EMPLOYMENT BONDS

HC Deb 08 July 1986 vol 101 cc228-35

'1. Income from employment bonds shall he exempt from income tax and gains realised on a disposal of employment bonds shall not be chargeable gains. 2. Employment bonds are securities issued by a body corporate resident and carrying on a qualifying trade in the United Kingdom the issue of which has been approved by the Board. 3. The Board shall not approve an issue of securities for the purposes of this section unless satisfied that

1. (a) the proceeds of the issue will be used for the purposes of a qualifying trade carried on in the United Kingdom;
2. (b) the making of the issue can reasonably be expected to result in additional full time employment in the United Kingdom for a period of not less than three years being offered to and accepted by not less than one individual for every £50,000 raised by the issue before expenses;
3. (c) the securities will be issued to and held by a recognised institution in accordance with the regulations for the time being prescribed under subsection (5); and
4. (d) the amount raised by the issue will constitute a normal commercial loan within the meaning of paragraph (5) of Schedule 12 to the Finance Act 1973.

4. A trade is a qualifying trade if it complies with the requirements of paragraph 6 of Schedule 5 to the Finance Act 1983. 5. The Treasury shall by order made by statutory instruments prescribed regulations for giving effect to this section, for imposing conditions relating to the giving and withdrawal of approval under subsection (3) and containing such incidental or consequential provisions as may appear to the Treasury to be appropriate, and may from time to time in like manner vary the regulations so prescribed. 6. Any statutory instrument made in exercise of the power conferred by subsection (5) shall take effect subject to an affirmative resolution of the Commons House of Parliament. 7. This section shall have effect with respect to securities issued on or after 6th April 1986:.—[Sir William Clark.]

Brought up, and read the First time.

Sir William Clark (Croydon, South)

I beg to move, That the clause be read a Second time.

New clause 14 stems from an idea by a Mr. Gareth Jones and a Mr. David Soskin who wrote an excellent paper on employment bonds. The new clause seeks to help unemployment in Britain.

7.45 pm

Having said that, what the Government have done for unemployment is not widely publicised. The percentage of the population of working age in work in the United Kingdom compares favourably internationally. We have just over 65 per cent. of the working population in work whereas West Germany has 59 per cent., France 60 per cent. and Italy 54 per cent. Therefore, we have a better percentage of people in work than do our three main partners in the EEC. The average in the OECD countries is 58 per cent. compared with ours of over 65 per cent. We are beaten by the United States which has 68 per cent. and Japan which has 71 per cent.

Mr. Michael Meadowcroft (Leeds, West)

Is not the particular difference that the proportion of long-term unemployed is far higher in Britain than in any of the countries that the hon. Gentleman has mentioned? Is not that the particular problem to which we must address ourselves?

Mr. Deputy Speaker (Mr. Harold Walker)

Order. The new clause relates to employment bonds. I hope that the debate will not extend to one about unemployment.

Sir William Clark

I am grateful to you for your protection, Mr. Deputy Speaker.

The employment bonds are to help unemployment. The Government have taken measures to help the long-term unemployed, to whom the hon. Gentleman has referred, such as the restart scheme, the community programme, the new worker schemes, the two-year youth training scheme, the job release schemes, the adult training schemes and the enterprise allowance. One would think, to hear Opposition Members, that the Government were doing nothing about unemployment. I remind the House that the Government are spending over £3,000 million of taxpayers' money to help unemployment. The business expansion scheme has also created many new jobs throughout the economy since March 1983. It is worth putting on record that nearly 1 million new jobs have been created by the various Government measures.

However, having said all that, there is still more to be done. One of the snags in our economy today is the high cost of borrowing. If one compares the cost of borrowing in Britain with that of our competitors, one sees that Germany has a well-developed debt market whereby long-term loans of 10 years and more are available to industry at low rates of interest. The clearing banks in Germany take equity positions in various industrial companies and that must he of assistance to German firms because there is no interest element within that. The United States of America has for many years had something called industrial development bonds, which are similar to the employment bonds that I am about to advocate. Japan, another of our competitors, has long-term low-cost finance. I do not have to remind the House that the economies of those countries is buoyant. France, one of our partners in the EEC, has direct interest subsidies.

