HC Deb 11 July 1989 vol 156 cc855-74

  1. '(1) In computing the amount of profits or gains to be charged under Case I of Schedule D of a bank carrying on a bona fide banking business in the United Kingdom, notwithstanding the provisions of section 74(j) of the ICTA 1988 any debts falling within (2) shall be deductible provided that the provisions of subsection (3) are fulfilled.
  2. (2) Bad debts fall within this subsection if they arise in respect of lending to third world countries, their governments, government institutions or enterprises operating in such overseas territories comprising sovereign risks, and the Board shall issue regulations specifying the countries, institutions and enterprises treated from time to time as falling within this subsection.
  3. (3) The requirements of this subsection are fulfilled if debts which are considered to be bad and for which a deduction is claimed are formally written off, waived or otherwise extinguished such that they are no longer repayable by the debtor.
  4. (4) Subsection (3) shall operate in respect of debts which are partly claimed as bad as though that past debt were a separate debt.'.—[Mr Nicholas Brown.]

Brought up, and read the First time.

Mr. Nicholas Brown (Newcastle upon Tyne, East)

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

Some Conservative Members, particularly the hon. Members for Beaconsfield (Mr. Smith) and for Stamford and Spalding (Mr. Davies), criticised the last new clause on the grounds of its scope. Although it touched the lives of about 24 million of our fellow citizens, they felt that it was a small matter. The same charge cannot possibly be levelled at new clause 7, which seeks to address the problem of Third world debt—

7 pm

Mr. Quentin Davies

As the hon. Gentleman has explicitly referred to me, I should like to correct his misapprehension. I do not think that he could have been following the previous debate with any attention.

The new clause did not affect the lives of 24 million people who may hold premium bonds. It merely affected the lives of those who wish to purchase premium bonds in future in individual amounts of less than £100. There is a clear distinction. I am sorry that the hon. Gentleman failed to notice it.

Mr. Speaker

Order. We have finished the last debate; let us get on with the next one.

Mr. Brown

Quite so, Mr. Speaker. If my attention wandered in the last debate while the hon. Gentleman was speaking, I dare say that I was not alone in that.

This debate relates to Third world debt. The proposition is specifically aimed at relating the tax deductions that First world banks seek from their Governments to debt forgiveness in the Third world. We believe that that is in line with the thinking behind the Brady plan, which aims at reducing existing loans to the Third world, if not an outright tax forgiveness. The difference between our proposition and the Brady proposal is best summed up as follows: the Brady plan relies on the voluntary co-operation of the private sector, whereas our proposals directly link tax concessions to willingness to forgive debt in the Third world.

The problem that we are seeking to deal with is vast and has been dramatically exacerbated by the recent fall in the value of Third world commodity sales. For example, debt service ratios for the African continent now exceed 50 per cent. of that continent's export income. The total current account deficit of the African region trebled between 1985 and 1986, with deteriorating terms of trade, low economic growth and outward interest payments far in excess of inward investment.

The problem is illustrated by countries such as Zambia, where the infant mortality rate has doubled since 1980 because of malnutrition. It is also reflected in countries such as Brazil, in which the infant mortality rate fell steadily until about 1980, when the debt crisis hit. Now 40,000 children die each year in that country. About 86 million Brazilians are on the minimum calorie intake, of whom about 30 million receive less than 1,600 calories per day. Yet Brazil is the sixth largest exporter of foodstuffs in the world. It is a disgrace that old debt servicing has meant a transfer of wealth from the south to the north.

The problem in the poorest part of the Third world seems self-perpetuating. Those to whom the money is owed put forward a range of solutions. The first solution which is attractive to them is tax relief from First world Governments for a problem into which they got themselves. When forced to look at other potential solutions they consider rescheduling of debt, bond conversion schemes and even further loans to perpetuate the debt interest cycle.

The financial institutions of the First world are reluctant to consider debt forgiveness. When they do, they want to consider it in exchange for something. They will consider just about any mechanism apart from outright default. In these difficult circumstances for the Third world, it reflects no credit on the Government of the United Kingdom that the volume of the British aid budget has been dramatically reduced. Britain's contribution during these troubled times has been to ensure that the amount that we spend on aid fell in real terms by more than a third between 1979 and 1987. That decrease has been marked in Africa, for which over the same period real aid has fallen by 26.5 per cent. As a percentage of our gross national product, overseas aid has steadily fallen during the 1980s to a pitiful 0.28 per cent. of GNP in 1987. In those circumstances, it is no wonder that our Government lag far behind even that of the United States in exploring new and constructive solutions to one of the most intractable problems in the world.

The sums involved are substantial, although banks are naturally shy of revealing the total sums that they regard as bad debt. In 1987, Barclays sought to offset about £713 million against tax because of bad debt to the Third world. The National Westminster bank offset a similar amount —£562 million; the Midland offset £1,016 million, and Lloyds, £1,323 million. As a proportion of these banks' total Third world debt we note that Barclays wrote off about 26 per cent. in 1987, National Westminster 23 per cent., the Midland about 25 per cent. and Lloyds about 34 per cent. In other words, the major banking institutions of this country are moving at a fair pace to offset as irrecoverable debts owed to them by the Third world against their tax obligations to the Governments of the First world. The International Monetary Fund estimates that the amount written off globally to Third world countries as bad debt between 1985 and 1988 was $9 billion. That includes only money written off to the 15 most indebted countries, calculated by debt service ratio.

Our contention is that because First world nations bear a public cost because of the private sector banks' irrecoverable debt to the Third world, the public interest should be represented in the way in which the debts are written off against tax. In theory, at any rate, those written off debts constitute a large cost for First world taxpayers. Had those debts not been written off, the major banks' tax liability would have been substantial and would have provided welcome additional income for the Exchequer. Whether that would have happened in practice may be open to question, but that does not undermine the strength of our case. It is surely in the public interest that the poorest countries in the world, crippled with interest payments and a debt burden that they can never meet, are brought back into the world economy in a way that ensures stability and holds out the prospect for real economic growth and steadily increased standards of living.

