HC Deb 15 February 1989 vol 147 cc305-6
9. Mr. McFall

To ask the Chancellor of the Duchy of Lancaster what has been the cost to industry of the rise in base rates since April 1988.

Mr. Newton

The cost to industrial and commercial companies to date of the changes in bank base rates since April 1988, compared with the cost if bank base rates had remained the same since April 1988, is estimated to be about £0.8 billion. The hon. Member should bear in mind, however, that a 1 per cent. increase in interest rates, even if sustained for a full year, costs companies far less than a 1 per cent. increase in pay settlements.

Mr. McFall

The rate has increased from 7.5 per cent. to over 13 per cent. in nine months, and the Government's own financial statistics have shown that that has penalised British industry by over £6 billion. Does the Minister agree with the latest CBI survey, "Economic Priorities for 1989—Building on Business Success", which says that such a policy has a very detrimental effect on investment in British industry and gives an added twist to the inflationary spiral? How can the Minister possibly say that he is helping British industry with such a simplistic and blunderbuss monetary policy?

Mr. Newton

First, there is little doubt that most people in British industry would regard a major resurgence of inflation as a significantly greater risk than the present level of interest rates. Our policy is directed at ensuring that we maintain low inflation, as the hon. Gentleman knows.

Secondly, the scale on which British companies are investing speaks for itself. I understand that in the hon. Gentleman's constituency in the past month or two there have been a number of significant proposals aimed at creating 700 new jobs—for example, from Allied Distillers and Sterling Investments.

Mr. Tim Smith

Will my right hon. Friend confirm that such has been the transformation in company liquidity since the early 1980s that many companies now have substantial amounts of cash in the bank? For instance, GEC has £1,500 million. Will my right hon. Friend confirm that the figure of £0.8 billion that he gave the House is a net figure, and that many companies are actually better off?

Mr. Newton

I can certainly confirm—without going into detail for which my hon. Friend asks—that companies' profitability overall has increased considerably. That, of course, has been one of the main sources of funds for the recent rise in investment.

Mr. Campbell-Savours

May I add a little original thinking to the right hon. Gentleman's contribution? Is it not true that penal interest rates are no more than taxes paid to financial institutions and the private sector, as distinct from direct and indirect taxes which are paid to the Government and the public sector? What is the difference? Do not interest rates constitute no more than a form of taxation?

Mr. Newton

I am having some difficulty in following precisely what the hon. Gentleman has in mind. Interest rates represent the price of borrowing money, in the same way as other prices, including taxes levied, measure the cost of acquiring products. I do not understand what conclusion the hon. Gentleman is seeking to draw.

Mr. Andrew Mitchell

Is it not true that the average gearing of British companies has fallen from a near peak nine years ago of something like 45 per cent. to little more than half that today? Is not that an eloquent testimony to the success of the Government's economic policies towards the corporate sector as well as an important identification of the fact that companies will be well able to withstand the current temporary high level of interest rates?

Mr. Newton

I certainly agree with the general proposition that underlies my hon. Friend's question.

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