When we look around at our international competitors we can see that we lose out on the cost of financing a development. Moreover, the cost of borrowing in the initial stages of a business is vital. Once a business is established it can afford a higher rate of interest because profits are being generated. But in the initial years it is vital for the cost of money to be as low as possible.

I hope that my hon. Friend the Economic Secretary will not bother to criticise the wording of the new clause because all that I am asking him and the Government to do is to accept the spirit behind it.

The idea of the employment bond is to channel investment into genuine job-creation projects. Each bond will be issued by one of the clearing banks. It is suggested that for any one project there should be a maximum bond of, say, £10 million, although 1 am not arguing for that figure. The hank would create the bond and then sell it to investors. If it were sold to 100 people, they could take £100,000 each, or whatever it may be. Consequently, the money lent to the business would be covered by the employment bond.

There is one stipulation, and that is that the money lent from the bond would go to a project whereby genuine jobs would be guaranteed for three years and no job should cost more than £50,000 of that investment. That would mean that if there were a maximum of £ 10 million for one project, 200 jobs would be created. It is true that £50,000 per job is extremely high. The American experience is that in practice the figure works out very much lower. But, if one takes the worst, it would create 200 new jobs.

In order to make the bonds attractive the Government must give the interest on the bonds tax-free. If it were given tax-free any investor, particularly those at the higher rates of tax, would be attracted to them. Remember, the bonds must be directed to a genuine project which will create long-term jobs.

If one takes the example of, say, 100 units going into a bond, a taxpayer at the maximum rate of 60 per cent. will, if he gets a 10 per cent. return on his 100 units, receive 10 units of interest. But the Exchequer will take six of those units and he will be left with four. The net interest that he receives will be 4 per cent. Consequently, that investor cart not only afford but it would be an incentive for him to lend his money at 6 or 7 per cent. tax-free.

We must remember that the individual employment bond scheme would be run by the banks. The banks would guarantee repayment to the investor. There could be a secondary market — like the Euro dollar market — in which an investor could buy and sell his bonds as and when he wished. I am sure that that would be an advantage. The Chancellor of the Exchequer and the Government should experiment with that. I suggest that the experiment should be £1 billion worth of employment bonds. I remind my hon. Friend the Minister that £1 billion worth of employment bonds would be about one eighth of the total manufacturing investment in the economy.

Before the Inland Revenue approved a scheme, it would have to be satisfied that it was a genuine project, that it created new jobs and, of course, that it was underwritten by the banks. If one considers a £10 million project, and assumes that the interest rate on it is 10 per cent., any individual or group of people investing that sum would collect £1 million a year in interest. If those people pay tax at the maximum rate, the Chancellor of the Exchequer would take 60 per cent. in tax. The loss to the revenue if the interest was tax-free would be £600,000 on £10 million invested. If one multiplied that to £1 billion—the sum involved in the experiment—the loss to the Exchequer would be £60 million. But we must remember that that loss of £60 million would create 20,000 new jobs. If one considers some of the job-creation schemes with which successive Governments have dabbled, that figure is small.

How successful will the scheme be? I can only remind my hon. Friend of the experience in the United States of America. An important report published recently by leading economists in the United States maintained that the success of the industrial development bond in the United States— no one can say that its economy is not buoyant—was shown by an increase of 4.75 per cent. in its gross national product. That 4.75 per cent. increase occurred between 1980 and 1985. If one could extrapolate that to the position in Britain, it could mean 1 million extra jobs in five years.

Employment bonds would be especially attractive to companies that cannot get off the ground, especially in low-return industries such as textiles, light engineering, food manufacturing and office equipment. In those industries there is a low rate of return on the capital employed. Consequently, with the base rate at 10 per cent., although one cannot borrow money at 10 per cent. anywhere and one is bound to pay two or three points above the base rate—if it is a new business, the chances are that it will pay 13 per cent.—interest charges are an enormous drain on a low-return industry, even if it is expanding.