As these written-off debts have been offset against tax liability, it is equitable that the British taxpayer should insist that the debt be truly written off. That has the obvious advantage of relieving Third world countries even of the theoretical burden of repayment. In short, this is tax relief for debt forgiveness.

It is no part of our case that the new clause should have universal applications. The scope for tax avoidance on a large scale is all too evident. The banks are large and powerful and some Third world nation states are small and vulnerable. We propose a remedy to deal with the present problem. We are not seeking to encourage an extension of the present difficulties or to set up a vast new tax avoidance industry for a Keith committee to deal with in the early 1990s.

The Third world debt problem was clearly not planned to emerge in the way in which it has emerged, and it is in nobody's interest that it should continue. Our remedy is designed to deal with the existing problem. To avoid creating new problems, it may be necessary to set a time limit on the operation of the relief or on the circumstances under which it may be made available. It may be necessary to set that down more specifically in the resolution. Nevertheless, it is the principle that is important. No matter how reluctant the banks, and probably the citizenry of this country, may be to accept the principle of debt forgiveness, it appears that of all the options open to First world Governments today, and of all the different machanisms that have been suggested for rescheduling, converting into bonds or dealing with the world debt crisis in some other way, by far and away the most effective mechanism is to offset the tax concessions that have been made to the banks against debt forgiveness, and to eradicate at least the current problem once and for all.

Mr. John Battle (Leeds, West)

I remember some time ago seeing a cartoon that depicted a Mexican peasant, who was faced with a well-dressed American. What was being offered to that Mexican peasant by the right hand of the well-dressed American was a teaspoon on which was written the word "aid". The problem was that the left hand of that well dressed American held that peasant by the windpipe and on the arm was emblazoned the word "trade". That cartoon summed up the position. A teaspoon of aid is offered, but by and large the rich world has the Third world by the windpipe in terms of trade relations. Trade terms are far more favourable to the First world than to the Third world. In recent years it has become clear that trade is not necessarily only in goods but is in invisibles, such as financial exchange. Such trading has increased in prominence in world trade relations.

As my hon. Friend the Member for Newcastle upon Tyne, East (Mr. Brown) said, if we were just to focus on what is in that teaspoon of aid for a few moments and considered our Government's record in the past 10 years, we would find that there has been a dramatic reduction in the volume of Britain's aid contribution in real terms and as a proportion of gross national product. As my hon. Friend cited, it was only in January in a written answer in Hansard that the Government admitted that aid in Africa had dropped by 26 per cent. over the period from 1979 to 1987. Yet this year the Treasury was able to announce that there was a surplus of £15 billion. One month after that answer on Africa the Prime Minister announced: We now have a higher standard of living than we have ever known. We have a great budget surplus."—[Official Report, 28 February 1989; Vol. 148, c. 154–55.] I am tempted to set against that another comment that she made in a contribution to a book which was called "Towards One World?" which contained international responses to the Brandt report published some years ago. The Prime Minister said: It is morally right that those who can should help the poorer countries to help themselves. The positive strategy of doing that would be one of debt remission, and that would be a contribution that British commercial interests could well afford.

More recently in 1988, the Select Committee on Foreign Affairs recommended that the aid budget should increase in line with the nation's increasing wealth. That has not happened, but in the meantime the real problem of trade—the stranglehold of the windpipe—has continued. We are not talking in this debate about industrial capital exchange that is tied up with factories —such as the provision of the processes of production, or agricultural development or provision of infrastructure —but about financial capital. That is the selling of money and turning a profit by charging interest.

I was interested to hear the phrase "recommending debt forgiveness". I am tempted to suggest that we should talk about debt remission, because forgiveness suggests that there is moral responsibility on the borrower only—it is the borrower who has sinned rather than its being the relationship between the lender and the borrower that is wrong. It is interesting that the charging of interest—that form of financial trade—was frowned upon by many traditions, whether Greek, Jewish or Christian, right through into the 16th century, as being usury. The problem for the borrowers is obviously how they will get the money to pay back the high interest that they promised to pay. In recent times often the answer from the bank has been to lend them more money at even higher rates. In practice, that has absorbed the money that those countries have raised from their agricultural and industrial production.

7.15 pm

On 5 April, I tabled a question on the Brazilian debt to the Foreign Secretary. I was informed that Brazilian debt was to be rescheduled over 20 years at interest rate charges of Libor plus 13 to 16 per cent. That would be an extraordinary way of helping Brazil with its debts, because it would put on it an additional burden.

In that answer I was also referred to table 15 of the Bank of England Quarterly Bulletin, which lists all the Third world debts to the United Kingdom-registered monetary sector institutions and all their branches and subsidiaries. I recommend that hon. Members read that bulletin, because it shows that in Britain banks have some £14 billion owed to them by the least-developed countries. Britain is the world's largest debt holder after the United States of America.

One of the contributors to the World Bank report, which was published just a month ago, was the editor of The Economist. In a review of the World Bank report in The Economist, he said: Because of this lack of savings, they"— Third world countries— need foreign capital to build up their productive investment. In principle, that sounds fine. It makes economic sense for a poor country with good growth potential to borrow abroad. But foreign borrowing can be risky. In the 1980s many poor countries ran into crippling debt troubles because they had borrowed too much in earlier years, and because exchange rates and interest rates moved against them. That is the context in which Third world countries have been borrowing.

The IMF in September 1987 issued a statement celebrating five successive years of growth in the world's economies, but I would have to say that that was unequal development and growth, because in that same period there was an escalation of the debt crisis wreaking havoc on the economies of the debtor nations. In other words, I would suggest that the successes of the industrialised countries have come about on the backs of the developing ones, whose incomes in real terms have declined by 30 per cent. in that period.

The injustice is that we now have a world in which the poorest countries are subsidising the wealth of the richest countries. That may seem a far cry from representing our constituents in Britain, but if we apply it a little more particularly, it appears that the credit card boom in Britain today is built on the backs of the interest repayments to our banks by the Third world countries. All their foreign exchange is being used to service those debts. The revenue that they earn on export sales has to be returned to United Kingdom and United States banks.

