and 1980 pre-tax historic cost profits. That does not seem to be an unreasonable amount. 706 If overseas earnings for the big four clearers are discounted, the estimated liability is 18 per cent. of their aggregate pre-tax 1978–79 and 1980 domestic profits.
§ Mr. Wickenden
Does my right hon. and learned Friend accept that the document put out by the banking information service shows that the pre-tax domestic banking profits of the big four in 1979 amounted to £1,017 million? That is before any allowance for inflation on current cost accounting. Indeed, on any normal accounting basis, the windfall profit tax would account for 80 per cent. of those current cost-accounted and post-tax profits.
§ Mr. Brittan
In considering current cost account profits for tax purposes, the decision whether that should be done is a matter for discussion in our forthcoming Green Paper on corporation tax. At present, taxation liabilities are based on historic cost accounting. There are no grounds for regarding CCA profits as having a validity in this context. Therefore, I cannot accept what my hon. Friend the Member for Dorking (Mr. Wickenden) says.
In many ways the most important question is whether taking this amount of tax on profit is likely to harm the ability of the banks to assist British industry. As the purpose of the tax is to assist the Government in achieving their public sector borrowing requirement, which provides a base for recovery, it would be highly undesirable if the tax had that consequence.
I do not foresee that the once-for-all special tax will have a continuing effect on the banks' operations. It will not affect the banks' rate of return on future commercial operations. The special tax will be paid initially out of the banks' free reserves. Although it is impossible to predict the free reserve ratio for 1981, the effect on the big four clearers' free capital ratio for 1980 of paying the tax is estimated to be to reduce their free capital from 4.3 per cent. to 4 per cent., which would still be a generous figure and would undoubtedly be higher than the ratios that existed earlier in the 1970s.
It has been argued that every pound removed from the banks' capital base reduces their ability to lend by £15 to £20. I do not think that banks generally would accept that there is an automatic relationship between the size of their capital base and their ability to lend. It is right that that relationship has varied considerably between banks, within banks and within the same bank over the past few years. The amount of a bank's free capital is by no means immutable in the medium term and it is possible for it to be increased, if the bank so wishes, by means of a rights issue, if it is thought to be inadequate.
I accept, that many of my hon. Friends feel strongly that this tax should not be introduced. That needs no underlining. I have also made it clear that the Government would not have wished to introduce this tax, other things being equal. The Government do not introduce it with relish or enthusiasm. If that were so it would have been introduced last time.
The objectionable features customarily associated with retrospective legislation do not apply in this case. The case for taxing the endowment gain made by the banks as a result of the increase in interest rates is entirely respectable on its merits. I do not believe that it will harm the banks' ability to assist British industry. For that reason the Government have introduced the tax.
§ Sir William Clark (Croydon, South)
On a point of order, Mr. Armstrong. I wonder whether it has escaped your notice that the debate has continued for some time. We have just heard a speech lasting about 45 minutes. During the debate one Conservative Back Bencher has spoken, the leader of the Liberal Party, the spokesman for the Labour Party and now a Back-Bencher from the Labour Party. Is there any hope of a Back Bench Tory Member being allowed to speak?
§ Mr. Ian Wrigglesworth (Thornaby)
Further to that point of order, Mr. Armstrong. It will not have escaped your attention that some members of the SDP have tabled amendments. I hope to have an early opportunity to speak in the debate.
§ The Second Deputy Chairman (Mr. Ernest Armstrong)
I assure hon. Gentlemen that that has not escaped my attention. I have been paying careful attention to the calling of speakers, but hon. Members must leave the decision to the Chair.
§ Mr. Sheerman
I wish to speak to amendment No. 60. I declare an interest in the clause as a Co-operative Member. I am pleased to see in the Chamber my hon. Friends the Members for Edmonton (Mr. Graham), Dunfermline (Mr. Douglas) and South Ayrshire (Mr. Foulkes). I shall stick to that interest. We have had a broad debate and long speeches on the principles of retrospective legislation. I can understand hon. Members' impatience. I shall be relatively brief.
I am making the case on behalf of the Co-operative group. The case is based on equity of treatment. I intend to make some harsh remarks about the Bill's provisions as they affect the Co-operative movement. However, it would be churlish not to mention clause 25, which is beneficial to common ownership enterprises. It will ease the problems of raising capital for workers co-operatives. Perhaps the Minister is so shell-shocked that he does not realise that I am one of the few hon. Members who have said something nice about the proposals. I thank him for clause 25 on behalf of the Co-operative movement.
I cannot be that generous about clause 122. The effects of that clause are immense. It is a sledgehammer to the Cooperative Bank and small banks which do not have a large foreign business to protect them. The leader of the Liberal Party did not understand that banks with mainly domestic business will suffer under the clause.
The Co-operative Bank, like the TSB and the National Giro, are particularly hard hit by the legislation. Such banks will pay 40 per cent. compared with the 20 per cent. that the clearing banks will pay. The amendment concerns a group of banks which are based on a different principle from the clearing banks. That is not often admitted or even realised, particularly on the government Benches.
The Co-operative group in the House is not against the taxation of bank profits. However, this is perhaps the wrong way to tackle the problem. After the next election a Labour Government will fundamentally tackle the structure of the banking business. We shall change the nature of finance for industry. We shall change the banking system in a meaningful way. That is in the future, perhaps as late as 1984 but perhaps earlier.
The windfall profits of banks are the result of Government policy. I take the point made by the hon. 708 Member for Winchester (Mr. Browne) that there are ebbs and flows and ups and downs in the profitability of banks, but I come down firmly in the camp of my hon. Friend the Member for Blackburn (Mr. Straw) who says that the British banking system is highly profitable.
The Co-operative Bank and the TSB are founded on a different premise from that of pure profit making. They were not set up purely to make a profit for their shareholders. They are a different kind of bank. The Government are aware from the representations that have been made—so far unsuccessfuly—to the effect that these smaller banks will be particularly badly hit by these proposals. The purpose of amendment No. 60 is to avoid a disproportionate impact on small banks such as the Cooperative Bank, the TSB and the National Giro. Those banks do not seek to maximise their profits. They rely principally on domestic earnings and do not have the advantage of substantial overseas and related banking services. That sort of income is not available to cushion the impact of the levy.
The Government cannot ignore the importance of the small banks to the British economy, although the big clearing banks dominate the British scene, and although over the past 10 years the incursion of foreign banks, mainly American, into the domestic market has been quite surprising. But we must not underestimate the role of the Co-operative Bank and other smaller banks in providing an alternative banking system. It may not represent an overwhelming percentage of the market, but it gives the consumer a choice to bank with an altogether different kind of enterprise.
§ Mr. Ted Graham (Edmonton)
My hon. Friend is too modest about the extent of the service that is given by the Co-operative Bank to consumers. Is not he aware that there are more than 4,000 banking in-store points in Cooperative stores, which are not restricted to normal banking hours, but are available to the 900,000 account holders during shopping hours? Thus, they are of great benefit to consumers.
§ Mr. Sheerman
I thank my hon. Friend. I was saying that the Co-operative Bank offers a different kind of banking service from the traditional banking service that is given by the great clearing banks. In many respects, it is a better service and one of which we in the Co-operative movement are particularly proud.
I am seeking to draw the Government's attention to the different nature of the enterprise. I want to give an example of the impact of the tax. In the case of the Co-operative Bank, the levy would be £4,450,000 against a group operating profit in the year to 10 January 1981 of £5,422,000. Thus, the levy would represent 82 per cent. of the last reported annual profit. That is far in excess of its incidence in the case of the great clearing banks. That is surely inequitable.
We have already seen the impact of the measures contained in the Finance Bill.
I wish that we had seen a larger number of hon. Members behind the Minister, and criticising him, when he introduced measures earlier this week that were inequitable to strikers and the unemployed. Those measures were more inequitable than the inequities to the banking system contained in this measure.
I do believe, even with this Government, that it is the Chancellor's intention to impose such a disproportionate 709 charge on a part of the banking sector which in no way can be said to be motivated by a desire to generate obscene levels of profit. The amendment will not single out any bank for special treatment. It will ensure that the levy is more closely related to a bank's ability to pay. We do not believe that the amendment is the be-all and end-all. Perhaps it is not the perfect amendment for the Co-operative group, but at least it will go some way towards changing the position. There is a case for reconsideration of the levy in its present form.
I hope that the Minister, when he replies, will say that he has not closed the door on any consideration of the special position of the small banks. I noted with some regret his answer, under great pressure from a number of sources, to my hon. Friend the Member for Dunfermline. It appeared to be an immediate negative response. The liability of certain small banks will be more closely related to the banks' ability to pay if the amendment is accepted.
It is true that to accept the amendment would benefit all banks, and the Government would be £35 million worse off. They would have to find that sum from somewhere else. That is not altogether too disastrous for the Government. They would have to think again. The Labour Government had to think again when they withdrew the petroleum tax increase in 1979.
There is still time to reconsider, not simply on the basis of the amendment, but on the basis that certain treatment for the smaller banks would be equitable. The Government will lose no face at all if they introduce an amendment to change the incidence of the tax, which is wholly unfair and will be crippling to an enterprise that is different, offers an alternative co-operative banking service, and will benefit the growth of the banking system in a diverse manner in years to come.
The distinct disadvantage vis-a-vis the competitors to the Co-operative Bank, the TSB, and National Girobank cannot be fair. That disadvantage will be a direct consequence of the proposed tax. The amendment aims to remove an injustice. The principle of the tax is not contested by the Co-operative movement.
§ Mr. Wickenden
I shall attempt to be brief, Mr. Armstrong, as I know that many of my hon. Friends wish to participate in the debate. First, I wish to correct one or two misapprehensions about the banking system generally. Before doing so, I must ask you, Mr. Armstrong, whether I have an interest to declare. I think that I own a bank.
§ Mr. Wickenden
Only one. It is a merchant bank, of which I am a director. As I understand that it does not take current account deposits, I do not think that it is covered by the clause. I declare my interest, for what it is worth.
We have been given the impression this evening that banks are the fat cats of the industrial sector and form a highly undesirable area from which the Government and future Governments can extract taxes at will. The banks employ 250,000 throughout the country and they are one of our major industries. To the extent that lending may be affected by the clause, the employment prospects of their employees is reduced.
My right hon. and learned Friend explained at some length that there is nothing wrong with retrospection as such—a definition with which many of us would disagree. He argued that it was not objectionable if those affected 710 would not have ordered their affairs differently had they known that the retrospective legislation was to be introduced. I do not think that it can be seriously challenged on any normal banking grounds that the withdrawal of £400 million from the capital base of the banking system will have an effect on their ability to lend, in the long term, by about £6 billion. If the banking system had known that it was to have £400 million withdrawn from its capital base it would not have been so free with its lending over the past two years. That is the objectionable element. The banks did not have the opportunity of ordering their affairs differently.
We have heard much about the high profits that banks have had because of what is called the endowment effect of current accounts. I hope that it follows from that that when interest rates drop below a normal level, which the 1977 Prices Commission deemed to be 9 per cert. as adjusted, the banks and the other institutions that will be affected will be subsidised by Government repayment. That is unlikely to happen, but that must follow, in equity. If we take when interest rates are high, we must give back when rates are artificially low. Over the past 15 years rates have been artificially low more often than they have been artificially high.