One can compare the purchase of capital equipment in America, where, with an industrial development bond, one could borrow £1 million, £2 million or £10 million—whatever the cost of the plant and machinery was—and repay it over 10 or 15 years, with the position in Britain, where no financial institution would give those terms. The best one could get would be a leasing arrangement perhaps over five years. If an American competitor borrows £10 million, and he must pay it back in 10 years, he must find £1 million plus interest each year out of the new venture. In Britain, a £10 million loan for a similar plant to be repaid over five years means that a business man has the millstone round his neck of a £2 million repayment each year plus a much higher rate of interest than is payable abroad.

The scheme is a much better incentive for the Government to create employment at a much lower cost. No extra bureaucracy is involved except for the Inland Revenue's approval. The Inland Revenue must consider three things. Is it a genuine project? Will it create jobs? Is it underwritten? Those are three simple points. The scheme involves no bureaucracy because private enterprise will take the responsibility for its administration and the risk.

The scheme has worked well in the United States, and with unemployment at its present level it is another idea to help to solve the problem. The Government have done much to contain unemployment, despite the fact that we have been suffering, as everyone in the House knows, from many more people of school-leaving age entering the labour market and fewer people retiring.

I urge my hon. Friend not just to dismiss the scheme.

I am sure that he will not criticise the wording of the clause. The spirit behind the clause is to attract investment into genuine businesses which will create genuine jobs.

Dr. Oonagh McDonald (Thurrock)

Labour Members share the anxiety of the hon. Member for Croydon, South (Sir W. Clark) about unemployment in Britain. However, he should note that in Britain the underlying trend of unemployment is still moving upwards and that there are I million fewer people in work now than there were in 1979 when Labour left office. Since 1979, Britain has lost more jobs more quickly than the other EEC countries put together. Since 1979, jobs have been destroyed at an alarming rate. The hon. Gentleman is right to recognise that it is a serious problem and to attempt to provide a solution. Part of the analysis that the hon. Gentleman proposed is accepted by the Labour party, but not by the Government. We agree with the hon. Gentleman's statement that high interest rates are a strong disincentive for investment and especially for investment in job creation.

There is an urgent necessity for investment in job-creating projects. The hon. Gentleman is right to urge the Government to make such investment. We would propose different measures for job creation from the ones that he has proposed in the new clause.

I have two more points to make about the new clause. The hon. Gentleman compared it with the business expansion scheme. I do not suggest that it would operate in exactly the same way, because, of course, it would not. That was not the best comparison for the hon. Gentleman to choose. The Peat Marwick report on the operation of the business expansion scheme shows clearly that, at best, that scheme has maintained some jobs rather than created new jobs. If the hon. Gentleman examines the figures, he will discover that that is the case.

Another problem with the business expansion scheme is that it benefits higher rate taxpayers. Since its inception, the Government have had to introduce one tax avoidance measure after another to prevent the use of the business expansion scheme, not for the purpose for which the Government intended — job creation — but as a tax avoidance measure by higher rate taxpayers. I can see that the same difficulty may arise for his scheme which, as he suggested, would encourage higher rate taxpayers to invest in employment bonds.

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Sir William Clark

It is surely illogical to assume that. If we are endeavouring to channel investments into employment, creating jobs, all the Government can do is to give fiscal incentives to a potential investor. Those who are paying a higher rate of tax are obviously the potential investors.

Dr. McDonald

It is not at all illogical to make the point. Fiscal incentives cost the Government money. If fiscal incentives are designed for job creation, the Government need to see to it that job creation results or there is no point in giving fiscal incentives because the Government will be giving yet another tax handout.

The hon. Gentleman himself drew a comparison between the business expansion scheme and his proposal. The business expansion scheme has often been misused, as the Minister knows. It has been used for tax avoidance purposes rather than for new investment that will lead to job creation. One has only to look at agricultural property investment and the investment in fine wines that took place under the business expansion scheme. It is difficult to ensure that fiscal incentives like this go towards job creation.