Since 1982 the poorer countries of the south have regularly transferred in excess of $30 billion to their rich creditors in America and Britain. Last year that transfer rose to $43 billion. In other words, it absorbed more than 5 per cent. of the entire gross domestic product of some of the world's most impoverished countries. Brazil, which owes $110 billion in foreign debts, is the world's largest debtor nation after the United States. Brazil pays 10 per cent. of its gross national product in interest on its debts. We must ask how on earth Brazil can restructure its economy, agriculture and industry, so that it can tackle issues such as the wasting of its resources by selling wood from its rain forests, which Brazil must do to enjoy the export earnings that will allow it to repay its debts to banks in Britain and America.

Mexico's foreign debt totals more than $100 billion, or 25 per cent. of its gross domestic product, yet Mexicans earn an average of less than one dollar per hour. They would have to work for 100 billion human life hours to repay Mexico's debt to the rich world. Developing countries have managed to sustain their debt repayments only by cutting imports, squeezing consumption and cutting back on public expenditure. Consequently, per capita income in Latin America has fallen by 10 per cent. since 1982 and investment has collapsed. Michael Manley commented some time ago that for a developing country to make progress in such conditions is like trying to climb up an escalator that is moving down.

The price of adjusting to the debt crisis has been borne primarily by the poor, which is reflected by increasing levels of poverty, malnutrition and infant mortality. My hon. Friend the Member for Newcastle upon Tyne, East referred to the 40,000 children who die each year in Brazil. In reality, they are paying Brazil's debt repayments with their shortened lives. Commodity prices have dropped dramatically in the last decade. In the past few days, the failure to settle the international coffee agreement has caused the value of coffee crops to fall daily. Countries that depend on such crops suffer not only a lack of export earnings and of economic growth but enormous debt burdens. Argentina owes about $35 billion to commercial banks and has paid about $100 million in interest since April of last year. Yet Argentina is already $3 billion in arrears with its interest payments.

One of the privileges of being a Member of Parliament is that one meets representatives of many other parliaments. Recently, I had the honour to meet visitors from Ecuador, who explained that that country could not repay its debt interest because Ecuador is dependent largely on its oil revenues to do so, and they asked how many British Members of Parliament knew that the recent earthquake in Ecuador broke oil pipelines and reduced the country's revenue. Ecuador is now two years behind in repaying its $6 billion debt. Peru has made no repayments since 1985 and has a $5 billion debt.

Until recently, of the Latin American countries having the largest dollar debts, Mexico, Colombia and Chile were able to maintain their repayment commitments. However, in the last week the international financial press has reported that Brazil has stopped making its debt repayments on 4 July because it can no longer afford to service it.

There have been two suggestions for dealing with the Third world's debt problems. The first is rescheduling debts but in practice that only means new loans that will worsen the problem in the long term. The second suggestion is that the countries concerned should default. However, in practice when non-payment occurs, it dries up credit and the countries involved are put on an international credit blacklist so that they cannot make any further progress. Last March, the United States Treasury Secretary, Mr. Nicholas Brady, devised a plan to tackle the debt crisis through a complex programme of so-called voluntary debt relief measures. Banks were urged to exchange existing debts for other assets such as equity in Third world countries or Government bonds at lower interest rates. To sweeten the pill, those bonds were said to be guaranteed by the World Bank and by the International Monetary Fund, to reassure banks that future repayments would be honoured.

It was envisaged that the World Bank and the IMF would provide Third world Governments with resources to finance the proposed debt equity swaps. In practice, with Third world debt being traded at less than half its value, and with private banks having undertaken massive provisions to cover themselves against losses, it seems absurd that Third world Governments should now be required to meet their past obligations in full. The reality of the situation was dramatically illustrated when, in Argentina recently, the Brady initiative was marked by violent rioting against austerity measures intended to met the IMF's repayment conditions.

As to the measures taken by the banks to cover themselves against losses, the Financial Times reported this week that the Bank of England is reviewing its credit scoring system for British banks to cushion them against possible loans to debtor countries. Known as the central bank matrix system, it is based on whether the borrower's interest payments are up to date and on whether the country has an IMF programme—and a country that does can score highly on the matrix. The system is also used by the Inland Revenue as a guide to the provision that should he made for tax allowances against such borrowings. The difficulty is that those provisions are too limited, so that proposal has not taken off. The matrix system itself is holding banks back from changing their approach.

To return to the Brady proposals, the Bush Administration has been concerned for some time to establish a coherent international debt strategy, because the debt crisis is viewed internationally as posing a threat to the United States security interests overseas. The fundamental flaw in the Brady proposals is that they do not tackle the central problem of funding future developments and of securing new lending. Four years ago, the Baker plan was scuppered precisely because of the inability of Governments to persuade commercial banks to provide new funds for future developments. Although one must prevent new loans from being siphoned off to pay interest on previous loans, debt relief alone will not solve the problem. Halting the transfer of resources from the southern to the northern hemisphere does nothing to bring about long-term development.

At current interest levels, the $70 billion debt reduction proposed by Brady will save developing countries only $2.3 billion per year in repayments. To make a significant impact on the current negative transfer of resources, a realistic strategy of debt remission is needed. It is worth remembering the Monday last October when the stock exchange collapsed and $100 billion was wiped off share values. That showed that the concept of debt remission is not an impossibility or an impracticable option. Banks —particularly in Britain—can afford to write off debts.

In reply to a recent written question from my hon. Friend the Member for Oxford, East (Mr. Smith), the Economic Secretary to the Treasury made it clear that the Third world debt crisis is over for the United Kingdom banks, as the money they have on loan to developing countries is now only one third of what it was five years ago as a proportion of the banks' capital. Loans to highly indebted Third world countries were 65 per cent. of the high street banks' capital last year. In 1984, the figure was 179 per cent. In other words, if all the Third world borrowers defaulted simultaneously, British banks would not be made bankrupt. Therefore, they are in a position to do something about Third world debts. Meanwhile, they refuse new loans to Third world countries.

In the past year, the Economic Secretary's figure of 65 per cent. could have been reduced to 44 per cent., if allowance is made for the banks' own provisions against bad debts. The figures clearly show that substantial debt reductions can be afforded by British banks.

