§ 3.23 p.m.
§ LORD BOWLES
My Lords, I beg to move that this Bill be now read a second time. I should perhaps begin by explaining to noble Lords why the Short Title of the Bill contains the words "No. 2" when this House has not had the benefit of a previous Revenue Bill this Session. The reason for this somewhat odd occurrence is that the Government thought fit to widen the provisions of the Bill after it had been introduced into another place, and effect to this decision could be given only by withdrawing the first Bill and substituting this one.
This Bill gives effect to the Government's decision to cease the additional payments made to manufacturers in the selective employment premium except for those in development areas, and to terminate the export rebate scheme. It may be asked why the Government have chosen to deal with two such unrelated questions in one Bill. The answer is that both provisions flow consequentially from the decision to devalue sterling, and both are concerned with significant reductions in public expenditure. It may be convenient, therefore, if I put these measures in their broader economic context and show how they fit into the strategy which the Government have been pursuing since devaluation.
Devaluation has given us a new opportunity to break out of the vicious circle in which every attempt to generate an expansion in the economy since the war has led, sooner or later, to a balance-of-payments crisis. But advantage can be taken of this oportunity only on condition that a big shift in our economic resources takes place away from the domestic side to the overseas side within the next year or so. Speaking in another place on January 17, the Chancellor of the Exchequer referred to the need to put 711 about £1,000 million in the balance of paymentsto get the turn round that we need and to meet the additional calls imposed by the loss on the terms of trade."—[OFFICIAL REPORT, Commons, 17/1/68, col. 1788.]The two measures contained in this Bill will contribute to a reduction in Government expenditure in a full year of £200 million—a by no means unimportant step towards the achievement of the target mentioned by the Chancellor. Other measures which have been taken by the Government since devaluation include the decision to increase the rate of corporation tax by 2½ per cent. and the substantial cuts in public expenditure which were announced by the Prime Minister on January 16. Finally, I need hardly remind noble Lords that the Chancellor of the Exchequer will have something more to say on March 19. So much for the economic setting into which the Bill's provisions can be placed. I will now deal with each provision in turn.
Noble Lords will be familiar with the main outlines of the selective employment tax and of the selective employment premiums. For reasons which I do not think I need go into now, the selective employment tax is collected in respect of all employed persons whatever the nature of their employment, and the exemptions, and where appropriate the subsidies, are taken care of by a subsequent repayment of the tax together with, in the case of manufacturing industry, "an additional sum". Since the inception of the scheme, this "additional sum", consisting of 7s. 6d. per week for men, 3s. 9d. a week for women and boys and 2s. 6d. a week for girls, has been paid to all manufacturers irrespective of their location.
Clause 1 of this Bill provides that, with effect from April 1 next, the additional sum shall be paid only in respect of employment in a development area. The continuing cost of these payments to manufacturers in development areas will he about £25 million a year. Other manufacturers will of course continue to be entitled to a full refund of the tax. These payments, representing a little over 1½ per cent. of manufacturers' outgoings on wages, have served a useful function in helping them to keep down their unit costs. But devaluation has completely 712 changed the situation. There will be an increased demand for exports, for import substitutes, and for new investment to create the extra capacity we shall need. The great majority of manufacturers will in one way or another be able to take advantage of this increased demand. Whether manufacturers are large exporters or not, they should reap substantial benefits if they take the opportunities which are now open to them. The case for continuing with these additional payments generally has therefore now largely disappeared.
The situation in the development areas is, unfortunately, rather different, and that is why the additional payments will continue to be made to manufacturers there. The position is that the unemployment level in these areas is still twice as great as it is in the rest of the country—4.5 per cent. compared with 2.2 per cent. This level of unemployment means not only a great deal of personal hardship; it is also a waste of resources which we can ill-afford. Once the additional sums in the selective employment payments are confined to manufacturers in the development areas, they will be performing much the same economic function as the regional employment premium. As noble Lords will he aware, R.E.P., which provides for the payment of 30s. a week for every adult male employed in manufacturing in the development areas, is one of the major instruments of Government policy for dealing with the problem of unemployment in these areas. When R.E.P. was introduced in last year's Finance Act, we pointed out that the expenditure would not have any inflationary effect because, on balance, it would create an increase in production in the development areas without creating any net increase in the rest of the country. Instead of making an extra demand on resources in areas like the South-East and Midlands, the effect of R.E.P. will be to bring new resources into use and so increase our total productive capacity. With the prospect of a more rapid expansion of domestic activity than we have been able to achieve hitherto, it will be even more important to reduce the waste of resources in these areas, especially human resources.