I share the hon. Gentleman's concern that job creation should be the result. The method that he has chosen in proposing this kind of tax incentive for investment in employment bonds is a dubious one. He suggested that it would not cost a great deal of money. However, I shall be interested to hear the Minister's figures based on the suggested amount of £1 billion in bonds of this kind. Even if the cost is only £60 million, that money must be used for job creation. That is why, although naturally sharing the hon. Gentleman's objectives, the Opposition are dubious about the method that he has proposed.

The Economic Secretary to the Treasury (Mr. Ian Stewart)

First, I compliment my hon. Friend the Member for Croydon, South (Sir W. Clark) for giving us an opportunity to debate the interesting idea embodied in the new clause. He drew attention to the number of jobs generated in the economy in the last few years, but rightly said that we are all anxious to ensure that there should be as many ways as possible of encouraging the creation of new jobs. That sentiment, I think, is shared by hon. Members on both sides of the House.

My hon. Friend said that the high cost of borrowing in the initial stages was one of the greatest deterrents to projects that are likely to give rise to new job-creating businesses. There is certainly truth in that. It is very encouraging that longer term interest rates have for the first time in many years come down into single figures. Although there is a margin to pay on top of the strict money market costs, it has not been possible for companies to work on the basis of gilt-edged stock yielding less than 10 per cent. for many years now. If that has not created a climate in which it is easier for all businesses that want to expand to raise longer term finance, it has certainly been a substantial step in the right direction, and it is one of the important achievements of our financial policies in the last few years.

My hon. Friend may have guessed that I would not feel able to recommend to the House that the new clause be accepted. I do not want to attribute to him any great powers of clairvoyance, but there is a certain similarity between this debate and one that took place a year ago at a similar stage of the Finance Bill. I recall that the hon. Member for Thurrock (Dr. McDonald) was involved and, although I was not called upon to respond, my right hon. Friend the former Financial Secretary did. The debate was opened by my hon. Friend the Member for Kettering (Mr. Freeman), and he made a number of these points. As that debate is on the record, I looked to see whether any of the arguments had changed. Following that, I had the opportunity of a meeting with my hon. Friend the Member for Lewisham, East (Mr. Moynihan) and the two gentlemen, Mr. Jones and Mr. Soskin, to whom my hon. Friend referred. I had an interesting discussion with them.

I shall certainly follow my hon. Friend's request that I should not dwell too much on the wording of the new clause, but deal rather with the spirit of it. Indeed, I go even further and promise not to read the Treasury brief that has been put in front of me for this occasion. I do not know that it would necessarily be conducive to the conduct of the debate at five minutes past eight this evening. I do not wish to cast any aspersions on the Treasury briefs, because they are marvellous documents. All those of us who have the opportunity to rely on Treasury briefs will bear witness to that. The points that my hon. Friend makes are really general, not detailed, about the wording of the clause, and I shall therefore try to deal with them.

The first and most important point is whether relief of this kind would be an economic use of tax revenues forgone. Would it be sufficiently targeted on the type of companies that my hon. Friend has in mind? Having thought about this, when I met my hon. Friend the Member for Lewisham, East and again when my hon. Friend the Member for Croydon, South tabled the new clause, I could not convince myself that the degree of targeting of a proposal of this kind would come anywhere near a sufficiently satisfactory level to justify the introduction of such a wide-ranging relief. My hon. Friend said that these should be specific projects of a kind that would lead to the generation of new employment, in practice, but I think that it would be a great deal more difficult to achieve that with any degree of confidence and certainty in order to justify such a relief.

My second anxiety is that a great deal of investment that was going to take place anyway could be organised in such a fashion that it would qualify for relief under these arrangements. This is a factor that has always to be taken into account. Not only is there potential advantage to new activity—what is known in the jargon as additionality— but there is also the possibility that, unless such reliefs are very carefully defined, there is a great risk that, within the law, a great deal of activity that would otherwise have taken place but would not have come within the ambit of relief of this kind could be organised in such a way that it did come within its scope. That would mean an Exchequer cost that would not be related directly to the purpose that my hon. Friend has so rightly said deserves our attention.