John Denham, an international debt expert, wrote in this month's issue of the magazine published by the World Development Movement: Broadly speaking, they"— the banks— could waive a third of developing country debt without incurring further losses. Meanwhile, as was said by my hon. Friend the Member for Newcastle upon Tyne, East, the burden of foreign debt servicing remains. Argentina alone owes the Midland bank £2.9 billion, Lloyds bank £2.3 billion and Barclays bank £1.2 billion. Despite the Brady proposals, commercial banks have been reluctant to make the necessary concessions to debtor countries, although those banks have been in their healthiest state for years. Even in America, there has been talk of resorting to legislation to force the banks to be more forthcoming.

Large-scale debt cannot be addressed by suggesting further indebtedness. It requires structural solutions to increase resource flows from the north to the south and to improve the productive capacity of Third world economies. Our new clause provides an incentive to encourage banks to write off their debts to developing countries and contribute positively to enabling Third world countries to move towards sustained growth. The debt crisis cannot be contained by indefinite tinkering and rescheduling of old debts.

The Brady proposals do not go far enough. If the new clause is accepted, it will enable the Government, at the meeting later this week of the economic summit in Paris, to present a practical example of how countries in the rich world can restore basic justice in relationships between the north and the south.

7.30 pm
Mr. Tim Smith

I share the concern expressed by Labour Members about the debt burden of Third world countries. There is no doubt that the cost of servicing the debt has become so great that it is often crippling and subsumes a large proportion of the revenue of less developed countries. We should examine every way of securing a situation in which they are relieved of a large part of the cost of servicing their debt.

I welcome the initiative taken by my right hon. Friend the Chancellor of the Exchequer to reduce the debt burden of the poorest countries in sub-Saharan Africa. I also welcome the initiative taken by Treasury Secretary Brady —to which the hon. Member for Leeds, West (Mr. Battle) referred, even though he felt that it did not go far enough. Such initiatives are welcome and can help. I understand that we are close to reaching an arrangement to help Mexico, which is one country with large debt burdens hanging over it.

The hon. Member for Newcastle upon Tyne, East (Mr. Brown) cited the figure for the four clearing banks in 1987. Not only the clearing banks, but the Export Credits Guarantee Department had to write off a great deal of debt, which will in due course fall directly on the taxpayer. I am not clear precisely how the new clause will help the less developed countries and I am concerned about the underlying taxation principles. I see no justification for treating one category of debtor differently from another.

For tax purposes, we say that a person can have tax relief if he has a bad debt on his hands and there is no prospect or considerable doubt about the prospect of recovering the debt. It is not sufficient to make a general provision—one must specify the debtors for which one is making the provision. Tax relief is not automatic even then, because the Inland Revenue will consider carefully the provision made. We can take it that the Revenue has done that in the case of the clearing banks, although my hon. Friend the Economic Secretary cannot tell us about the specific position of individual banks because that would breach taxpayer confidentiality. My point is that it does not necessarily follow that, just because a bank makes provision in its accounts, it necessarily gets tax relief.

I understand, and have considerable sympathy with, the arguments advanced by the hon. Member for Newcastle upon Tyne, East. Why would it be right to make a distinction between debtors who happen to be less developed countries and all other types of debtor to banks or any other trading concern? What practical help would the new clause give less developed countries?

Mr. Nicholas Brown

I tried to deal with that point towards the end of my speech. I have said that this is a specific measure designed to deal with a specific and unique problem. The hon. Gentleman has asked what help the new clause will give those nations. The answer is that it will free them of the obligation to pay continuing interest on their debt or to repay the capital sum. The debt will be written off, or forgiven. It will no longer exist.

Mr. Smith

I see. It is a hypothetical position and there is not much point in debating whether it will happen. The assumption is that the banks will adopt the proposals in the new clause, take the tax relief and permanently write off the debt. Obviously, the hon. Gentleman thinks that that will happen if we accept the new clause and that that is the right thing to do.

Although I have considerable sympathy with much of what has been said, I have doubts about making distinctions between categories of debtors. Unlike the hon. Member for Leeds, West, I believe that anyone who has borrowed money—I do not care who it is—has a moral obligation to repay it. Perhaps it was wrong to lend those countries the money in the first place. If the banks felt that there was no prospect of the money ever being repaid, perhaps that was not the right commercial judgment to make, but I should not like the new clause to give the signal that there was no obligation to repay the debt, because that would not be the right signal to give. Although I have considerable sympathy with the motive behind the new clause, I have doubts about whether it would be wise to adopt such a distinction in practice.

Mr. Beith

There are specific reasons why it is a reasonable and wise proposition that there should be some remission of debt to Third world countries. Much of that reasoning lies in the prospects for any stable economic development of those countries, which are wholly destroyed by the interest rate burden that they are now carrying, and the prospect of a future world financial and trading system in which they can readily participate. It is unrealistic to treat developing countries' debts as though they were the same as the banks' other bad commercial debts at home. We are talking not about individual companies that may have gone or may go bankrupt but about countries and peoples, many of them in grinding poverty.

What is most alarming about the Third world debt position is that, from the narrow point of view of the western nations, the problem is much less serious than it was, but from the perspective of those living in the countries with the heaviest debt, the problem is as serious as it ever was. The fact that the danger to us seems to be receding suggests that it will be addressed with decreasing urgency. So long as it was seen to be a serious problem for the Western nations and their banks, it was regarded as something about which nations had to get together and worry. I am alarmed that the more it seems that the West no longer has a problem, the less the issue will be addressed when it is still so alarming for those who live in Third world countries.

The Chancellor said: The danger of a systemic collapse of the banking system has been averted". That must be so. There is plenty of evidence to show that the exposure of the banks has been dramatically reduced. Net financial flows to the Third world have fallen from $67 billion in 1982 to $16 billion in 1988. The commercial banks have been substantial beneficiaries of that collapse. Although their cash exposure has increased, their exposure as a percentage of equity has been halved over the same period. We have negative financial flows to the Third world. We have an outflow of funds that is financing the economic development of the western world at the expense of those countries most desperately in need of sustainable development.