§ Mr. John Bruce-Gardyne (Knutsford)
Does my hon. Friend argue that if, as could conceivably happen, the oil companies that are operating in the North Sea were confronted by a slump in the international oil price, they should be entitled to a subsidy of petroleum revenue tax?
§ Mr. Wickenden
If we tax windfall profits when they are high, we must in equity give relief when they are low. That is the burden of my argument. I do not believe that that will happen. That is one of the reasons why this is an unfair tax, as to a large extent is PRT.
It has been questioned whether the banks are engaged in a risk business. It may be useful if I remind the Committee that as recently as December 1974, less than six and a half years ago, the chairman of one of the big four clearing banks had to call a special press conference on a Saturday morning to assure the City of London that that bank would not go into default on its deposits.
At that time the shares of that bank and of most of the big four banks were standing below par value, which made it impossible for them to raise a rights issue from their shareholders, even if it were right, as has been suggested this evening, for shareholders to be asked to put up cash for a rights issue so as to pay tax.
I draw attention to the difference of view that appears to some extent exist between Treasury Ministers. My right hon. Friend the Financial Secretary to the Treasury argued last year that to introduce a discriminatory tax on profits legitimately earned in one sector of the economy would require a strong case to be made and that in his judgment that case had not been made in respect of the banks that year.
That was last year, since when bank profits have declined, particularly domestic bank profits. Yet my right hon. and learned Friend the Chancellor, in a speech made this year at Chartered Accountants' Hall, said:The case for special, once-for-all, tax on banks is a strong one.".However, bank profits are lower this year than they were last, when my right hon. Friend the Financial Secretary said that no case had been made out. At the very least, there seems to be some dissension on the Treasury Bench.
711 My right hon. and learned Friend the Chancellor made an extraordinary speech at Chartered Accountants' Hall, although some of it was repeated this evening in the same words, which leads me to the conclusion that it was not entirely my right hon. and learned Friend's own speech. He added:A ratio of 1 to 25 is comfortably above the ratios enjoyed by the clearers earlier in the 1970s".That is a bad simile to draw, because earlier in the 1970s the banks were extended beyond all prudent banking principles. Indeed, we should not be looking for similar ratios to those which existed in the early 1970s.
I object to this tax on three main grounds. First, as has been admitted, it is retrospective. The effect of that retrospection will unfairly impinge on those who did not know—although there appears to have been a suggestion of a nod and a wink in earlier times—that the tax would definitely be introduced. It has been said that the levy is not retrospective, because the Chancellor mentioned it in his Budget statement last year and again in private conversations early in 1981. Surely that misses the main point. Banks, like anyone else, should not be punished for doing what is lawful. It is worth remembering that laws are made by Parliament and not by ministerial decree or by statements made in previous years.
There is an element of retrospection that I believe to be undesirable. My right hon. and learned Friend the Chief Secretary dismisses the argument that it will make it easier for the Labour Party to introduce retrospective legislation by saying that they would do so anyway. That seems to advance the argument that just because they are a bad lot it is all right for us to be half a bad lot.
Secondly, no point has been made on the industrial lifeboat that exists. A substantial industrial lifeboat is in existence at present, and it has been in existence for the past two years. It has been conducted on an informal basis. Had the banks' capital base been eroded it would not have been possible for them to make that lifeboat as large as it is. I believe that there is a serious danger that at least over the medium term it will be withdrawn.
Those hon. Members who enthusiastically support this levy may be less enthusiastic if further unemployment is caused in their constituencies as a result of facilities being withdrawn from local companies.
Thirdly, as amendment No. 50 will make possible another £2½ billion of potential bank lending, which will not be available if the levy is imposed, I recommend that amendment to the Committee.
§ Mr. Wrigglesworth
Before addressing my remarks to amendment No. 60, in the name of my hon. Friends and myself, I should like to comment on the general principles and arguments that have been advanced so far.
Clearly, all hon. Members want to try to uphold the principle of restrospection in the financial sector whenever they possibly can, and I would hope always in any other sphere. [HON. MEMBERS: "Uphold?"] I apologise. I meant to say that they would want to uphold opposition to restrospection and to stop it being introduced at any time.
Action is taken by all Governments to forestall avoidance of taxation measures, and has been over a very long time. One has to look at each case in this sphere as it comes up. It comes ill, particularly from some Members 712 on the Opposition Benches who only two or three years ago supported legislation that had a restrospective element in it, to be criticising the Government in this case for introducing legislation that has an element of retrospection about it. [Interruption.] I am not against that. I voted for it when it was introduced previously and I am in favour of the legislation that is is being introduced this evening.
I thought that the Chief Secretary was rather uncomfortable in following the logic of his case against the prejudices and vested interests of his own party. I am very pleased that he felt able to do that, because I think that the case for this tax is a very strong one. The Chief Secretary,despite the reluctance that he expressed, put the case very, very strongly. In principle, the tax deserves the support of the Committee.
There has been a fair amount of comment from the Government side about the level of profits on banking in this country. I can only say to hon. Gentleman opposite that any who have experience of international banking and of banking in this country are only too aware that the level of profits in banking in this country compared to virtually any other country in the world are historically high, and have been very high in recent times. I should like to quote one extract from the Financial Times world banking survey that appeared just a couple of weeks ago to bear this out, because we should not weep too many tears for the banks that are faced with this levy on their profits. The article on Britain is that world banking review was written by Michael Lafferty, the Financial Times correspondent.In that article he said:Anyone who doubts that British retail banking is exceptionally profitable has only to look at the registration statement filed in April this year with the U.S. Securities and Exchange Commission by Barclays Bank. This shows that Barclays earned net interest margins of 6.6, 8.1 and 7.7 per cent. in the three years to December 1980 on its domestic lending. This compares with international lending margins of about 2.5 per cent. for the same years, and is far in excess of the margins achieved by other major banks either in Europe or North America, according to a study by IBCA Banking Analysis, the London research firm. The only country with banks which earn margins anything like those of Barclays appear to be Spain, a country which has so far seen little competition in retail banking.To support that international view he went on to say:The profitability of British banking, and the retail market in particular, is the main attraction behind the rival bids which emerged from the Royal Bank of Scotland group in March and April. Royal consists of two separate banks: Williams and Glyn's, the fifth English clearing bank, and Royal Bank of Scotland, the largest of three Scottish clearing banks, (the others are Bank of Scotland, and Clydesdale Bank, a Midland subsidiary). The jewel is Williams and Glyn's, with its 300 branches in England.Mr. Peter Graham, chief executive of Standard Chartered Bank, said:British banking is the most profitable in the world".Lord Barber, of course, is the chairman of that bank and I would prefer to take his word and the report from the United States rather than the assertions that have been made by representatives of the large clearers and some of those that have been made this evening from the Government Benches. As I said, one would prefer that from the horse's mouth rather than some of the crocodile tears that we have heard emerging from hon. Members opposite during the course of the debate.
Coming to my amendment, the levy impinges upon certain banks in a quite capricious and, indeed, lethal way, as the right hon. Member for Huyton (Sir H. Wilson) said in the Second Reading debate. It does so on some of our 713 smaller banks in quite a staggering way. I hope that the Chief Secretary will take careful note of what some of his hon. and learned Frieds will be saying tonight about the extent of the impact on some of the smaller banks.
There is a gross inequality in the way in which this tax hits the various banks. Little judgment seems to have been made about the ability of the different banks to pay the levy that is being imposed. In my view and that of my hon. Friends the principle should be, in so far as it is possible to attain it, that no bank should pay proportionately more than other banks in relation to total profits.
Let me take, firstly, the trustee savings banks. These have been covered in another amendment, in the names of the Members for Ludlow (Mr. Cockeram) and Galloway (Mr. Lang). What I am about to say will probably be amplified by them later in the debate. If the Bill is not modified, either in the way in which we have proposed or by the amendment that I have just mentioned, it will tax the trustee savings banks to the extent of £10.3 million. There is one example that illustrates the impact of this tax upon the TSBs.
The worst impact will be on the TSB in the South-East, which will have to take the levy out of its reserves, because the levy will be in excess of its profits. For that bank, the windfall tax exceeds its forecast post-tax profit for the current year. As I say, the payment will have to be made from reserves. The relevant figures are that the bank's profit before tax will be £4.2 million; its normal corporation tax will be £2.2 million; and the windfall tax will be some £2.7 million. It will therefore have to take £700,000 out of reserves to pay the levy.
That cannot be right. It is a quite inequitable state of affairs. It is surely something that the Government must reconsider. Surely it was never intended that the tax would impinge upon banks so much that all their profits would be removed and they would have to pay all or some of the levy out of reserves.
§ Mr. Douglas
Will the hon. Gentleman therefore challenge the Chief Secretary's assertion in terms of retroactive taxation? A company, or a bank such as that about which the hon. Gentleman has been speaking, could not have arranged its affairs differently if it had known that this would be taking place.
§ Mr. Wrigglesworth
I take the hon. Member's point. That is absolutely right. He makes the point very clearly. I hope that the Chief Secretary will respond to it.
I was one of those—along with, I think, other hon. Members present—who went through the various stages of the Trustee Savings Banks Bill in 1976. We sought then—I think that we succeeded—to set all the trustee savings banks on the right course. They have made considerable progress since then but they are still in their formative years and have not yet got into a state of full health. Parliament having passed that legislation to give the TSBs this new start, I hope that we will not now seek to set them back many years by imposing this levy. They have not yet fully got out of the old public sector net in which they rested prior to that legislation—which was Labour legislation with support from the Conservative side. The TSBs still have about £1.1 billion lodged at the disposal of the Treasury, through the National Investment and Loans Office, and they are paid only 7½ per cent. on that.
Therefore, is it not asking a great deal of the trustee savings banks that they should be penalised in this way, 714 when they are under way towards a new role in the banking sphere and when they have funds on deposit in the Treasury at this rate of interest? They will be hit hard by the levy and should not be hit harder in any way in proportion, than the clearers.
There is a similar situation in the National Girobank. The House has made changes since that bank was established, in order to set it on a proper course. It made profits of about £7.8 million last year, which was a success in terms of the size of the bank. If our amendment is carried by the House the levy on the National Girobank will be reduced by about £3½ million.
The Co-operative Bank is in a similar position. It is wrong that 82 per cent. of that bank's profits should be taken by the levy, as against about 23 per cent. of the profits of the clearers. That bank, the National Girobank and the trustee savings banks are in a weaker position in terms of being able to sustain such an imposition on their balance sheets than are other clearers. Such a percentage take of their profits compares with 23 per cent. overall for the clearers. For Barclays it is 18 per cent. of its profits, for Lloyd's it is 21 per cent., for the Midland it is 26 per cent., and for the National Westminster it is 24 per cent.
Our amendment seeks to bring the take of the profits into line around the figure that the clearers are paying. I hope that the Committee—and the Chief Secretary—will feel that it would be equitable to bring the banks into line and to see that the smaller banks are not penalised by the blunt instrument of the tax in the way that they will be unless our amendment or another amendment is accepted.
§ Mr. Bruce-Gardyne
Surely the purport of the hon. Member's argument is that the levy should relate exclusively to the level of profit, regardless of how the profit arises. One cannot fail to make a distinction between the so-called windfall profits, which result directly from interest rates and not from any action of the banks as such, and profits that arise from other sources.
§ Mr. Wrigglesworth
The Bill does not do that, because it already has a threshold. We are seeking to increase that threshold so that the small banks are helped in the way that I have described. Therefore, the principle is already contained in the Bill.
