§ 2.52 p.m.
§ LORD BESWICK
My Lords, I beg to move that this Bill be now read a second time. The Bill is designed to reform the accounting arrangements for Government borrowing and lending. It is intended to 700 make these arrangements more intelligible, and more in line with modern methods of assessing the Government's role in total economic activity. The reform means that many obsolete relics of 19th century accounting will be abolished. This is all the Bill does; it proposes a change in the method of accounting for Government payments and receipts—nothing more. Parliamentary control over the way the Government raise their money, and the way they spend money is not reduced in any way. I understand there have been misconceptions about this when the Bill was examined in another place, and I propose to try to clarify these particular matters.
Inevitably, given the nature of the matters with which it deals, the Bill looks somewhat complex. Government accounting matters have always been complex to most of us. In this Bill the mysteries have needed to be spelt out in language appropriate for legislation. But the basic principles on which the Bill has been constructed are, I believe, clear and precise. In consequence, the Bill should help to make these very important issues more easily understood, both by experts in this field as well as by the general public.
Broadly, the Bill takes out of the Consolidated Fund the Government's lending and borrowing transactions so that accounting for these transactions will fall on a new National Loans Fund. Revenue and supply expenditure will remain with the Consolidated Fund. This is it in a nutshell. It is not a division between a current and capital account. Government supply expenditure includes capital expenditure as well as lending on soft terms—as for example overseas aid. But if supply expenditure is taken as all spending out of Votes, and revenue is taken as receipts from direct and indirect taxation, this broadly covers the transactions appropriate for the Consolidated Fund under the proposed new system.
The National Loans Fund will lend to the nationalised industries, local authorities and others, provided the terms of the loan are "hard", and will match this lending (again broadly) by the use of any surplus that may arise on the Consolidated Fund account and by borrowing. As lending undertaken by the National Loans Fund must be "hard", the Bill provides that the rate of interest 701 charged on loans issued from the N.L.F. must be sufficient to cover the cost to the Government of raising similar amounts on comparable terms in the market. The Bill charges all existing national debt on the National Loans Fund, but with recourse to the Consolidated Fund. This means that any shortfall between interest received by the National Loans Fund and the interest it pays out will be met from the Consolidated Fund.
Now for these apparent misconceptions. There is especial interest this year about the size of the Government's borrowing requirement in the coming financial year and to some extent this interest stems from the International Monetry Fund Letter of Intent. In this Letter the previous Chancellor of the Exchequer agreed that a borrowing requirement of not more than £1,000 million might be regarded as appropriate for 1968–69. One argument heard is that Parliament should have the right to control the size of the borrowing requirement, and attempts were made elsewhere to amend the Bill so as to provide for this control.
The misconception lies in the implication that the borrowing requirement has a separate identity of its own. This is not so. The borrowing requirement is the result of the difference between Government receipts from all sources (other than from borrowing) and Government expenditure and lending. As your Lordships I hope will agree, Government expenditure and lending is subject to close Parliamentary control, as of course are the means by which the Government raises its revenue. No lending, for example, is possible without appropriate legislative authority. This is not to say that the borrowing requirement has no significance. Of course it has. But the requirement cannot be regarded as independent of the two large aggregates—revenue on the one hand and expenditure on the other. The requirement therefore follows as the result of Parliamentary decisions on the other two factors.
I think I should say something, too, about the financing of the borrowing requirement. Amendments have been discussed designed to place constraints on the Government on the way the requirement is financed. To a large extent we 702 have from the Government point of view a great deal of sympathy with the objectives of these Amendments. Broadly they are concerned to ensure that the requirement is financed by attracting genuine savings from the public, and not by inflationary financing like printing money or borrowing on Treasury Bills from the banking system. One proposal is that the Government use funds generated by its overseas borrowing to finance its own expenditure. I cannot go into these complex matters in any detail; but in passing it is worth saying that a good many of these matters were discussed in a most interesting fashion and I should have thought that a good deal of information was given, in the debate initiated by the noble Lord, Lord Nugent, on Nationalised Industries and Economic Policy. But to-day, there are, I think, possibly just a few points I might deal with.
First, the Government fully accept the need to finance as much of their borrowing as possible by attracting the genuine savings of the public. A prime objective of policy has been and will continue to be to sell as much gilt-edged as possible and to attract maximum national savings all from the non-banking private sector. But this policy cannot be pursued regardless of other considerations equally important for the economy, like the interest rates and the need to avoid damaging confidence in gilt-edged in the long term.