The new clause seeks to deal with the position of the commercial banks, which in the United States and in Britain have already benefited substantially from official sources. Most new lending between 1983 and 1987 was from official sources such as the development banks—for example, the International Monetary Fund—and during that time about one third of the interest payments made by highly indebted countries was covered by new lending. There was an S18 billion public sector subsidy to the banking sector because the new lend was actually paying for the interest on the old loans—certainly 15 per cent. of the interest on loans held by commercial banks.

That new lend from development banks and other official sources has reduced the banks' share of the indebted countries' foreign debt from 67 per cent. to 56 per cent. The percentage involvement by commercial banks in Third world debt has been reduced by substantial public sector intervention. In most creditor countries, the banks have received some sort of tax relief on their provisions against Third world debt, even though the loans have not been cancelled or written down. In some cases, the loans continue to be serviced in full. The commercial banks are emerging reasonably comfortably from what at one time appeared to be a dangerous position. Following considerable public sector aid, the world banking system appears to be capable of surviving all the debt problems. However, the Third world nations and their peoples are still suffering from the enormous burden of interest payments and they have no prospect of debt repayment.

We should be seeking ways to involve commercial banks, through the public sector, in various forms of debt remission, related—as some inevitably will be—to structural adjustment and changes in policies, as has happened as a result of the IMF's activities. It must be part of the Government's programme of measures to involve the commercial banks more closely in debt remission.

The new clause is a genuine attempt to achieve that aim. If the Government can suggest a better way, we should be interested to hear about it. What we want to hear today is that the Government are prepared to get together with commercial banks to seek the remission and cancellation of a significant part of the debt burden.

Mr. Quentin Davies

I am rather concerned about the Opposition's evident intellectual muddle in proposing the new clause to the House. It might be useful if I threw a little light on at least three of the Opposition's major confusions. The first confusion forcibly to strike anyone reading the new clause is that of terminology. It suggests that debts for which a deduction is claimed are formally written off, waived or otherwise extinguished such that they are no longer repayable by the debtor. The implication is that all three options are either progressions of the same thing or more or less equivalent, yet in reality they are quite different concepts. To write off or write down a loan is to decide, in all prudence, that it is sensible to make a provision because it is likely that all or part of the loan will not be recovered, at least on the terms on which it was originally lent. As my hon. Friend the Member for Beaconsfield (Mr. Smith) said, it has been this country's sensible system, where a bank or any other business makes a specific provision that can be justified as the sort of prudential provision that a business should make, that the Inland Revenue accepts that as a reduction in taxable profit.

That is different from waiving or extinguishing a loan. Waiving means that a claim on the borrower is forgone by the lender. The lender could easily decide to write down a loan and provide against it without that making the slightest difference to the force of his claim on the borrower. That is a vital distinction which is blurred by the clause. Indeed the way that the clause is drafted implies that the draftsman was not even alive to that essential distinction.

Even more serious than the confusion of terminology is the Opposition's moral confusion. The best example of that was shown by the hon. Member for Leeds, West (Mr. Battle), who objected to the phrase "forgiving debts" on the ground that the implication was that the borrower had incurred some moral obligation when he first took out the debt. The hon. Gentleman thought it iniquitous that a borrower should have any moral obligation.

7.45 pm
Mr. Battle

I wish to correct the hon. Gentleman. I objected to the word "forgiveness" because it implied that the moral obligation was only on one side and that no reference was made to the fact that the lender could also have moral obligations, which might include the rate at which he lends money.

Mr. Davies

Any lender has the considerable obligation of prudence. Where the lender is a bank, the shareholders and depositors of which are the general public, the directors have an important fiduciary responsibility. I do not mind conceding that a number of major banks made serious professional errors in the 1970s in the lending policies that they pursued in the Third world and elsewhere. None of that in any way reduces, and must not be taken to do so, the moral obligation of any borrower— whether a country, a corporation or an individual—that is assumed when the debt is undertaken, a loan agreement signed or a bond issued. It is morally dangerous, as well as potentially carrying the most unfortunate and damaging practical consequences, if there is for one moment any doubt about that fundamental principle.

Mr. Dennis Turner (Wolverhampton, South-East)

Does the hon. Gentleman accept that the many millions of people who would be affected by the new clause cannot read confused terminology? They are interested in the way in which they have to lead their lives, and they are living in great poverty and deprivation. The debate is about human beings and about how Britain, as a rich country, can help the poor, struggling countries. What are the hon. Gentleman's suggestions about ways in which we could respond positively to the problems that we both know exist in such countries?

Mr. Davies

Within the constraints of order, I shall deal with the hon. Gentleman's points later in my speech.

If we are at all serious about this matter, the House should accept that it is absolutely fundamental that anyone who takes on a debt incurs a moral obligation to repay it and to conduct his affairs in a way that, as far as is possible, puts him in a position to repay that debt. If we forget that principle we not only do a disservice to lenders, but do a terrible disservice to borrowers because we undermine one of the vital mechanisms by which resources are cycled from savers to borrowers or from surplus countries to deficit countries. The consequences for humanity of undermining or seriously damaging that mechanism, which would happen if we accepted the Opposition's argument, are incalculable.

That is not the end of my story because a third and important confusion has been displayed today by the Opposition, and that is an economic confusion. It is a confusion in properly identifying the different economic interests.

The burden of the argument advanced by the hon. Member for Newcastle upon Tyne, East (Mr. Brown) in support of new clause 7 was that as the taxpayer incurs a cost when banks can reduce their taxable profits by virtue of provisions against bad debts that are accepted by the Inland Revenue, the taxpayer should have some countervailing benefit which would be that the debts would be forgiven—to use the phrase which the hon. Member for Leeds, West dislikes. In other words, that implies that there is some conflict of interest between banks and the taxpayer in how those debts are to be treated if they are written down, and whether the claims on the borrowers are waived.