§ Mr. Brittan
That is not right because a threshold is not a profit threshold but a level of current account threshold.
§ Mr. Wrigglesworth
Yes, but we are seeking to increase the threshold that is already there. I am arguing that one must take the impact of the tax on the banks in the round. I was going to say that those banks are non-profit making organisations in one sense. They are new organisations in another way. They do not have the international input to their profits that the longer-estabilished and bigger clearers have. They have not had the surpluses over many years to be able to invest overseas so that the profits are remitted back home. I am sure that we all want to see diversity in our banking sphere. Therefore, we should try to treat those smaller banks equitably in comparison to their big partners in the clearing house.
The Committee should view our amendment sympathetically. If the Minister feels that it is defective in detail I hope that he will not close the door tonight but will allow us to consider the matter further on Report, 715 particularly after he has heard representations from his hon. Friends and the banks. I hope, too, that we shall have the support of Labour Members. I am sorry that more are not here to support the amendment. It will be unfortunate if we do not have Labour support in the Lobby. We should demonstrate our support for the Co-operative Bank, the National Girobank and the trustee savings banks.
§ Mr. Straw
I am grateful to the Social Democratic Party representative for giving way. A large number of my hon. Friends have been present, including my hon. Friends the Members for Edmonton (Mr. Graham), for Dunfermline (Mr. Douglas), for South Ayrshire (Mr. Foulkes), for Huddersfield, East (Mr. Sheerman), for Harlow (Mr. Newens) and for Glasgow, Maryhill (Mr. Craigen). It ill behoves the hon. Gentleman to complain about absence from the Chamber when this is the first occasion on which he has been present for the Committee proceedings. The Social Democratic Party has been conspicuous by its absence in the important debates on poverty.
§ Mr. Wrigglesworth
My hon. Friend the Member for Gateshead, West (Mr. Horam) has made a considerable contribution to the debates on the Finance Bill throughout its passage.
The amendment closely concerns the Co-operative Bank, the Girobank and the trustee savings banks, so I would expect it to have wholehearted Labour support. I repeat that I hope that the Minister will not close the door on the amendment.
§ Sir William Clark (Croydon, South)
It has been an interesting debate, but the hon. Member for Huddersfield, East (Mr. Sheerman) took the biscuit when he said that small banks cannot afford the levy because they do not have overseas earnings. This is a sad day for the Conservative Party. We are arguing with niceties of phraseology about whether the tax is retrospective, when we know jolly well it is. We cannot talk our way out of this one. I am sufficiently old-fashioned to feel that when the Labour Party believes that a tax is a good tax, there is something wrong with the policy.
Many of my hon. Friends are concerned that this is a tax on success. Bank profits in 1980 were about £1,400 million, of which about £600 million was earned in the overseas markets—at the sharp end, where we are competing with the Germans, Swiss, Italians and so on. The entire £800 million made in the domestic market did not result from the high MLR, as the banks do many things that do not depend on the MLR. However, let us assume that the entire £800 million was made through the windfall arising from the Government setting the MLR at 16 per cent. or 17 per cent. To charge the clearing banks £400 million on that is a 50 per cent. impost on success. I and many of my hon. Friends are diehard supporters of the Government's economic strategy, but we object to the penalising of success when our party is supposed to be the one to encourage it. If a man wants to improve himself, do not penalise him. That is not Conservative policy.
In putting their case forward the banks were a little lax. They failed to get across to the general public or to hon. Members, certainly on the Tory side—I do not know whether they got it across to Treasury Ministers—that their 716 profits were split between home and overseas. The banks had talks with my right hon. and learned Friend the Chief Secretary and my right hon. and learned Friend the Chancellor about the Export Credits Guarantee Department.
My right hon. and learned Friend the Chief Secretary made a long intervention since we are to have a winding-up speech as well. In that speech he should have taken us into his confidence on what happened over ECGD. I should like to cut a chunk off the public sector borrowing requirement. We know all the arguments about increases in interest rates leading to inflation and the rest. I shall not rehearse them. But would the banks have taken on the ECGD liability? I am told that if they had it would have reduced the PSBR by about £1,000 million. Is that figure correct? My right hon. and learned Friend did not mention that.
My right hon. and learned Friend should have referred to the loan guarantee scheme. I accept that my right hon. and learned Friend the Chancellor said last year, in something of an aside, that he was looking into the issue of bank profits. But that was not giving notice to the banks. After that the Treasury team had discussions with the banks and the banks tacitly agreed to extend the loan guarantee scheme. The banks were to take 20 per cent. of the liability, with the Government taking the rest. Would the banks have taken that 20 per cent. if they had realised that they would be faced with this windfall profits tax? My right hon. and learned Friend must say something about that.
It has been suggested that if £400 million is removed from the banks' cash flow, that will affect potential lending of between £6,000 million and £8,000 million. In the long term the figure may be £3,000 million. These are huge sums, particularly when we are looking to the banks to help private enterprise, to help in the development areas and to help with the establishment of new businesses. If, by taxing the £400 million windfall profits, we are putting that at risk, what are the banks to do? Do they have a scrip issue? Do they go to the market and try to raise extra cash to top up their cash flow so that their borrowing requirement is not affected?
I welcome, for what it is worth, my right hon. and learned Friend's categoric statement that this is a once-for-all tax. We are all long enough in the tooth as politicians to know what "once-for-all" means. I wish that we could get the agreement of the Opposition, including that of the Social Democrats—indeed, of the alliance under which the leader of the Liberal Party courageously said that he would support the Social Democrats this evening—that this is only a once-for-all tax.
Although it is probably impossible, I wish that an assurance could be given by both sides of the House to the effect that this is a once-and-for-all tax. I appreciate the difficulty that my right hon. and learned Friend is in. However, Tory philosophy and policy is that we do not like retrospective legislation that will create a precedent. Despite what my right hon. and learned Friend may say, if this country were to be so unfortunate as to elect another Labour Government, they would seize on this opportunity. Our arguments would be weakened.
I appreciate the difficulty that my right hon. Friends are in. They have lost about £85 million of the reduced revenue on derv. We are still waiting to hear how that amount will be made up. I hope that it will be made up from betting, although not necessarily from horse race 717 betting. I am thinking also of one-armed bandits, casinos and so on. The money could easily be made up. It is impossible to replace £400 million at this late stage unless the standard rate of tax is tampered with. Having reduced the standard rate from 33 per cent. to 30 per cent., I would be diametrically opposed to increasing it. Therefore, it is Hobson's choice. What can we do about the £400 million?
At this late stage, we cannot accept the abolition of the £400 million. However, the Government should be clear about the matter. We must not shilly-shally. Let us accept that the measure involves retrospection and creates a precedent. We regret that. It is unfortunate. We have not tackled public expenditure with sufficient vigour. If we had done so, there would not have been any necessity for the £400 million windfall profit tax. I ask my right hon. and learned Friend to accept that the Conservative Party will regret this measure. I regret it, although I know that it is inevitable now.
§ Mr. Foulkes
My hon. Friends will be happy to hear that I have only a few remarks to make on this subject. I was inspired to speak by the Chief Secretary's amazing performance. Those who missed it missed one of the most exciting theatrical events of the year. Indeed, the performance of the right hon. and learned Member justifies the immediate rewriting of part of the script for the show at the Whitehall theatre. He performed an amazing acrobatic feat.
We did not get what we had expected. We did not witness a careful and devastating attack on the arguments put forward by the Opposition Front Bench. However, as the arguments were made so well, such an attack would have been difficult. Instead of attempting to make an attack the Chief Secretary turned to his alleged and potential supporters and pleaded with them. Labour Members could see only the back of the Chief Secretary's head. I can assure hon. Members that that is not his most exciting aspect. He turned to Conservative Members in a vain attempt to solicit their support.
There is a large turn-out of Conservative Members. There was no such turn-out when we debated the taxation of the unemployed and of strikers. The right hon. and learned Gentleman's attempts are in vain, because Conservative Members are here to look after their vested interests. He was addressing Conservative Members who had no intention of paying attention to him. For once, the right hon. and learned Gentleman was making a relevant point, yet his hon. Friends were ignoring it. He was talking to deaf ears—to people who knew their interests, who had their minds made up, and who would not be convinced.
I noticed that in the course of what the hon. Member for Croydon, South (Sir W. Clark) described as an extremely long speech the Chief Secretary fell into some contradictions. I can understand how they may creep into such a long speech. At the start, the right hon. and learned Gentleman spoke of this measure as being essential to reduce the public sector borrowing requirement. He repeated the gramophone record that we hear so regularly—"his mistress's voice"—yet later he said that the money would be recycled into industry. He did not spell out how it would be recycled. He did not say what new incentives or financial assistance would be given to industry. He used a peculiar phrase about how the new base of the PSBR would somehow encourage industry, but that is different from recycling into industry the money 718 that will be taken from the banks. If that is what he was talking about, however, we should like to have more information about how the money will be recycled. That would, I am sure, be of interest to the whole Committee.
We had from the hon. Member for Thornaby (Mr. Wrigglesworth) a not unexpected intervention. We are getting used to the Social Democrats and their twists and turns in explaining away their previous affiliations, or occasionally trying to hang on to some of their erstwhile affiliations, but many of us find it rather sickening to listen to lectures from former members of the Labour Party.
In particular, the hon. Member for Thornaby tried to make a case about what is happening at this stage of the Bill regarding amendment No. 60, to which he had put his name. I remind him that we are in Committee arid, in considering amendments relating to the smaller banks, we can consider other courses of action apart from voting for or against one amendment. I hope that my Front Bench will explore possible ways of helping the Co-operative Bank, the trustee savings banks and the National Giro—ways that are more practical and sensible than that proposed in the amendment presented by the hon. Member for Thornaby.
I put my name to that amendment. Since I see some smiles at that, perhaps I should explain why. Only a short time was available to us—I know that the hon. Member for Thornaby had no longer to consider it—and discussions were taking place between the Co-operative Bank and the Minister which the bank thought would produce some results, because it believed that the Minister would see reason and accept the rational argument put to him by the bank.
§ Mr. Foulkes
He may still. I shall come to that. But prior to this debate and the submission of the amendment there was the hope that the Minister would see reason. He had not, however, seen reason as late as Thursday of last week, and therefore the amendment was tabled. I do not regret it as an ideal amendment. It does not do exactly what we want, because it means that the other banks also will be given some kind of relief. I do not want the other banks to be given such relief.
I hope, therefore—this is the purpose of the Committee stage—that if the amendment is not pursued my right hon. and hon. Friends on the Front Bench will enter into discussions and find a way of tabling an amendment that will give some relief to the Co-operative Bank, the trustee savings banks and the National Giro without letting off the banks that have the huge profits.
§ Mr. Wrigglesworth
Will the hon. Gentleman tell the Committee what consultations his Front Bench had with the Co-op Bank, the National Giro and the trustee savings banks before tonight's debate?
§ Mr. Foulkes
The Co-op Bank has been having detailed discussions with Co-operative-sponsored Members and the Co-op group, which is part of the Parliamentary Labour Party, but it first felt that it ought to try to persuade the Government to accept its point of view. Having failed to persuade the Government, I understand that they will now enter into detailed discussions with the Labour Front Bench to find a way to achieve their aims.
As my hon. Friend the Member for Dunfermline (Mr. Douglas) said, it would be better for the Chief Secretary 719 to the Treasury—who benefited from an excellent education, although he is not showing it in his attention to some of the points being made—to accept some of the points made by representatives of the small banks and in Committee by my hon. Friend the Member for Huddersfield, East (Mr. Sheerman).