My hon. Friend went on to say that the idea of these bonds has been inspired to some extent by experience in the United States and other countries. He made a general point about other countries, but one has to look at the financial conditions in each country and at existing markets. It is not easy to extrapolate from one country to another, regardless of the surrounding circumstances and taxation systems for companies, and say that they would operate just as efficaciously in another country.

My hon. Friend concentrated on the United States. Therefore, I ought to do so, too. Tax relief in the United States operates in a way that is bound to be popular with some of those who are involved. It is popular with the recipients because this money is a subsidy. Tax relief makes it possible to quote a lower rate of interest. Therefore, it is popular with those who are able to invest and gain a gross interest on bonds that are not liable to tax. It is also popular with those states in the United States that operate this system. They are able to offer tax subsidies to enterprises in individual states, but the cost falls on the federal Government. Ultimately, therefore, the federal Government have to bear the loss of revenue and to weigh up whether they believe they are getting a reasonable deal. The latest United States Treasury view is that inefficient, economically distortive, and ill-targeted tax expenditures of this type should be eliminated. Preliminary steps towards that end have been taken in the United States.

One of the reasons why the United States came to that conclusion was that a significant proportion of the tax relief was being given as a subsidy to financial intermediaries or to higher rate taxpayers. I am sure that that would happen in this country, because our rates of personal tax are higher than those in the United States. If approximately one third of the cost in the United States was used not for the creation of new jobs but as a subsidy for those other parties, I do not think we could expect that the percentage that leaked out in that way would be any lower. Indeed, it could conceivably be higher.

The United States authorities concluded that for every $2 of interest costs that are saved by the borrower, the federal Government forgo more than $3 of revenue. That is not a formula upon which we could base a similar provision. That leaves aside any possibility of exploitation or lack of targeting to which the hon. Member for Thurrock alluded. A loan guarantee scheme or a business expansion scheme needs to be as closely targeted as possible. It is inherent in any such scheme that one has to look at the limits of the target and to maintain vigilance, because the temptation for it to be used for purposes other than those that we have in mind are bound to be great.

If an experiment costing £1 billion were carried out—with an interest rate of 10 per cent. and with only top rate taxpayers at 60 per cent. involved—we should be talking of £60 million. However, it is almost impossible to quantify the cost because we do not know what rates of interest relating to the credit worthiness of the borrowers would be charged on particular bonds, and we should not know what were the individual tax rates of those who put

Finally, my hon. Friend said that the experience of this scheme in the United States was that the gross national product increased within a few years by about 4.75 per cent. That is a huge figure if it can be attributed to a single measure of this kind. The paper that includes these figures refers to a sum that is quoted in dollars rather than to a percentage of GNP. The GNP percentage is nearer 0.1 per cent.

On the evidence of the figures and the American experience, I do not feel that a case has yet been made for a provision of this kind. We are always anxious to find ways in which to encourage businesses to create more job opportunities. Along the lines of employment bonds there may be a formula that would work and be economical for the general body of taxpayers, but I regret that the formula that is contained in this new clause has not found it.

8.15 pm

Sir William Clark

That was a very disappointing reply, particularly as my hon. Friend prefaced his remarks by saying that he would not read the Treasury brief, and then proceeded to quote from the Inland Revenue brief.

My hon. Friend took me to task at the beginning of his reply on bank interest. I know that interest rates have been reduced and I congratulate the Government on that reduction. However, the idea behind employment bonds, as I tried to point out, is to obtain a lower rate for genuine projects. I do not accept my hon. Friend's assessment. If there are loopholes, it is up to the Inland Revenue to close them, as it did with the business expansion scheme. Of course, these ideas will be exploited, but it is up to the Inland Revenue to close the loopholes.

I said that the Inland Revenue would closely monitor employment bonds. The fact is that £60 million would create 20,000 jobs. The figure may be less or it may be more, but I believe that my hon. Friend agrees that a £1 billion issue of investment bonds would cost £60 million, and the risk would be taken by the banks.

In view of what my hon. Friend has said, it is obvious that this year we shall be unable to push the matter further. However, I assure him that the matter will not be forgotten and that it will be raised again. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.