The Labour party's position is that there is such a conflict of interest. I put it to the House seriously that there is no such conflict of interest, because the taxpayer shares exactly the same interest as the depositor or shareholder of a bank in maintaining the claim. If that claim can ultimately be made good and the debt is ultimately serviced and repaid, not only can the bank write back that amount to profits, but those profits will be taxable and the taxpayer will gain his full due proportionate benefit in due course. There is that fundamental error in the Labour party's position and it is important that the debate should not proceed without its having been identified.

I am not insensible of the need to think carefully about how we can better structure the capital flows in the world, including the capital flows between the OECD area and the Third world. There is no question but that in contrast with previous periods there was a greater distortion in those capital flows in the 1970s which led to many of the problems with which we live today.

The period before 1914 was characterised by substantial net capital outflows from the developed countries to what we would now call the Third world—Latin America, Asia, the Russian empire and so on. In contrast to that period there was an extraordinary phenomenon in the 1970s when almost the total sum of capital flows went through the banking market and virtually none went in the form of private debt through the bond market or through the equity market in the form of direct industrial investment or portfolio flows. That was a distorted flow and it means that the Third world has had a distorted portfolio of indebtedness and the OECD countries have a distorted portfolio of Third world assets which is in the interests of neither party.

What does one do about that.? One creates conditions in which it is possible for deficit countries to exploit other forms of capital, particularly to attract private debt to the bond markets and equity flows in the form of direct investment or portfolio flows. A small number of Third world countries have achieved that. Malaysia and South Korea are pertinent examples. They have not only thrived and prospered—they have been models of economic success—but they have not had the problems to which we are referring today and have not had to write off any of their bank debt.

The remedy is there. It is important that we make it clear to Third world countries that the solution largely lies in their hands and that if they create the conditions in which those flows are attracted a great deal of the problem will automatically be solved. But there is one thing that we shall not do. We shall not do a good day's work for the Third world, for investors in Britain or for the future prosperity of the globe if we live in the Alice-in-Wonderland world of financial illusions and make-believe which the Labour party currently appears to inhabit.

Mr. Max Madden (Bradford, West)

On a point of order, Madam Deputy Speaker. The hon. Member for Stamford and Spalding (Mr. Davies) made a number of references during his remarks to conflicts of interest and other remarks that were relevant to banking. I note from the Register of Members' Interests that the hon. Gentleman is a consultant to Morgan Grenfell, merchant bankers. Would you confirm, Madam Deputy Speaker, that the entry in the register in no way lifts the obligation on hon. Members to declare a relevant interest during the course of their remarks? I hope that in future the hon. Gentleman will make clear his direct interest when contributing to debates such as this.

Madam Deputy Speaker (Madam Betty Boothroyd)

I confirm that it is for an hon. Member to declare his interests. I am sure that if the hon. Member for Stamford and Spalding (Mr. Davies) has such an interest to declare he will do so on a future occasion.

Mr. Quentin Davies

I have declared an interest on many occasions, including in Committee. The fact that I was a director of Morgan Grenfell until fairly recently, and am now a consultant to the firm, was referred to earlier this afternoon. Therefore, it seemed otiose to refer to it again lest it was interpreted as a plug for a particular financial institution.

Madam Deputy Speaker

I am sure that the House is much obliged.

Mr. Tam Dalyell (Linlithgow)

It often happens in the House that hon. Members preface their speech by saying that they hope that they will be excused if they do not follow the previous speaker. I should like quietly to follow the hon. Member for Stamford and Spalding (Mr. Davies). I listened intently to his speech and I shall send a copy of it in Hansard to Morgan Grenfell to ask whether it represents its point of view. It is a matter of some seriousness if some of the great merchant banking houses in Britain share that view. I know merchant bankers who are a great deal wiser than the hon. Gentleman and who understand the desperate situation in South America that we are often talking about.

My hon. Friend the Member for Leeds, West (Mr. Battle) raised the question of morality and he received a legitimate, sensible and calculated answer from the hon. Member for Beaconsfield (Mr. Smith). It happens that I believe in a degree of fiduciary responsibility, because otherwise the world does not work. But is not there an obligation on the part of lenders? When some institutions in the West were awash with money much of the lending to Brazil was irresponsible.

I had the good fortune to go to Altimera, at my own expense, with Friends of the Earth, and then to talk to people in the Brazilian Government. Like the hon. Member for Beaconsfield. I speak with some knowledge. Is it responsible for the West to lend huge sums of money for nuclear power stations? I happen to be unashamedly pro-nuclear, but it is not acceptable for us to lend enormous sums for power stations that do not work. The three power stations between San Paolo and Rio, one of them made by Westinghouse and the other two basically by Siemens, are not working properly. That is no way to treat Brazil with its problems.

If we do nothing, the result will be simple—the rain forests will go. It is no good talking about keeping the rain forest if we adopt the general attitude of the hon. Member for Stamford and Spalding that we cannot have our cake and eat it.

We must be clear about the view of Morgan Grenfell. I want to ask the Economic Secretary a direct question. It so happens that when I was in Brasilia a lunch was given by the excellent British ambassador, Michael Newington, physicist and many other things, for Kit McMahon, an old friend of mine from the Bank of England in the 1970s when he used to brief me for the budget committee of the European Parliament. Let me say openly in the House that I think that he has been greatly attacked, as has Jeremy Morse, for being "callous" about the rain forest. I am sure that, in his personal capacity, Kit McMahon is as concerned about the rain forest as I or any other Opposition Member—as is Jeremy Morse. I criticise neither the chairman of Lloyds bank nor the chairman of the Midland bank.

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I should, however, like to ask the Treasury a question. On his return from Brasilia, Kit McMahon talked at some length—if not to Ministers, at least to officials—about practical ways of alleviating the debt problem. He had been accompanied by senior debt advisers from the Midland bank. My first question is, what has been the result of the McMahon mission? Is there anything that the House can be told?

As a result of the initiatives of the hon. Members for Wycombe (Mr. Whitney) and for Gravesham (Mr. Arnold) and other officers of the Latin American parliamentary group, I met over lunch—and subsequently —the Ecuador ambassador, Senor de Correa. My hon. Friend the Member for Leeds, West gave a striking example of the results of the many earthquakes in the area: after one of them oil pipelines were cut, and it became difficult to repay the debt.