I hope that right hon. and hon. Members have not been put off The Guardian by its publication of the Marplan poll, which disseminates useful information about how far ahead we are in the opinion polls. The Social Democrats did not feature in the poll in Scotland, published by the Glasgow Herald, until the respondents were prompted by the poll interviewers reminding them that the Social Democrats existed.
Mr. Lewis Lee, the chief general manager of the Co-op Bank—who was the optimist who hoped that he could persuade the Government to change their minds—is quoted in The Guardian as saying of the Co-op Bank:we are a different kind of bank. We do not aim to maximise profit, let alone make windfall profits.It is and has been our stated policy immemorially to share profit with our customers in lower charges and this we have continued to do during the year in question. So we have no windfall profit. If none the less it was decided to penalise the Co-op Bank along with the other banks the impact would be 'ludicrously disproportionate.'That has been said by a number of hon. Members tonight.We cannot believe that it was the Chancellor's intention that the Co-op Bank, owned ultimatedly by 10 million small co-operators up and down the country should be relieved of 80 or even 90 per cent. of its profit when the average impact on the Big Four appears to be around a third of that.Our case for the moment rests on our belief in the sense of fair play which we none the less attribute to the Ministers and officials who guide them.That is a noble sentiment indeed, attributing fair play to the Ministers and to the officials who guide them. I hope that the argument that has been effectively made by my hon. Friend the Member for Huddersfield, East and, indeed, by the hon. Member for Thornaby and the leader of the Liberal Party, speaking for that great conglomerate new alliance that exists—
§ Mr. Foulkes
The right hon. Gentleman is still here, as a sort of Shirley Williams surrogate in reverse drag, and he fits the part well.
I hope that the argument in favour of the smaller banks has been made effectively, if not by myself by the previous speakers. I hope that we have a sympathetic response from the Chief Secretary to the Treasury or from our Front Bench which will enable us to find a formula that will help the banks and that we can support in later stages.
§ Mr. Robert Banks (Harrogate)
I am tempted to join the general discussion on the clause but, due to the lateness of the hour, suffice it to say that I dislike all forms of taxation. Least of all do I like once-for-all taxation. I suspect that in the fullness of time it might well become a "once every so often" tax to be levied. For that reason, I have the strongest reservations about it.
My amendment deals with the base level of the £10 million figure in the clause. A similar amendment has been tabled by the hon. Member for Huddersfield, East (Mr. Sheerman) and others, but it deals with the matter in a more extravagant way. My amendment is modest and I hope that it will find favour with the Govwernment.
720 I recall the Budget speech by my right hon. and learned Friend the Chancellor of the Exchequer. When referring to bank profits, he said:A substantial part of these profits is the direct consequence of high interest rates in recent years; this applies in particular to so-called 'endowment profit' on current accounts on which no interest is paid".—[Official Report, 10 March 1981; Vol. 1000, c. 772.]That statement has been referred to on several occasions this evening. I do not challenge that statement in so far as it applies to the clearing banks. Indeed, I believe that my right hon. and learned Friend had in mind the big five clearing banks when he uttered those words. Strictly, I should refer to the big six clearing banks in England, but for general understanding it is easier to refer to "the big five".
My amendment seeks to assist the smaller fish, the smaller banks. The proposed tax is a flat rate of 2½ per cent. on an average of chargeable deposits in excess of £10 million held on three dates over the last three months of 1980, that being the quarter referred to. In effect, it is a tax on the windfall that arose from obtaining high rates of interest on money lying in customers' current accounts which do not rank for interest payments. For the sake of clarity, I shall refer to current accounts rather than non-interest-bearing chargeable deposits, which is a bit of a mouthful.
The high street banks—the nine London and Scottish clearing houses—have high volumes of current accounts. The services provided for their customers are largely paid for by the use of current account credits or deposits to generate bank revenue from interest obtained. We fully understand that. However, the clearing banks receive greater benefit from current accounts at times of high interest rates than at times of low rates, since the cost of providing their services is not directly linked to levels of interest. Their profits reflect that.
The banks that are not members of the London and Scottish clearing houses are in a different position. Most of them have different types of banking businesses. They include, of course, the merchant banks, wholesale banks, foreign banks, savings banks and others. Some are small and others large in turnover terms. Generally, they have relatively few accounts on which they do not pay interest, and those are only sometimes incidental to their activities. Their current account balances are, therefore, small, both absolutely and in relation to interest-bearing deposits, whereas the clearing banks have more substantial current account balances in relation to their total business.
I understand that the level of current account deposits is mostly specifically negotiated with customers with reference to interest rate levels at the time, so that the bank concerned may derive sufficient interest revenue to cover the cost of its services to the customer. The benefit of high interest rates is therefore, almost without exception, passed on to customers, because lower deposits are negotiated. In the case of such banks, the windfall element of their profits is absent. Likewise, the nature of their operations is based on close personal banking services and they cannot make the sort of economies of scale that are available to the big five.
That is all the more relevant during a period of high wage settlements, such as was experienced in banking last year. It would not be unfair to say that those settlements were chiefly not activated by the smaller banks.
721 11.45 pm
My amendment aims to give some relief to those banks which I do not believe fall into the category of candidates liable to this tax. It does not call for a radical change in the scheme. If I take a fishing analogy, it does not seek to prevent trawling but just to use a slightly larger gauge of net. By raising the base level from £10 million to £15 million, some of the smallest banks could come through the net altogether. To others, it would be significant, because less tax would be paid. To those other small banks it would be less tax on what I shall term "real profits", not windfall profits.
No doubt the clearing banks would welcome a reduction, even though it would be hardly noticeable to them. About 90 per cent. of the estimated £400 million to be raised by the tax will be paid by the clearing banks. I regret that I cannot accurately calculate the cost of this proposed amendment, but it would be very small.
This country can pride itself on being the banking centre of the world, and I hope that my right hon. and learned Friend will agree to bear a little more gently on the younger and smaller elements in it.
§ Mr. Eggar
Before coming to amendment No. 41, standing in my name, I shall say a word about the general principles that are involved in this tax.
This is a bad tax. On that even the Opposition are agreed. It is a bad tax, first, because it is retrospective. I must tell my right hon. Friend, with respect and with a certain sadness, that I was far from convinced by his arguments about retrospection. I preferred the definition of retrospection that was given by my hon. and learned Friend the Minister of State, Treasury in 1978.
I do not want to go into all the arguments about why the tax is retrospective. If the Government had said "We do not like this tax, because it is retrospective and it sets an appalling precedent, but where else can we find the money?" at least those of us with reservations about the tax would have had to consider where else to find the money. The Government's argument was disappointing and even—dare I say it?—slightly dishonest.
However, the tax is not only retrospective but discriminatory, and in an unfortunate way. The speech of the hon. Member for Blackburn (Mr. Straw) brought home the impact that the tax will have. If it affects banks this year, who will it be next year? Farmers, perhaps? The chemical industry? It sets a precedent so that any profitable industry at the top of its cycle can have an arbitrary tax placed on it retrospectively. That is the principle and the precedent about which Conservative Members are concerned.
Attempts have been made—not, I admit, by my right hon. and learned Friend tonight—to justify the tax on the ground that it is similar to the tax that was imposed on oil companies or the one that was imposed on television companies. There is no such similarity. Oil companies are exploiting a natural resource that rightly belongs to the nation and should be taxed accordingly. Television companies are exploiting an artificially created monopoly that was created by the Government. That is certainly not the case for the banks—[Interruption]. My hon. Friend the Member for Knutsford (Mr. Bruce-Gardyne) should not make sedentary observations. If he wishes to interrupt he should get up and do so.
§ Mr. Eggar
I do not want to interrupt a private conversation between my hon. Friends the Members for Horncastle (Mr. Tapsell) and Knutsford. If the argument is that the Government raises MLR, which creates an artificial profit, fair enough. If it was the Government's intention to have consistently high interest rates during the past two years they should have said when they took office "We will have high interest rates and place a tax on the banks". It should not be done retrospectively.
§ Mr. Eggar
No. I know that my hon. Friend wants to make his speech in his time. I am sure that we shall all listen to him with great care. I suspect that he will support the Government.
The tax is fundamentally ill-conceived because it is being introduced when domestic profits for the main clearing banks have fallen by 19 per cent. As my right hon. and learned Friend said, the average rate of MLR has been 2 per cent. higher than last year. Yet domestic profits have still fallen by 19 per cent. How can it be said that the tax will retrieve the endowment and domestic profits that the clearing and other banks have earned?
My right hon. and learned Friend went further. He said that the justification for imposing the tax was that the Government were concerned about the public sector borrowing requirement and about money supply. So are we all. There is no doubt about that. But if it had been the Government's intention to introduce measures to help the PSBR, why did they not accept the offer made to them by the clearing banks to take over ECGD funding? That would have had an effect on the PSBR of £750 million.
If the Government were concerned about the effect on the money supply, I have to tell them that the effect of this tax is exactly the same as taking £400 million in special deposits from the banking system. The effect is the same whether there is a tax of £400 million or special deposits of £400 million, especially if special deposits are not interest bearing.
Another argument used by my right hon. and learned Friend was that the tax of £400 million was necessary to assist industry. I am disturbed to hear that the Government believe that they are best at transferring funds from one sector of the economy to another. I have always assumed that Conservatives believed that the private enterprise system and the private enterprise economy were the best means to effect such a transfer.
My right hon. and learned Friend said that bank domestic profits had fallen because of the high level of increases in wages paid by the banks last year. I admit that it was a dramatic increase, which I deeply regretted. But, in fairness, the banks compete with the Government for the majority of their staff. The majority of the 250,000 who work in the clearing and other banks are fairly low-paid clerical workers who have the same types of skill and expertise as those employed in Government offices throughout Britain. One of the reasons why the banks had to increase their levels of pay was the dramatic increase in the levels of pay of Government employees. That must not be overlooked.
Amendment No. 41, which stands in my name, is deficient in some respects. It was tabled as a debating amendment. Bank profits are over-stated when considered 723 in historical tax terms. Unlike industrial companies, the banks can take no advantage of stock relief. They have no form of indexation for the payment of corporation tax on profits. If current cost profits are calculated, the effect of the levy on the clearing banks will be to take about 80 per cent. of all current cost profits after corporation tax. I have been unable to ascertain the effect of the tax on the United Kingdom clearers' domestic profits, but I am assured by National Westminster that the effect of the levy and corporation tax will be to leave it with about £24 million profit from all its domestic banking operations last year. A considerable chunk of its profits will be lost.
Amendments Nos. 57 and 60 stand in the name of my hon. Friend the Member for Harrogate (Mr. Banks) and members of the Social Democratic Party. It is pleasant to find that the small banks are the tenuous bridge that links SDP Members and Labour Party Members. It is rather touching that banks should bring them together. It will be interesting to see whether the Co-op-sponsored Members on the Opposition Benches will be prepared to support the Social Democratic Party's amendment if it is pressed to a Division.
§ Mr. Eggar
Indeed. I do not support the amendments, for reasons that are simple. The tax already discriminates against banks in general. The effect of both amendments, whether the figure is raised to £15 million or £150 million, means that the tax will discriminate against fewer banks. There is no reason why the imperfect competition in the banking and financial markets should be further weakened.