Secondly there are suggestions that the Government is too easily able to meet its borrowing requirement by printing money, and by this I gather the critics had in mind the expansion of the fiduciary issue over the last few years. The suggestion here is that the continued expansion of notes was the cause of inflation. In fact changes in the public holdings of notes may be a symptom of inflation, but they are not a cause. This is because they represent only one-fifth of the total money supply. They simply reflect the public's requirement for ready cash to keep in their pockets and tills. The Government's function is confined to ensuring that sufficient notes are available to meet this need. Rising incomes, and therefore rising expenditure on goods and services, mean that the public need for currency, for notes and coin also goes up. What is important in this context is the remaining four-fifths of money 703 supply which is held in bank deposits. Changes in bank deposits can have significant implications for the economy. This is why the Government tries to maximise its debt sales to the non-banking public, thus helping to keep down rises in bank deposits.
Thirdly, there is the charge that the Government is able to finance itself through borrowing from overseas sources, like the I.M.F. or overseas central banks or Governments. The short answer is that the Government does not borrow sterling—it borrows foreign exchange. The purpose, of course, is to support the reserves. It is true that if the borrowed foreign exchange is used to cover a balance of payments deficit the Exchange Equalisation Account acquires sterling in exchange and the sterling is lent to the Government for its internal financing. Perhaps this is what the critics have in mind. But there are two points to be said about this. First, whatever sterling the Government may acquire through E.E.A. operations, policy continues to be to sell as much debt as possible to the non-banking sector. Secondly, receipts of sterling through the E.E.A. help to reduce the Government's need for bank finance. Indeed, they may help the Government to repay debt held by the banks. Hence the effect tends to be deflationary rather than inflationary. I hope, therefore, that the Bill will be recognised for what it is: a reform of the Government's accounts—no more and no less—designed to present the Government's financial transactions more clearly and in a more meaningful way.
§ Moved, That the Bill be now read 2a.—(Lord Beswick.)
§ 3.2 p.m.
§ THE EARL OF DUNDEE
My Lords, this is a Money Bill of a kind which your Lordships do not usually wish to discuss at any length. On this side of the House we are content to accept it. The Bill is concerned purely with accountancy, and I have no comment to make on the Bill itself. I would congratulate the noble Lord, Lord Beswick, on the great trouble which he has taken to explain its contents and to remove any possible misapprehensions which your Lordships might otherwise have had about it. I hope that your Lordships are now suitably enlightened. For my own part, I am afraid 704 that the Bill itself and the noble Lord's explanation of it remind me a good deal of the Athanasian creed: the Consolidated Fund is incomprehensible; the National Loans Fund incomprehensible; the Local Loans Fund incomprehensible; and yet there are not three incomprehensibles, but one incomprehensible.
The noble Lord has spoken in his explanatory remarks about our borrowing powers for the next year, which I have no doubt will also be examined with interest by the gentlemen from the International Monetary Fund who are now here, or who are soon to be here, to give assistance and advice to the Chancellor of the Exchequer. I hope that my noble friend Lord Aberdare in a moment will say a word or two on the Bill in connection with A Programme for National Recovery, of which he is one of the compilers. In its first issue that Paper showed clearly how our borrowing over the last six years for which figures are available has exceeded our Budget surpluses, the long-term loans having amounted to £5,653 million, Budget surpluses to £3,813 million, making a total deficit of £1,840 million which has all been provided for by increasing the domestic supply of credit money, thereby effecting a considerable inflation because the increase of credit money has been at something like twice the rate of our gross national product. I think that this is one reason, perhaps the main reason, why we have been unable to stop inflation, why the rates on borrowing have gone to such a high figure, and why we have got this preposterous bank rate of 8 per cent. which is such a terrible handicap to the smaller industrialists and producers in the country.
Nothing in this Bill itself can do anything to remedy this state of affairs, but the Bill can, and I hope will, enable those of us whose duty it is to examine our Public Accounts to see a little more clearly how we are spending more than we earn and borrowing more than we produce at rates of interest which are a crippling disincentive to sound investment.
§ 3.5 p.m.