This is my second question: have the Government any contingency plans for what might be called "hiccups", when for one reason or another it becomes difficult to pay debt in the short term? It is the old moratorium problem. Unless we do something, there will be a simple consequence: the Japanese will give Ecuador money for fishing round the Galapagos Islands, with terrible consequences to the ecology of that unique archipelago.

Incidentally, we should understand that the huge Green vote in the European elections did not necessarily represent an endorsement of every aspect of Green policy. It was about something else; it registered a general unease about the problems described so excellently in "The Fragile Earth" and other programmes on all four main television channels.

My third question is this: is the Minister able to report on the success of the mission to Brasilia undertaken by the Minister for Overseas Development—the Patten mission? As one who has secured Adjournment and Consolidated Fund debates on rain forest problems, I am led to believe by what I read and hear that the Minister did extremely well in Brasilia. I happen to share the view of a leader in The Times that the way to go about such matters is through quiet diplomacy. If a British Minister has done well, I feel that it is up to Opposition Members to say so. That is my view until such time as the Minister can report back in detail.

I should, however, like to know under what Treasury guidelines the right hon. Gentleman reached last week's agreement. I say that as one who was invited by the Foreign Office Minister—as were a number of others—to meet the British ambassadors to South America when they were in London last month. They were extremely cognisant of the problem.

That brings me to my fourth question, which concerns the Paris summit. What will be the Treasury's view of the general concept of debt-for-nature swaps? The Times leader of 6 July, quoted so approvingly by the Prime Minister at today's Question Time, states: Brazil's own newly-minted environmental scheme for the Amazon, launched last April under the nationalistic slogan `Our Nature', has been widely criticised as a public relations exercise. It includes new forest reserves and nature parks, forest guards, and a much-needed new soil map, and has temporarily suspended subsidies for logging and ranching. Land reforms are proposed to encourage small farmers to settle in the more fertile scrublands of central and west Brazil. But the funds to match the plan are lacking; and it was accompanied by cuts in the budgets of the two major Amazon research institutes. Brazil's difficulty in servicing its foreign debt, underlined again this week by its formal notification of delays in payments to its creditors, ought to make possible some form of debt-for-environment deal. What is the Treasury's view?

I know that there are constraints on time, and this is my last question. Treasury Ministers, along with many other people, will know about the long articles on the Brazilian rain forest that have appeared in The Sunday Times. I—like, I suspect, a number of my colleagues—wrote a detailed letter to Sir Peter Walters. BP has always been extremely helpful to me; I represent one of its big units in Grangemouth, where many people work. I should like to ask the Treasury about an aspect of the reply to my letter. I think that this is in order, as it directly concerns the World Bank.

Madam Deputy Speaker

Order. It is indirectly related, but as I am sure that the hon. Gentleman is about to conclude his remarks, I shall allow him to do so.

Mr. Dalyell

It is difficult to scrutinise the actions of the British director of the World Bank in the House although I do not criticise him personally. Presumably he acts under Great George street instructions.

Item 2 of Sir Peter Walters' reply states: 'The mining company says the total directly cleared for open cast mining sites is 13,500 acres', whereas, `an expert employed by the World Bank and surveys by the Brazilian forestry service estimate that as much as 250,000 acres has been adversely affected'. BP replied: The area of the Jamari National Forest is 215,000 hectares (531,000 acres) in which Jacunda's mining rights cover 59,500 hectares (147,000 acres) about 28 per cent. of the Forest. The area of land cleared for operations, including mining, access roads, housing and caring for the workforce and their families, is 4,500 acres, less than 1 per cent. of the Forest; depending on the season, a further 2,500 to 7,000 hectares are flooded areas to provide water for the operation. These figures have been confirmed by the forestry service, IBAMA. As we have so far been unable to contact Marc Dourojeannie, the World Bank authority cited by the Sunday Times, we cannot comment on the basis of his calculations, or his statement on the area being 'affected', but if they are intended to apply only to the Jacunda project they are simply incompatible with the scale of this operation. As the Treasury is the British Ministry responsible for World Bank actions, I am entitled to ask for a considered reply from the Treasury—although obviously I cannot expect an answer tonight—explaining what instructions it has given our own executive director of the World Bank about the controversy between Sir Peter Walters and BP on the one hand The Sunday Times on the other.

Mr. Lilley

Hon. Members on both sides of the House have expressed concern about the burden of debt, including servicing debt, placed on many underdeveloped countries. The question we must consider is whether the new clause provides an appropriate way of dealing with the problem. As my hon. Friend the Member for Beaconsfield (Mr. Smith) correctly and lucidly spelt out, the existing law already relieves all bad debts from taxation, whether they are owed to sovereign Governments or commercial entities, and no distinction between the two is made.

In practice, new clause 7, which grants relief when a debt to a sovereign third world country is cancelled, would add nothing to the existing law. It would be neither a relief nor, as it stands, a restriction of a relief. It would simply reaffirm part of a relief that is inherent in the law as it stands.

The debate is circling around new clause 8 which, for technical reasons, has not been called. New clause 8 would limit tax relief in respect of other bank loans to Third world countries which have not been cancelled. The question is whether the new clause would help. It is obviously intended to encourage the cancellation of Third world debts to banks, but it would discourage new lending by banks to Third world countries. Banks would be unlikely to enter into new loans with Third world countries if they knew that, in the event of failure to repay, tax relief would not be made available to them, as it is when they make provision for expected repayments in their dealings with sovereign countries or commercial companies. We should be creating a disincentive to banks to engage in new lending to underdeveloped countries. That would be good. A resumption of new lending by banks to underdeveloped countries is vital, where appropriate, and where confidence exists. That is part of the reason for the so-called Brady plan and the encouragement of moves along those lines by the Group of Seven. We should like the burden of servicing existing debt to be alleviated and new lending to be resumed by commercial banks to large debtors. I cannot therefore recommend either new clause 7 or new clause 8, although I recognise the entirely benevolent intentions of the Opposition in tabling them.