It is said by the Government that the clause affects the tax that is paid on retail domestic banking deposits. We are told that it is specifically designed to take away the endowment profit on the domestic banking operation. The argument advanced by the smaller banks is that they do not have the international banking operations to cushion them, so they do not have the extra profits. If the Government's argument for introducing the tax is that it will take away domestic profits, it is curious to say that we must extend the clause to cover the smaller banks because they do not have the advantage of the considerable international profits.
Conservative Members are aware that although this is a wrong and thoroughly bad tax, the Government will have their pound of flesh and the tax will come into effect. However, we want a clear undertaking—much clearer than the undertaking given earlier—that the Government have no intention of introducing another such tax during the life of this Parliament. We should like that spelt out clearly and specifically.
§ 12 midnight
§ Mr. Douglas
I shall be brief. I immediately declare my interest as chairman of the Co-operative group in the House. I should therefore like to speak to amendment No. 60, which has already been mentioned by my hon. Friends the Members for Huddersfield, East (Mr. Sheerman) and South Ayrshire (Mr. Foulkes) as well as by the hon. Member for Thornaby (Mr. Wrigglesworth).—[Interruption.] A Conservative Member indicates that he 724 is not sure whether he owns a bank. My difficulty is to determine whether the bank owns me. That is the difference between them and us.
The hon. Member for Enfield, North (Mr. Eggar) made a great play of profits in relation to the banks' domestic activities. Amendment No. 41 might be marginally acceptable to the Co-operative Bank, because it would bring it more into line with the Government's proposals.
I draw the attention of the Chief Secretary to the discussions between the banks and the Inland Revenue, particularly the Co-operative Bank. If the right hon. and learned Gentleman intends to argue that it is right for the Government to introduce retrospective legislation, my answer is based on equity. There is always a case for Governments re-adjusting taxation. No Government or Opposition could put their hand on their heart and say "We will never have retrospective legislation".
If we accept that things such as windfall profits and economic rent are taxable, and if they accrue not because of economic activity, the Government have a right to cream them back, both in the economic interest and in terms of balancing the economy. That is the role of Government and I do not detract from it. It is no good the Opposition arguing against that case. However, if that is to be done, it should be done equitably.
The hon. Member for Thornby deployed his considerable political skills and knowledge of this matter to inquire whether the Co-operative group and others would support him in the Lobby. I do not intend to support the hon. Gentleman's amendment because by its nature it seeks to probe the Government's intentions. It would be difficult to support it in the Lobby and carry it into practice because of the crude nature of the tax as well as the necessarily crude nature of the amendment itself.
I am seeking from the Government some assurance that they recognise the unfair impact of their crude tax on the smaller banking sector. If they do not do that I believe they are being very unfair indeed. I can realise the Chancellor's position. He found himself with a larger public sector borrowing requirement than he had anticipated. He had to do a number of things that perhaps he did not want to do, such as having a particular form of taxation on the oil companies. He would not necessarily want to do that. He therefore had to raise another £400 million in terms of the banks. He may not want to do that either. The structure of this tax can be seen to be unfair, because theoretically it is levied on what we call chargeable assets. Its impact is on profits. If it will be argued, as the Chief Secretary has argued, that if they are some form of endowment profits these endowment profits ought to be the marginal profit, the 10 per cent. top rate profit. When one looks at the impact of this tax on the profits of the Co-operative bank it will be seen that they do not meet the 10 per cent, or the 15 per cent. or the 30 per cent. provisions. The impact will amount to 80 per cent. In no case could it be argued in equity that that is a justifiable imposition on what the Chief Secretary argues are endowment profits. I am going on his own assertions here, and I say to him that if he pursues this line my hon. Friends who are on the Committee—and I hope that I will carry the Labour Front Bench with me—will seek to put down further amendments to get the position adjusted.
I want to be very clear on this. We are not saying it is wrong to have retrospective legislation.
§ Mr. Douglas
I understand from previous experience that there is likely to be a Report stage. Discussion can take place, I hope, on this and other clauses of the Bill. There is time for further discussion and further refinement. This is what the Committee is for. [Interruption.] Perhaps I am being very trying, but the Committee is trying to look at the Government's intentions and not trying to argue a massive case for getting a reduction of revenue of £100 million or so. We seek a reduction of revenue of £2 million or £3 million. The hon. Member for Thornaby wants to intervene again.
§ Mr. Wrigglesworth
I am grateful to the hon. Gentleman. I want to be helpful. I would point out that we tabled this amendment only after considerable discussion of various forms of amendment with the Trustee Savings Bank, the National Girobank and the Co-operative Bank. We do not regard it as a probing amendment. We regard it as a means of bringing about the sort of changes we think are necessary.
§ Mr. Douglas
The hon. Member has made his case in relation to what he considers to be the efficacy of the amendment but I trust he knows that its effect, if it were put into practice, would be to give considerable advantages to the other banks as well as the three that he has named. The other banks would get an additional advantage which I would argue, from my point of view, is undeserved. My point may be a narrow one, but I think it is a valid one in equity. I rest my case not as a lawyer, but as an economist arguing an equitable case in relation to the impact of taxation. It is wrong to put the impact of this taxation, if it is on endowment profit, on an 80 per cent. level. If the Government do not recognise that, then they are failing in their duty and responsibility.
§ Mr. Eric Cockeram (Ludlow)
I want to refer to amendment No. 52, standing in my name and that of my hon. Friend the Member for Galloway (Mr. Lang). In line 22, after the word "England", we seek to inserta Trustee Savings Bank as defined in the Trustee Savings Bank Act 1976".I must declare an interest, because I am a trustee—which is the word used in the Act; in more commercial usage, the term is probably "director"—of the Trustee Savings Bank, North-West, the largest of the trustee savings banks.
As the Committee will know, there are 17 trustee savings banks, organised on a regional basis, federated together under an umbrella organisation—the Central Trustee Savings Bank—which has a parliamentary panel of hon. Members on both sides of the House of Commons, of which I have the privilege of being chairman.
The trustee savings banks differ from the clearing banks in that they deal only with personal customers. They do not deal with commercial firms. The consequence of that is that their deposits are very small sums by comparison. They total a large figure—about £555 million—but they derive from 2¾ million customers. It works out at an average of about £200 per account, which is a very small sum in relation to the London clearers, with their commercial accounts running into very big figures.
726 Since the TSBs do not make any bank charges to customers who keep a balance of £50 or more in their account, it follows that very few customers pay bank charges with the TSBs.
In addition to the TSBs' deposits of about £555 million, it is by chance that the second and only other figure that I wish to quote is almost exactly twice that figure—namely, £1,100 million. That is lodged, not at any option of the TSBs but compulsorily, with the Fund for Bank Savings, which is a Government fund managed by the Treasury especially for the TSBs. This derives from the historic background to the TSBs prior to the Page report and prior to the statutory changes and reforms that have taken place with the TSBs.
This fund of £1,100 million is lodged effectively with the Treasury, and the TSBs get interest on that money of only 7½ per cent. If, therefore, the minimum lending rate—as has been the case—is raised to 17 per cent., it is not the TSBs which make the windfall profit. It is the Treasury, because the Treasury is getting that money at 7½ per cent., and it is the Treasury which has the opportunity to lend it on at 17 per cent. or more, as the case may be. It is manifestly inequitable that the TSBs will have to pay this tax on the so-called windfall profits when it is the Treasury that has made the windfall profits.
I appreciate that the total funds of the TSBs are very much more than the figures that I have quoted, but again, to put them in perspective, they are personal deposits of £555 million, upon which this tax is to be levied, and £1,100 million, twice as much, is lodged with the Treasury at penal rates.
The Chief Secretary said that banks derive their profits not merely from home trading but from trading abroad, and that they were not paying tax on those overseas profits or deposits. That is not the case with the TSBs, which operate entirely within the United Kingdom. In consequence, they have not had the opportunity—they do not have the opportunity; they are statute-barred from trading abroad—of making profits overseas to balance out the impost of this tax.
My hon. Friend the Member for Croydon, South (Sir W. Clark) referred to the banks' support for the Government by supporting the Export Credits Guarantee Department and thereby helping to reduce the public sector borrowng requirement. The TSBs joined in that. They lent about 10 per cent. of their customer liabilities.
In his speech, which I regret was lengthy, as is the debate, the Chief Secretary used arguments that were equally tortuous. He said that the banks that had to pay the tax could go to the capital markets if they ceased to expand their capital base. He was right about the clearing banks but he was totally wrong about the trustee savings banks and the Co-operative banks. They do not have access to the capital markets. They are mutual co-operative banks, whatever one may call them. That argument is not valid in this case.
Consequently, I seek to remind the Chief Secretary that the tax bears particularly heavily on the trustee savings banks. The hon. Member for Thornaby (Mr. Wrigglesworth) has already referred to one savings bank, namely, the Trustee Savings Bank, South-East, which is for the London area. It has been calculated that as a result of the clause it will pay a sum in tax that will not only totally wipe out all its post-tax profits but will cause a loss. 727 To the best of my knowledge, it will be the first time that a member of the Clearing Banks Association has produced tax loss in its annual accounts.
§ Mr. Robin Maxwell-Hyslop (Tiverton)
My hon. Friend's North-East has company in the South-West, where that trustee savings bank will have to raise its reserves to £200,000 which will extinguish all its profits and requires a raid on the reserves of £200,000.
§ Mr. Cockeram
I am grateful to my hon. Friend for adding to my argument. I was not aware that another trustee savings bank was affected so severely. All the banks are affected in one way or another. Those which have not only all their profits confiscated as a result of the tax but have to raid their reserves are in a situation that I hope no Conservative Government would contemplate.
I hope that the Chief Secretary will pay particular heed to the arguments that have been advanced about the smaller banks—the banks that do not have access to the capital markets, that do not trade overseas and that consequently will be paying a higher percentage of their post-tax profits—in two cases it is over 100 per cent.—than the London clearers.
§ Mr. Soley
The debate has been marvellous stuff. I would not have missed it for all the tea in China. For the first time I understand what is meant by the Tory Party at prayer. Members of that party are down on their knees begging the Minister to leave bank profits alone. It is a marvellous sight. Early in the morning, there are dozens of them all over the Benches. The other day when we were dealing with taxes on low-income earners, there were only a handful of them here, with just one speaker.
There was also the debate on capital transfer tax, otherwise known as handouts to the rich. There were no speakers and only a handful on the Back Benches at that debate. The hon. Member for Thornaby (Mr. Wrigglesworth) chided some of the absentees on the Labour Benches. There have been eight members of his party here during the debate today—at times it has been less and at times it has been more. I do not blame them for being interested in their amendment. That is fair enough. However, one should ask the hon. Member for Thornaby what the order of priorities is. Why are there eight SDP Members here for this debate when there was only one SDP Member occasionally here for the debates on taxes on low-income groups and capital transfer tax?
§ Mr. Wrigglesworth
When we heard that Labour Members would not be voting for the amendment, we had to rustle up as many Social Democrats as possible to ensure that there was a substantial vote.
§ Mr. Soley
I was asking about the Social Democratic Party's order of priorities. The hon. Gentleman will not answer that question. There is a different emphasis among the various parties.