§ LORD ABERDARE
My Lords. I intervene with some hesitation in an economic debate somewhat out of my own field. The only other occasion on which I was dragged to my feet was by 705 the iniquities of the selective employment tax. I do so on this occasion, as my noble friend Lord Dundee has rightly guessed, because I was a signatory of the document entitled A Programme for National Recovery which was published last July and was signed by a number of eminent economists, writers and industrialists, all far more eminent than I; and I rely very largely on their expert advice in drawing your Lordships' attention to this document. It was extremely well received and excited a great deal of interest, and, even more important, it excited sufficient financial support to allow us to pursue further studies. In fact, last month the first research paper was published and it is because of the relevance of this research paper to this Bill that I venture to draw attention to it.
My noble friend Lord Dundee has mentioned some of the conclusions. The research covered the six years 1961 to 1966 inclusive, and some interesting figures emerged. As my noble friend Lord Dundee said, on income and expenditure account there was a surplus of £3,813 million, which was a very satisfactory result, but over the same period long-term loans amounted to £5,653 million. This converted the surplus into a deficit of £1,840 million. Incidentally, these long-term loans were 90 per cent. loans to local authorities and loans to public corporations. This deficit is what is described as the Chancellor's borrowing requirement. If it had been met by genuine borrowing—that is, by the sale of marketable Government securities or a net inflow of National Savings and utimately by recourse to the Bank of ngland—then there would have been no currency inflation. But as it was, as the figures in this research paper show, £756 million of the deficit—that is, 41 per cent. of it—was met by an increase in the issue of notes and coins.
I know that Lord Beswick has pointed out that this was not so, but if he is correct I should like to know how the figure of £1,840 million was made up, because on the figures I have in this paper that was the figure shown. The final effect was that total money supply over the six years increased at an annual rate of 4.7 per cent. while the gross domestic produce at constant prices rose 706 by only 2.9 per cent. I should have thought that that was the simple reason why inflation occurred. But, in reality—again taking the same figures—the situation was even worse, because of this total deficit of £1,840 million only £1 million net was found by d Dr-nestle borrowing and over £1,000 million of it was found by what was, in effect, living on capital; that is, by sales of our reserves of gold and convertible currencies and by the use of sterling flowing into the Exchange Equalisation Account as a result of overseas borrowing.
I take the noble Lord's point that the sterling flowing in as a result of borrowing could be considered as a genuine borrowing from overseas rather than borrowing from within, and to that extent might be justified. But, at the same time, I think there is a danger when the Exchange Equalisation Account becomes confused with the National Loans Fund, as it is now. I think the two ought to be kept separate. So according to my figures, 41 per cent. of this deficit was financed by printing new money, and 55 per cent. of it was financed by living on capital. Put in very simple terms, then, we were financing an overall deficit by sales of capital and by the creation of new money.
I should like to quote in support of this what was said by the noble Earl, Lord Cromer, on May 18, 1966. He said:We unfortunately have a system under which Exchequer financing can, and does, lead to the creation of money quasi-automatically to the extent that the requirements of the Exchequer are not met by genuine savings or taxation.The National Loans Fund will not put this situation right. It will distinguish outstanding loans on long-term account, and will help to focus attention on what is really the most important point—how these loans are financed by the Exchequer.
. But I regret that it is a "pip-squeak" of a Bill after the mighty roar of Chancellor Callaghan in his 1967 Budget Speech, when he said:I have also been considering whether the time is coming to consider changes of substance. Is it necessarily the best arrangement that so much of the borrowing requirement of local authorities and public corporations is financed in the first instance by the Exchequer?The present arrangements have grown up as a series of ad hoc responses to particular situations over a long period of years. I think that the time has come to take stock of the 707 suitability of the present arrangements in the contemporary world, and I have therefore put a review in hand."—[OFFICIAL REPORT. Commons, 11/4/67, cols. 998–9.]This Bill is the result. As the noble Lord, Lord Beswick, has said, it is really only a Bill to make changes in methods of accounting, and does not make any changes that I would describe as changes of substance.
As the noble Lord has told us, the Opposition tried in another place to amend it to give greater control to the House of Commons over the Government's financing of long-term loans, but without success. In 1967 those loans reached a figure of some £1,500 million, and I believe there is a danger that Parliament may be losing its grip on the national expenditure in this particular province. I shall naturally study the speech of the noble Lord, Lord Beswick, with the greatest of care. As he said, these are complicated matters and I shall certainly look very carefully at what he said.