The hon. Member for Berwick-upon-Tweed (Mr. Beith) said that the effect of Government lending and of the lending by international financial institutions had enabled the underdeveloped countries to repay their interest on commercial debt to commercial banks and that it had amounted, therefore, to a subsidy to the banks. He is saying, in effect, that Government aid goes not to underdeveloped countries but by a circuitous route to banks. It was an interesting attempt to undermine the case for Government aid to underdeveloped countries. According to that analysis, none of it reaches underdeveloped countries.

My hon. Friend the Member for Stamford and Spalding (Mr. Davies) rightly pointed out that banks have a fiduciary responsibility in the running of their affairs both to their shareholders—the people . who ultimately finance the provisions that are made against bad debts —and to their depositors and that it is right that they should behave responsibly and recognise their duties. We welcome the fact that the worst phase of the debt crisis has passed. It poses much less of a threat to the world financial system than it did because banks have built up provisions, at the expense of their shareholders, to enable them to finance the bad debts on their books. We do not believe that it is wrong that in meeting the tax law requirements they should enjoy tax relief on those provisions against bad debts. It is accepted that people should not pay tax on profits that they have not made. If we were to deprive them of tax relief on the provisions that they have made against genuine bad debts, we should be taxing them on profits that they have not made. That could not be in the interests of the banking system, depositors and the many shareholders who ultimately are the owners of the banks.

Ms. Diane Abbott (Hackney, North and Stoke Newington)

I am grateful to the Minister for giving way because I was not here during the earlier part of the discussion on the new clause. The Minister says that the worst part of the debt crisis is over. It may be over for the European banks, but for Third world countries, which are under the hammer of the International Monetary Fund, the worst part of the debt crisis is yet to come. The debt crisis is not just about making life easy for western European banks; it is also about social and political conditions in Third world countries. Does the Minister agree that banks which made unwise loans to corrupt and illiberal regimes should not get a tax rake off from the taxpayer?

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Mr. Lilley

I hope that the hon. Lady is satisfied with making that rather pedantic point. I said that the worst threat to the international financial system is over. I accept that the real concern of the House, as I began by saying —perhaps the hon. Lady was not in the Chamber even then—relates to the poverty burden that has been placed on underdeveloped countries. I gave up five years of my life to working on aid programmes in underdeveloped countries, so I know considerably more about it than perhaps the hon. Lady does. Therefore, attempts to prove that she is holier than the rest of us carry little weight.

Our contribution to the well-being of indebted countries takes a number of forms. My hon. Friend the Member for Beaconsfield paid tribute to the fact that my right hon. Friend the Chancellor of the Exchequer took a leading part in what became known as the Toronto terms agreement, under which sub-Saharan African countries —those most heavily indebted and whose debts are primarily to Governments—have had their loans converted into gifts by the creditor companies, while the servicing costs of non-aid loans have been reduced. That has been a major achievement of British diplomacy. A number of countries are already benefiting from that international agreement.

It is vital that we should also encourage the renewed flow of private capital from developed countries to underdeveloped countries—not least equity capital. Since we abolished exchange controls, the flow of private capital from this country to developing countries has exceeded that of all the other member states of the European Community put together and amounts to many billions of pounds. [Interruption.] When equity capital is invested by developed countries in developing countries, it increases considerably the wealth of those countries—[Interruption.] The hon. Member for Hackney, North and Stoke Newington (Ms. Abbott), who knows absolutely nothing about trade, chooses to demur.

Ms. Abbott


Mr. Lilley

The second way in which this country can help developing countries is by opening up the prospects for free trade. The hon. Member for Newcastle upon Tyne, East (Mr. Brown) said that we give aid with one hand and take it back via trade. Nothing could be further from the truth. By opening the markets of developed countries to the products of developing countries we are benefiting them. [Interruption.] The whole House must surely welcome that. [Interruption.] Unless the hon. Member for Hackney, North and Stoke Newington has anything novel to say on the subject, I shall not give way to her.

We also want to encourage, by means of aid provision and any technical assistance that we can give to developing countries, the development of their own economies so that they will be able to prosper on their own without having to rely on aid. [Interruption.] Does the hon. Lady wish to intervene or just to continue to chatter?

Ms. Abbott

I am grateful to the Minister for giving way because, as he says, I was not here during the early part of the debate. However, is he aware that 3 per cent. of the gross domestic product of developing countries flows not from us to them but from them to us?

Mr. Lilley

If the hon. Lady had been here during the early part of the debate she would have known that that point had been agreed by all the parties. She has not contributed to the debate by intervening and making that point now.

Having taken the initiative in the case of the sub-Saharan African countries—the most impoverished and the most indebted countries whose debt is primarily to Governments—our concern now relates mostly to middle income debtors. Their debt is, by and large, with the commercial banks. It is therefore up to them, in consultation with the commercial banks, to reach arrangements to their mutual benefit to enable those countries satisfactorily to service debts, where appropriate, for the banks to recognise that debts may have to be written off, to reschedule or reduce the burden of those debts and, above all, to try to open the way to renewal of lending. That is the way forward, but it cannot be achieved by the Government manipulating the tax system, and for that reason I urge the House not to accept the new clause.

The hon. Member for Linlithgow (Mr. Dalyell) asked a lengthy list of questions. Obviously I shall have to write to him, but I hope that he will clarify his second question asking me whether I am aware of the hiccup problem and the fact that it could well lead to Japanese fishermen going round the Galapagos Islands. I shall need considerable clarification before I can answer that question, but I shall do my best.

I urge the Opposition to withdraw new clause 7 which fails to achieve what they sought, and would simply create a disincentive to new lending by banks to underdeveloped countries, which the whole House wishes to continue.

Mr. Nicholas Brown

The Economic Secretary's style in the House seems to be deteriorating. He seems to be modelling himself on the Chief Secretary to the Treasury, and I cannot commend that. As I understand his summation of the debate, the decision to borrow money carries great moral obligations which can never be redressed, yet the decision to lend does not. We do not accept that proposition. Nevertheless, the Economic Secretary was right in discerning that our heart was really in clause 8 which has not been called. Therefore, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

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