The hon. Member for Winchester (Mr. Browne) left the Chamber for a while, I am sure for good reasons. I thought that he might be riding shotgun for Barclays Bank in case the Minister staged another raid on profits. The hon. Gentleman made a marvellous speech, which brought tears to my eyes. I had visions of bankers—those ragged-trousered philanthropists—queueing outside supplementary benefit offices, their cheeks pinched and hollow and 728 their coats thin, with collars turned against the bitter north wind of a Tory Government. The hon. Gentleman has considerable financial knowledge, and I wish that he could make a similar speech for the low-paid. I was so moved by his speech that when the banks open tomorrow I shall rush to the Midland Bank to cash a cheque, which I gather will now cost me 50p, as I do not have an account with the bank. If I am feeling generous, I may cash two, as I know that the money will go to a good cause.
I do not like retrospective legislation as a general rule, but if it is a choice between retrospective taxation on banks, which, by any standards are not poor, and giving benefits to the low-paid, who always lose out, we must choose the former. A moral principle is involved in retrospective legislation and in the division of wealth in our society. We must decide our priorities between the rich and poor.
Bank profits have been high in the United Kingdom, yet our economy has had no advantage over other economies where they have been lower. Alas, banks such as the Co-operative Bank will suffer unfairly from the tax. The Government have bungled the economy. Despite their talk of making people suffer, we are seeing a handout to the rich with capital transfer tax and a big defence campaign for the banks by Tory Back Benchers. The party of mass unemployment has also become the party of high taxation and retrospective legislation.
§ Mr. Peter Hordern (Horsham and Crawley)
The Chief Secretary said that he introduced the levy with great reluctance and only after careful thought. The Financial Secretary gave careful thought to a similar proposition a year ago, but came to a different conclusion. However, my right hon. and learned Friend did not say why he found great difficulty in introducing the levy. His remarks were addressed solely to the need for it.
My right hon. and learned Friend dealt with the retrospective element of the levy with curious ambivalence. None of us likes retrospective legislation, but it is strange for my right hon. and learned Friend to argue that it does not matter what the Opposition fee because, if ever they formed a Government, they would not hesitate to introduce a levy. I cannot help wondering what would be the position of the Conservative Party in Opposition when that occurred. What arguments would we be using in that event? My right hon. and learned Friend should mount an adequate and suitable defence for such an occasion. It is a sad day for the Conservative Party when it introduces retrospective legislation of this sort.
One could always say that the national interest is involved. Like my right hon. and learned Friend I think that it is worth examining the considerations that the Government had to take into account in deciding whether to impose the levy. I do not altogether agree with my right hon. and learned Friend's conclusions. It is not necessary to be a wholesale friend of the banks and to say that there are no arguments on the other side. I agree with those who argue that the banks would have done much better if they had stressed the small size of their current cost accounted profits and the wage claims upon them, and perhaps the dividends that they paid to their shareholders.
There are practical considerations that my right hon. and learned Friend did not address himself to, no doubt through lack of time. He said that the banks could easily restore their capital by having rights issues. The difficulty about that is that if such issues are to be underwritten a 729 profits forecast must be given. How is such a forecast to be made if there is a risk of a levy of this nature, which could happen at any time that the banks, through the nature of their business, happened to make a large profit?
The effect of the £400 million being taken from the banks is supposed to help in reducing the PSBR. My right hon. and learned Friend will know the argument about the negotiations that took place between the clearing banks and the Treasury on the alternative method of taking over the financing of ECGD from that department. I understand that that would have saved the PSBR some £750 million rather than £400 million. Will my right hon. and learned Friend deal with that argument when he replies to the debate?
The important point is that the £400 million that is to be taken is the base upon which the banks will be able to lend no less than £6,000 million. I cannot help but believe that this is a singularly bad time to remove the capacity of the banks to lend that sum when the economy is in its present state. I do not think that it is a good swap to suggest that the Government will better be able to help industry in some way—
§ Mr. Hordern
My right hon. and learned Friend is right. It is no swap to take £400 million in tax, thereby depriving the banks of the ability to lend £6,000 million. That unwise action will have another strange side effect. I wonder whether it was calculated in arriving at this decision. The banks will not stand idle. They will get the money by borrowing it in the money market. In doing so they will increase the rates of interest in that market. That will create a gap on some days as between the short-term money market rates of interest and the MLR.
The effect of that will be to increase the money supply. The money raised from the money market is one of the measures of the money supply. That has a curiously perverse effect. Unfortunately, that is not the only effect. A distinction might be drawn between short-term money market rates and the minimum lending rate. The provision will also have the effect of allowing company treasurers to borrow from the banks and to lend on to the money markets with a margin in between. That will also increase the money supply.
For all those reasons, the levy will have a thoroughly perverse effect. The Government have not thought this matter through. Unwillingly, I have come to the conclusion that far from helping industry, this measure will create further difficulties for it. The minimum lending rate will have to be kept at this level for longer than would otherwise be necessary and formidable problems may be created in the money supply. We shall see.
The banks are better judges of what industry needs and of how those needs are to be financed than the Government. I do not have as much confidence as the Government have in the Department of Industry's ability to pick winners, but I have confidence in the banks' abilities to supply money to their customers. For those reasons, I believe that the measure has not been thought through.
I turn to the subject of small banks. I shall not labour the points, as they have already been made well. I cannot mention the name of the bank that I have in mind, as I have not got permission to do so. However, in the case of one 730 bank the levy amounts to £2.1 million and the profits available to pay it amount to £900,000. I am glad that my right hon. and learned Friend is taking note, because the effective tax on that bank is 167 per cent. Such a levy, and its consequent effect, cannot have been intended. Like many hon. Members, I hope that my right hon. and learned Friend will take this point into account either in Committee or on Report and come forward with suitable amendments.
The debate has been extraordinarily interesting. As far as I can recollect, this is the first time that the Opposition have officially come out in favour of nationalisation of the banks. That was a significant statement from no less a man than the hon. Member for Blackburn (Mr. Straw). It was impossible to interpret his words in any other way, He implied that the official Opposition are in favour of nationalising the banks. If that is so, it is an important announcement, which will be widely noted.
§ Mr. Watson
I am glad to have an opportunity to say a few words in support of what the Government are trying to do. I agree that the time is right for some form of special levy on bank profits.
About a year ago I first started asking what were then thought of as somewhat embarassing questions about the level of bank profits. About a year ago the banks started to announce high profits. They seemed to be related entirely to the level of interest rates and to be unrelated to the quality of judgment exercised by bank management. They seemed to be substantially unrelated to the risks that they ran. The high bank profits seemed similiar to the high profits that television companies made from their monopolies, or to the high profits made by North Sea oil companies from the windfall of North Sea oil. In those circumstances, I could see no intellectual reason why the banks should not be treated in the same way as oil or television companies. I could not understand why they should not succumb to some form of special tax.
§ Mr. John Browne
My hon. Friend said that the profits were unrelated to the business of the banks. However, given the state of the United Kingdom's economy, have not the risks attached to loans in the domestic sector vastly increased? Given that vastly increased risk, the income should be much greater in order to cover the risk. Many loans are made to companies that will be doubtful for many years to come. In part, I should have thought that profits reflected the business of the banks.
§ Mr. Watson
There is an element of risk but. I would say that the major element of risk has been completely accommodated by the banks when they have increased by 400 per cent. their bad debt provision.
I should add that my enthusiasm for some kind of tax on bank profits was, if anything, increased when the so-called corset restriction was removed in the summer of last year, and all sorts of distortions then came home to roost which showed that the banking industry had not exactly been co-operating with the Government's intentions in the manner that it had originally stated.
Since the Budget announcement that there was to be this special levy, the arguments have been rehearsed very fully, and I pay tribute to the banking industry for presenting its arguments with great skill, care and thoroughness. Some of those arguments seem to me to be undeniable. I think it undeniable that the levy will militate against overseas earnings. I think it undeniable that certain aspects of the levy are discriminatory and unfair.
731 It is certainly clear that the return that banks are making on their capital at present is no longer as high as it was and no longer so high as is being made in some parts of manufacturing industry. On the other hand, perhaps we should not expect it to be anyway. A large part of a bank's increased asset base is contained in its interests in freehold and leasehold investments in high streets throughout the country. Those investments, unlike investments in manufacturing machinery, are at least likely to keep pace with the rate of inflation.
It is undeniable that this is retrospective legislation, and to my mind that is the most regrettable aspect of it.
It is undeniable also that it can be used as a precedent. Perhaps I may add in parenthesis, that after we had heard my right hon. and learned Friend the Chief Secretary say that in some ways is was not retrospective legislation or, if it was, it was in some way justifiable retrospective legislation, and we then heard the hon. Member for Blackburn (Mr. Straw) say that he would use it as a precedent, I was reminded of two quotations. The first was about the dinner guest of whom the host later said "The louder he proclaimed his honesty, the faster we counted the spoons." The second—I was reminded of this by hearing confessions of the hon. Member for Blackburn, saying that this measure would indeed be used as a precedent—was from Mark Twain, that "Confessions are good for the soul but are normally pretty bad for the reputation."
There are, however, a couple of aspects of this matter that still deserve coverage in the debate. In the first place, although I concede that this tax is effectively retrospective, that it sets a precedent, that it is discriminatory and that it militates against overseas earnings, there is one argument of enormous power which can still be set in its favour—that the Government need the money. If that had been said with greater clarity during the debate, there might, I think, have been somewhat more sympathy for it.
Next, there are two arguments advanced by the banking industry which I regard as open to more challenge than has been mounted against them tonight. First, it is said, "If you tax us like this when times are good, how will you compensate us when times are bad?" With respect, I do not regard that as a particulary sound argument. We have heard it said that bank profits are cyclical. Indeed, at one time I almost had a bet with one of my hon. Friends about who would be the first to say that they were bicyclical. But it there is any cycle in bank profits it is a cycle between their being moderately satisfactory and being very good. The only occasion that I can recall when bank profits were bad was in 1974 and 1975, and the reason why they were then very bad was due not to any cycle or windfall element but simply to the bad judgment of the bankers themselves in lending to so many property companies at that time.
Secondly—this is the most serious argument—it is said that at a time of high inflation we must allow the banks to retain a large portion of their profits if they are to maintain their elemental gearing ratio. I take that argument on board, but I wonder why the banking industry feels that, in advancing it, it is so different from the rest of Britain. When I argue that with colleagues in the banking fraternity they normally tell me that because I have never been in banking I cannot understand what they are talking about. I reply that they have never been in manufacturing 732 industry, and therefore I can forgive them for not understanding fully the problems that face manufacturing industry. Shortly afterwards we start hitting each other.
The gearing ratio to which the banks pay so much attention is, to me, little different from the debt equity ratio, which has become almost biblical for manufacturing industry. Someone in manufacturing industry faced with inflation also needs a greater amount of take-home profit to finance working capital, to maintain existing levels of stocks and to replace machinery that inevitably has become more expensive since first it was purchased.
Most manufacturing companies in the past two years have not been able to increase their profits. They have had no alternative but to increase debt equity ratios. Some members of the banking community say that they should be afforded a liberty of manouevre by the Government which circumstances alone have denied to those in manufacturing industry. That is arrogant. Therefore, for those two reasons there is much to be welcomed in what the Government propose—perhaps more than has been acknowledged by Conservative Members tonight.
§ Mr. Tom Benyon (Abingdon)
I am pleased to have a chance to speak briefly in the debate, although many of the arguments I intended to muster have been recycled at least four times.
It is nice that the Government admitted at the beginning that their reason for passing this unsatisfactory retrospective tax on bank profits was that the banks have the money and the Government need it. When one says that one has said the lot.