Primarily, of course, this is a matter for another place, but it is also of great Parliamentary importance and deserving of the closest attention by all of us who are interested in the financial situation and in our Parliamentary institutions. The simple plea I make is that there should be a complete and clear separation of the income and expenditure account and the capital account of the Exchequer, and that any deficit on capital account should be met by genuine borrowing on the market. This Bill does nothing to tackle the problem of Parliamentary control, and does nothing to ensure that future Government loans represent true market borrowing. But at least it helps to separate the income and expenditure accounts from the long-term loans account, and that is a first step in the right direction which I welcome.
§ 3.15 p.m.
§ LORD BESWICK
My Lords, possibly I can seize on the last sentence of the noble Lord's speech and not on some of the others which he uttered earlier. I gather that, when it comes to the point, both noble Lords will not vote against this Bill. I am sorry that it was called a "pip-squeak" of a Bill, because it is not; it is important. Certainly, it is, as I have already said, only an accountancy 708 measure, but, on the other hand, as I understand accountancy, it is a most useful tool in the hands of those who wish to control expenditure. By the passing of this Bill we make no difference to the amount of money which is borrowed; we make no difference to the way in which money is raised; but we enable noble Lords in this House or Members of another place, or the public generally, to follow what is being done. As a result of having more and clearer information at their disposal, I should have thought it would be possible to control each individual item which goes through this National Loans Fund.
The noble Lord, Lord Aberdare, said that we are losing our grip on public expenditure. There may or may not be criticism there, but it is not a criticism to be levelled at this Bill. This Bill will enable us to control public expenditure rather more closely, and if indeed there is any question of losing grip, then that is to a very large extent a criticism of the Opposition, for it is their job as well as that of the Government to control supply expenditure.
I was asked several questions, and some were so detailed that, if I may be allowed to do so, I should like to study what was said and will write to the two noble Lords concerned. However, I will endeavour to answer the point about raising money on the market. I accept that it is essential in providing finance for local authorities, for nationalised industries, and for the Government to get genuine savings to the largest extent possible. I accept the fact that if additional money has to be borrowed it should be borrowed from the market. The point I tried to make earlier is that at the present time, in one way or the other, money is raised in the market to the extent that it is not met by a surplus on the Consolidated Fund Account. I was asked by the noble Lord whether I could give a breakdown of the figure which he used. I imagine that to be for the year 1967–68. I am unable to give a breakdown of that, but I have figures for the year 1966–67 which will give some indication of how money is raised.
In that year the local authorities borrowed £518 million, the nationalised industries £813 million, and there were other borrowings of the order of £147 million. In the same year the surplus 709 of revenue over expenditure came to £738 million, leaving a deficit to be met from borrowing of £740 million. The question of the noble Lord, Lord Aberdare, was: where does this money come from? As I understand him, he has a suspicion that to some extent, at any rate, it comes from just turning the handle of the printing machine. I do not think that fear is justified. The breakdown for that year is as follows: £53 million was raised by overseas borrowing, the notes and coins issue came to £125 million, there was £30 million forthcoming from the Tax Reserve Certificates, there were gilt-edged securities of £565 million, there was a deficit of Treasury Bills of £38 million and of National Savings of £197 million, leaving a net total of £485 million, and a further £202 million came from the banking sector. So I think it can be shown that, so far as notes and coins are concerned, they comprised a comparatively small proportion of the total.
The other point I would make to the noble Lord about these figures is that the currency and coins which are circulated are a function of the amount of bank deposits; and if we wanted, as he and the noble Earl, Lord Dundee, wished, to control the total amount of money in circulation, the sector to which we should direct our attention is that of the bank deposits. This is where the real inflationary pressure comes from. The noble Lord, Lord Aberdare, said that the increase of bank deposits between 1961 and 1966 was very considerable. I quite agree with him, it was; and, as he uses this period 1961 to 1966, I can see that he is putting the point forward in no Party sense at all. But if one turns to that year, one finds that there was in fact a decrease in Government borrowing to the extent of £85 million and an increase in the private sector borrowing of £3,013 million, so the pressure there came from the private sector. It is perfectly true that there was too heavy a borrowing in those years; and, of course, part of Government policy has been to restrict the borrowing in this last year or two. But it was from that borrowing that the increase in the notes and coinage came.
I am not at all sure that this adds anything to our discussion. Possibly, when it appears in Hansard, the noble Lord and the noble Earl will be kind 710 enough to read what I said, and I will read what they said; and if there are any additional points to be cleared up, I will do it by correspondence. In the meantime, my Lords, I hope that this Bill will be given a Second Reading.
§ On Question, Bill read 2a, ant committed to a Committee of the Whole House.