I could not understand, due to my inexperience in the House and my naivety, why, when I expressed my doubts on the unsatisfactory nature of the tax, that my specific "usual channel" appeared to be singularly uninterested. Later I realised his reasons for being singularly uninterested were, first, because the amendment will probably not be put to the vote and, secondly, because the Labour Party will support it. The fact that I might be a defector could not matter less.
I agree with my hon. Friend the Member for Croydon, South (Sir W. Clark) that the Conservative Party should watch carefully any tax that goes down so enthusiastically with the Labour Party. I cannot believe that this is a Tory tax. It is indiscriminately levied and is justified on the basis that the banks have made super, or windfall, profits. It is possible that the Government will give some of the money back to manufacturing industry. Socialists like the Robin Hood principle of taking from the rich to give to the poor. We have heard that so often in the past.
I have done some research on Robin Hood because I thought that it would be useful to bring it to the debate. Robin Hood legends are wrapped in mythology. There are many variants of what he did. However, anyone who has ever studied Robin Hood agrees on one point. He was a robber. However, he was a nice robber with good motives. His intentions were pure. He believed that his aims to give to the poor justified his means, which involved robbing the abbeys and the houses of rich earls. However, there is one snag to that story. That is that there is no evidence that he ever gave anything to the poor.
According to a man called Stow who did a lot of work on Robin Hood, he entertained "100 tall men, all good archers," with the spoil he took. That means that the money got lost in administration. If anyone thinks that the £400 million which is being taken from the banks will be 733 spent on manufacturing industry or the poor—which was mentioned earlier by the hon. Member for Hammersmith, North (Mr. Soley)—he is living in a world of his own.
The Government believe that the current economic climate justifies the bank profits tax. They believe that the ends—shortage of money and the national interest—justify the tax, discriminating and retrospective as it is. I do not believe that the ends ever justify the means. More bad law is passed on that assumption than any other.
This is not the first time that a tax has been introduced by Government using an emergency as an excuse. We are so used to Governments acting in that way that there is now little protest over this new example. We should not forget that that was not always so. Passive acceptance of unacceptable taxes is a modern feature of the contemporary political scene. Earlier generations put up long and arduous struggles against what they considered to be arbitrary and penal taxation. If there had not been a struggle we might never have had a Parliament and America might not have won its independence. The history of taxation is full of cunning tricks played upon a gullible electorate. The most used trick in the past, as it is today, is to use the excuse of national emergency to introduce a temporary tax which somehow turns out to be permanent. That is how income tax was introduced in 1799 when the younger Pitt needed money to finance his war with revolutionary France. It was called a temporary measure, but it stayed for 17 years.
Gladstone introduced an income tax in his 1853 Budget. He promised to repeal it in seven years. However, in 1854 the Crimean war broke out, Government expenditure rose sharply and Gladstone declared that he could not keep his promise, but was ever so sorry. Purchase tax was a war-time innovation which was not supposed to last. It was introduced to boost war-time revenue temporarily, but it stayed.
The banks are right to make vigorous protests about this new impost. However, I do not believe that it will make much difference. I can find no example of an outside body making representations to a Chancellor which stopped him imposing a tax that he wished to impose. On many occasions hon. Members have put pressure on the Chancellor to modify tax. I know of only one example of an outside force influencing the Chancellor. That was in 1053 when the Earl of Mercia decided to impose a tax on the people of Coventry. The only way that it could be stopped was by Lady Godiva riding through the streets of Coventry on a white horse covered only by her long hair. The earl responded. The wives of the chairmen of the clearing banks might consider growing their hair, mounting horses and possibly riding down Downing Street. I can promise them that the street is short and that my right hon. and learned Friend will not peep. However, that will not matter because the tax has come to pass.
The Government have used the unpopularity of the banks as a chance to impose this inexcusable, retrospective and discriminate tax that amounts to the appropriation of shareholders' funds. It cannot be excused or explained by Government needs. Government needs are always urgent. There is always enough bad news to generate a crisis if one is needed to defend the indefensible.
The retrospective element of the tax is defended on the ground that Ministers warned the banks that the tax was 734 likely. I cannot accept that. The tax is retrospective. Just because a Minister might have mentioned the possibility that such a tax might be imposed does not change the retrospective element. We are not, thank goodness, governed by ministerial diktat.
The tax sets a precedent for other taxes to be applied in the same way. Why not tax other companies which make profits from Government policy in defence and engineering? Ministers might argue that such companies earn their profits and banks do not. That is not sensible. Try telling that to a Socialist Government when they are short of money. They will stick their snouts into any convenient gravy boat and use our example as a precedent.
If Socialists had introduced this tax we should have condemned them for allowing expediency to rule principle. We would have condemned them for having the nerve to confiscate shareholders' assets without compensation. We would have reminded them that the assets that they were expropriating in such a way did not belong to people in top hats smoking large cigars, but to unit trust holders, the beneficiaries and potential beneficiatries of pension schemes and insurance policies who depend on profits for their savings, their ease in retirement and a safe future.
We would have been right to condemn Socialists. The people own the banks, not the institutions. We would have condemned the Socialists if they had proposed such a tax on the ground that such an arbitrary tax would act as a threat to every cyclical industry which attempted to plan its affairs, on the assumption that it may face an arbitrary levy at its cyclical peak. From now on, anyone contemplating a large, high-risk venture must reckon that not only may he lose all his money if it goes wrong but he may restrospectively be taxed if it goes right Let anyone who thinks that I am overstating the case ask the oil companies.
This tax is retrospective in concept. It is discriminatory in that it singles out the banks without anyone attempting to make a serious effort to show that bank profits are excessive relative to industry in general. It is arbitrary in its amount and incidence. No attempt has been made to assess ability to pay. The tax should be particularly offensive to any Government who are in favour of encouraging profit. Gradually over the years the public have been educated to believe that "profit" is a clean and not a dirty word. Criticism has come now from many quarters. I shall not quote the newspapers that condemn the tax, because time is passing, and I am sure that hon. Members will have read what they say.
The worst feature of the tax is its retrospection. People and institutions should be able to act in the knowledge of the law passed by Parliament, and not have to anticipate the uncertain intentions of Ministers. I hope that the Government will consider the proposal carefully. It can get through the Committee only with the reluctant support of the payroll vote, the surly compliance of their Back Benchers and the enthusiastic support of Socialists.
§ Mr. Straw
This has been a fascinating and entertaining debate, which has given us a new insight into the workings of the Conservative Party. Conservative Members can read each week of the goings on inside the Parliamentary Labour Party, but it is not so often that Labour Members have an insight into what must go on in the 1922 Committee. We are grateful to have had this opportunity.
735 The debate has also demonstrated the great contrast in the concerns of Conservative Back Benchers about the changes that are proposed in the Budget. Yesterday we had debates on the Government's wholly unjustified and despicable proposals to tax short-term social security benefits without reinstating the 5 per cent. that was taken away from those benefits on the ground that they were to be taxed and until they were taxed. Only one Conservative Member spoke in that debate.
A week ago we had a debate on the way in which the Government were forcing up the tax burden—the State putting its snout in the trough, to use the eloquent language of the hon. Member for Abingdon (Mr. Benyon)—on virtually the whole working population, in complete contradiction to the Conservative manifesto. In that debate not one Conservative Member spoke throughout the day, and only one or two were present during the debate.
Yet tonight, when we are simply debating the taxation of what are unquestionably windfall profits for the banks, the Conservative Benches—even at 12.55 in the morning—have been full, and no fewer than 40 Conservative Members have been present throughout the debate. That is an indication, if any were needed, of the relative sense of priorities of Conservative Members.
§ Mr. Tapsell
Does not the hon. Gentleman think that the capacity of the commercial banking system to lend £6,000 million to British industry at the present levels of unemployment is a matter that deserves our serious attention at this hour?
§ Mr. Straw
I do not dispute the interest and concern that hon. Gentlemen display in this issue. I only wish that they would show the same interest and concern in the other issues, particularly when their Government break their election promise and force up taxation. That is the issue. I am sorry that the hon. Member and so many of his colleagues found reasons to be absent when clear breaches of election policy were debated.
I hope to be brief. I wish to deal with the issue of the smaller banks—the Co-operative Bank, the National Girobank and the TSB. In doing so I shall refer to the speeches of my hon. Friends the Members for Dunfermline (Mr. Douglas), South Ayrshire (Mr. Foulkes) and Huddersfield, East (Mr. Sheerman), who are supported by their colleagues in the Co-operative group—my hon. Friends the Members for Edmonton (Mr. Graham), Harlow (Mr. Newens) and Glasgow, Maryhill (Mr. Craigen).
The Opposition Front Bench recognises the clear concern of the smaller banks about the way in which the tax may impact upon them, and the possibility that it will be discriminatory against them. We support the imposition of the tax overall, but it should be fair and equitable between larger and smaller banks. We accept that it may not operate in a fair way in its effect on the smaller banks. We shall listen carefully to what the banks and our colleagues have to say. We shall raise the matter in Committee, because the schedule to the clause, which goes into a great deal of detail, will provide an opportunity to discuss the matter. If we are not satisfied with any undertaking given we shall raise the matter again on Report.
I am sorry that the hon. Member for Thornaby (Mr. Wrigglesworth) should have tried to mix it between his 736 concern for the Co-operative Bank and that of his former colleagues who are still members of the Co-operative group inside the Labour Party. My colleagues and I have made repeated efforts to contact the Co-operative Bank to seek its comments. It is a reflection not on us but on the bank that its comments were not forthcoming until earlier today. The reason for its reticence was given in the Financial Times on 24 March, which discussed the tax on the Co-operative Bank, the National Girobank and the TSB under the headlineBanks windfall profits tax may be eased for the Co-op and the GiroThe article said:They understand this to mean that they should not launch any public campaign against the tax or talk to the press about the matter. In return, the implication is that their objections will be met eventually by the Government.I should be grateful if the Chief Secretary would say something about the Government's attitude towards the way in which the tax will impact on the smaller banks.
A central issue in the debate was retrospective. As I listened to the Chief Secretary's remarks I became more confused. He said that the tax was retrospective but not objectionable, because the tax could not have been avoided even if the banks had known about it in advance. But he also said that the tax had to be retrospective because it could have been avoided by people charging interest on the due dates. In two paragraphs the Chief Secretary contradicted himself.
The Chief Secretary voiced the anxiety that the Opposition might use his arguments as a precedent to justify future retrospective legislation. I assure him that we would seek better arguments than his. In the speech that I made some hours ago in the earlier part of the debate I have no recollection of saying—the Official Report will contain the exact words that I used—that the next Labour Government will nationalise the banks. I quoted a leading article in the Sunday Express which voiced concern that a future Labour Government would use the tax to justify nationalisation. Conservative Members know enough about the workings of the Labour Party to know that I do not write its manifesto. I know that that is of great concern to Conservative Members. They would sleep easier in their beds if I wrote it but I do not, and it will not be written for at least another two years.
Although Conservative Members entertain great fantasies about retrospective legislation that future Labour Governments may introduce, I know of no proposals that are circulating in the Labour Party to introduce retrospective legislation. They need have no worries on that score, either. This is a major piece of retrospective legislation that could easily have been avoided by the Government if they had decided last year to tax bank profits and had taken measures to do so at the time.
The justification for the tax is that, apart from the size of the profits, its yield will be used to help industry. That was the Chancellor's argument when he made his Budget Statement on 10 March. He argued that the taxing of these profits would enable the Government to help industry. I hope the Chief Secretary will say exactly how the Government intend to use the £400 million to help industry, as the Chancellor suggested.
§ Mr. Brittan
As I indicated when I spoke earlier, I proposed in my opening remarks to deal with the main arguments and considerations and to deal in the closing 737 remarks with some of the amendments that had not then been spoken to. I shall confine my general remarks to a few short comments. [HON. MEMBERS: "Hear, hear."] I welcome that encouragement for speed. I hope that I shall escape criticism for not dealing with some contributions because I follow the advice that has been given.
First, there seems to be some doubt about the basic purpose of the tax. My hon. Friend the Member for Abingdon (Mr. Benyon) suggested that we should have made it clearer that we wanted to introduce the tax to raise money. I welcome the opportunity to do so. I thought that it was axiomatic and unnecessary.
Secondly, my hon. Friend the Member for Croydon, South (Sir W. Clark) castigated the tax as penalising success. I hope that I made it clear that that is not its purpose. It seeks merely to deal with that part of the banking business—it is only a small part of its total success—which derives from matters over which it has no control, namely, the increase in interest rates.
Reference was made, especially by my hon. Friend the Member for Dorking (Mr. Wickenden) to capital ratios and the question whether the tax will prevent banks from lending money to the extent that would otherwise be possible. It is true that capital ratios are higher now than in the mid 1970s. They are greater than those that applied over the earlier part of the 1970s, before the problems of 1973. That seems to support the proposition that even if we considered the relationship between the size of the banks' capital base and the ability to lend, the small diminution in the capital base caused by this tax could not be regarded as likely to impair their ability to lend. Therefore, I do not accept the estimate used by several hon. Members that a removal from the banks of £400 million would lead to an inability to lend to the extent of £6,000 million.
Reference has been made to the alternative ways in which the money could have been obtained as well as to the discussions between the Government and the banks. Ministers spent a lot of time trying to secure the agreement of the clearing banks to the proposals for sharing the costs for subsidised export credit when that was high as a result of high interest rates from which the banks were benefiting. The banks felt unable to agree and said that they would prefer a statutory tax to such an arrangement.
Their alternative proposal was to offer to resume responsibility for a large part of fixed-rate lending at present refinanced by the Government. The effect of that would have been to bring forward PSBR savings which would otherwise have occurred when the refinanced loans matured, but there would have been a corresponding increase in the PSBR in the later years. That was not a substitute for the cost-sharing proposals, because it did not represent a real contribution by the banks to the Government's fiscal needs. As the banks were not prepared—for reasons that were perfectly understandable—to provide the contribution on a voluntary basis, there was no alternative but to impose it by way of this special tax.
Let me now deal with some of the specific amendments. The amendment in the name of my hon. Friend the Member for Winchester (Mr. Browne) would base the tax on the average non-interest bearing sterling deposits held over the years 1975 to 1980, instead of those held in the last quarter of 1980. The argument against doing that was deployed by my hon. Friend the Member for Skipton (Mr. Watson), and I shall not repeat it. 738 Objection was also taken to the retrospective element in the tax, but that would only be greater as a result of the amendment proposed by my hon. Friend the Member for Winchester.
My hon. Friend the Member for Dorking has tabled an amendment to reduce the rate from 2½ per cent. to 1½ per cent. That would substantially reduce the take of the tax. As my right hon. and learned Friend the Chancellor explained during his Budget Statement, the tax at the rate of £400 million was a crucial and essential element in his Budget strategy and in his attempt to bring down the PSBR.
In that context, hon. Members asked how the £400 million would assist industry. There is no mystery or need for doubt or surprise about what that meant. My right hon. and learned Friend explained during his Budget Statement the measures that he proposed to assist industry. He also announced a reduction in the minimum lending rate and made it clear that it would not have been possible to take those measures were it not for the contribution made by the bank tax to the nation's general finances, particularly the PSBR.
The effect of the amendment in the name of my hon. Friend the Member for Enfield, North (Mr. Eggar) would be that the total of corporation tax and tax chargeable under this clause would not exceed 52 per cent. of the current net profits earned for 1980 in the United Kingdom. My hon. Friend was candid enough to say that that was a peg on which to hang some of his points, rather than a suggestion that he wished to put forward seriously. I therefore accept it in that spirit.
I shall now deal with the very serious points raised about particular sectors of the banking world by a number of hon. Members—particularly some hon. Members on the Government Benches—in relation to the Co-operative Bank, and also in relation to the Girobank and the trustee savings banks. I think that this matter was first raised by my hon. Friend the Member for Harrogate (Mr. Banks) in his amendment, which would increase the de minimis level from £10 million to £50 million. In so doing it would exclude certain banks altogether from the tax.
I accept that the effect on some of the smaller banks that are in a special position, in that the tax is being applied to them on a fair basis in relation to the endowment element, may, because of their structure and size, be more substantial than in the case of the clearing banks. I understand that argument. What I can say at this stage is only that we shall continue to consider the points that have been raised in the debate in relation to these various matters.
I am not in a position to make a statement about these matters now, but I understand the force of what has been said and I accept that there may be considerations that require attention. Whether we shall be able to take action that will assist those concerned, and in what way we shall do it, is something on which I am not in a position to give an undertaking tonight.
§ Mr. Cockeram
I am grateful to my right hon. Friend. Does he include in his remarks the trustee savings banks, which are, in effect, 17 small banks? He referred to the Co-operative Bank. Does he include the trustee savings banks?
§ Mr. Brittan
Yes, I certainly do, but, in fairness, I want to make it quite clear that I can do no more than say 739 that I will look carefully into the points made by my hon. Friend and others and that I accept that in certain respects some of these institutions are in a different position. The extent to which that argument holds would require more time than I think the Committee would wish me to spend at this time. I do not accept at all the totality of the arguments, but I shall look into the matter and consider whether or not any action is appropriate.
§ Mr. Sheerman
In regard to what the Minister has said, especially in relation to the smaller banks, can I hope that what he meant by that was that discussions with those banks will continue to take place on an open-ended basis?
§ Mr. Brittan
I think that what I said was sufficiently clear. I am afraid that I am neither able nor willing to go any further tonight. I hope that I have dealt with the bulk of the amendments that have been put forward I would only say to the Committee, as I said at the outset, that I do not present this tax as being something that one puts forward to the Committee or to the House with enthusiasm, but I assure my hon. Friends that it is necessary and justified.
§ Mr. John Browne
I thank my right hon. and learned Friend for having led such a stimulating and interesting debate. I listened with great interest to his arguments but I cannot say that I accept them all. I believe that many of my hon. Friends feel the same way about this tax. Despite what my right hon. and learned Friend says, we feel that it is retrospective and discriminatory. However, I feel that we have registered our anxiety and deep concern for this proposed legislation and I therefore beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Amendment proposed: No. 60, in page 103, line 7,leave out '£ 10' and insert `£150'.—[Mr. Wrigglesworth.]
§ Question put, That the amendment be made:—
§ The Committee divided: Ayes 13, Noes 111.740
|Division No. 182]||[1.15 am|
|Alton, David||Sandelson, Neville|
|Beith, A. J.||Steel, Rt Hon David|
|Brocklebank-Fowler, C.||Wainwright, R.(Colne V)|
|Cockeram, Eric||Wilson, Gordon (Dundee E)|
|Ellis, Tom (Wrexham)|
|Lyons, Edward (Bradf'd W)||Tellers for the Ayes:|
|Maclennan, Robert||Mr. John Roper and Mr. Ian Wrigglesworth.|
|Owen, Rt Hon Dr David|
|Alexander, Richard||Arnold, Tom|
|Alison, Michael||Baker, Nicholas (N Dorset)|
|Ancram, Michael||Banks, Robert|
|Benyon, Thomas (A'don)||Mather, Carol|
|Berry, Hon Anthony||Maude, Rt Hon Sir Angus|
|Bevan, David Gilroy||Maxwell-Hyslop, Robin|
|Biffen, Rt Hon John||Mellor, David|
|Biggs-Davison, John||Meyer, Sir Anthony|
|Blackburn, John||Miller, Hal (B'grove)|
|Bowden, Andrew||Mills, lain (Meriden)|
|Brinton, Tim||Murphy, Christopher|
|Brittan, Leon||Myles, David|
|Brooke, Hon Peter||Neale, Gerrard|
|Brown, Michael (Brigg & Sc'n)||Needham, Richard|
|Bruce-Gardyne, John||Nelson, Anthony|
|Cadbury, Jocelyn||Newton, Tony|
|Carlisle, John (Luton West)||Normanton, Tom|
|Carlisle, Kenneth (Lincoln)||Page, Rt Hon Sir G. (Crosby)|
|Clark, Sir W. (Croydon S)||Page, Richard (SW Herts)|
|Clegg, Sir Walter||Patten, John (Oxford)|
|Cope, John||Percival, Sir Ian|
|Costain, Sir Albert||Proctor, K. Harvey|
|Crouch, David||Raison, Timothy|
|Dean, Paul (North Somerset)||Rees, Peter (Dover and Deal)|
|Dorrell, Stephen||Ridsdale, Sir Julian|
|Douglas-Hamilton, Lord J.||Sainsbury, Hon Timothy|
|Dover, Denshore||Shaw, Giles (Pudsey)|
|Dunn, Robert (Dartford)||Shelton, William (Streatham)|
|Eggar, Tim||Shepherd, Colin (Hereford)|
|Elliott, Sir William||Silvester, Fred|
|Fairgrieve, Russell||Speed, Keith|
|Faith, Mrs Sheila||Speller, Tony|
|Fenner, Mrs Peggy||Spicer, Jim (West Dorset)|
|Fookes, Miss Janet||Stanbrook, Ivor|
|Fowler, Rt Hon Norman||Stanley, John|
|Gardiner, George (Reigate)||Stevens, Martin|
|Garel-Jones, Tristan||Stradling Thomas, J.|
|Gow, Ian||Taylor, Teddy (S'end E)|
|Griffiths, Peter Portsm'th N)||Tebbit, Norman|
|Gummer, John Selwyn||Thatcher, Rt Hon Mrs M.|
|Hawksley, Warren||Thomas, Rt Hon Peter|
|Heddle, John||Thompson, Donald|
|Henderson, Barry||Thorne, Neil (llford South)|
|Howe, Rt Hon Sir Geoffrey||Trippier, David|
|Howell, Rt Hon D. (G'ldf'd)||Waddington, David|
|Hunt, David (Wirral)||Wakeham, John|
|Hunt, John (Ravensbourne)||Waller, Gary|
|Jopling, Rt Hon Michael||Watson, John|
|Kaberry, Sir Donald||Wells, Bowen|
|Le Marchant, Spencer||Wheeler, John|
|Lloyd, Peter (Fareham)||Wickenden, Keith|
|Lyell, Nicholas||Williams, D.(Montgomery)|
|Macfarlane, Neil||Wolfson, Mark|
|McNair-Wilson, M. (N'bury)||Tellers for the Noes:|
|Major, John||Mr. Robert Boscawen and Mr. Alastair Goodlad.|
|Marshall, Michael (Arundel)|
§ Question accordingly negatived.
§ Clause 122 ordered to stand part of the Bill.
§ Bill (Clauses 1, 4, 19, 23, 27, 29, 88, 89 and 122; and Schedules 1, 2 and 11), reported, with an amendment; to lie upon the Table.