There are a number of other points in Clause 1 on which I should comment. 713 First, subsection (1) provides that the clause shall have effect in relation to contribution weeks from April 1, 1968. This is because claims for premium are paid quarterly, in arrears. The Ministry of Labour will therefore, continue to make payments of the additional sums after April 1, amounting to about £25 million, relating to employment before that date. The net saving in 1968–69 is thus likely to be about £75 million. Subsections (3) and (4) deal with certain nationalised undertakings which are engaged in manufacturing activities—for example, National Coal Board brickworks, railway workshops and so on. At present, they are entitled to additional payment under Section 3(2)(a) of the Selective Employment Payments Act. This clause provides that they shall continue to be treated in the same way as private manufacturers; that is, only those undertakings in the development areas will continue to receive the additional 7s. 6d. Subsection (5) provides for an order-making power to continue payments over and above refund of S.E.T. to manufacturers in areas which cease to be development areas. This provision will give flexibility to terminating Government assistance when development areas are de-scheduled. It parallels a similar provision for R.E.P. in Section 26(5) of the Finance Act 1967.
This clause does not apply to Northern Ireland, where selective employment payments are made under local legislation. We understand that the Government of Northern Ireland will continue to pay the additional 7s. 6d. to manufacturers there, since for economic purposes the whole of Northern Ireland counts as a development area.
Clauses 2 and 3, and the Schedule to the Bill, give effect to the decision announced by the Chancellor's predecessor on November 18 to abolish export rebate as from March 31, 1968, as one of the measures accompanying devaluation. Export rebate has been payable on goods of United Kingdom production exported on or after October 26, 1964, on sale, or on hire, for at least a year, to foreign customers, or for use by a United Kingdom trader in his business abroad. It is not now payable on goods exported to our EFTA partners if the goods receive EFTA tariff treatment in the importing country. The rebate, which is expressed as a per- 714 centage of the value of the goods (the average is at present about 1.8 per cent.) relieves the exported goods from certain indirect taxes which entered into their production costs: hydrocarbon oil duties, vehicle excise duty and certain elements of purchase tax. Now the rebate is to be abolished. The primary reason for this is that the rebate is no longer needed. It was introduced in October, 1964, in order to make our exports mote competitive. Apart from exports to our EFTA partners, it has continued ever since, but with devaluation this aid is no longer needed.
Let me give the broad figures, my Lords. The competitive advantage which devaluation gives in terms of foreign currency is 16⅔ per cent., but there ire certainly deductions to be made from that advantage. First, there is the removal of the S.E.T. additional payment, to which I have already referred, which accounts for about ½ per cent., and this, of course, has to be added to the costs. The export rebate is worth approximately, on average, 1.8 per cent., so let us call the removal of that roughly a further 2 per cent. addition to costs. Then again, devaluation inevitably leads to increases in import prices. Many exported goods include an element of imports in their make-up, and so we have to add on a further 2½ per cent. in respect of higher import prices. It would be reasonable, too, to have regard to some increases in wages, and I would suggest that for this we include a figure of 1 per cent. These increases I have mentioned total about 6 per cent., leaving a net advantage in export prices, resulting from devaluation, on average of somewhere between 10 and 11 per cent.
It is clear, therefore, that as a result of devaluation the export prices can be more competitive, and so the usefulness of the rebate disappears. As will be seen from the Explanatory Note to this Bill it is estimated that the complete abolition of the rebate will reduce public expenditure by about £100 million per year. The Government also consider that the abolition of the rebate should have an important side-effect in the direction of stimulating exports; namely, the dampening down of demands for additional tariffs in other countries. We have always regarded the rebate as compatible with our international obligations, but we have had to 715 face the fact that some countries have been highly critical of it, and we hope that by its abolition foreign Administrations will be helped in resisting the wave of protectionist pressure in those countries. We can but hope that this pressure will continue to be resisted.
Let me now describe some of the more important details of these two clauses. Clause 2 provides that export rebate will not be payable on goods exported after March 31 of this year, except for those goods which are shipped under certain kinds of written contracts entered into before devaluation; that is, before November 19, 1967, when the exporter counted on getting the rebate. Briefly, these contracts are those whose terms are such that devaluation will not confer any benefit on the exporter when he does export his goods under the contract. Let me give some examples of the operation of this clause. Take a contract priced at £100 in sterling. If the contract provides for an alteration in the price on a change in exchange rates or on withdrawal of rebate, then the supplier is protected against loss whether his contract is payable in sterling or, for example, in dollars. But if no such provisions exist and the price is payable in sterling, the supplier will receive only £100 and will suffer from withdrawal of the rebate. He accordingly, therefore, receives the rebate. If the price is payable only in dollars, however, and there is provision for converting the sterling price into dollars at the pre-devaluation rate, which would yield payment of 280 dollars, that would now be worth nearly £120. The supplier has thereby benefited from devaluation and will not receive the rebate. As noble Lords will realise, there are many variations on prices in contracts, and this clause attempts to continue rebate in cases which have arisen and where abolition of rebate could cause hardships.
Clause 3 provides that the Treasury will have power to reintroduce export rebates, either generally or in respect of goods consigned to or exported for use in specific countries or territories. This power did not appear in the original Bill tabled. It was included in the present Bill (which was substituted for the former one) because in the meanwhile indications had arisen that other countries might be considering protectionist measures, including rebates, in support of their 716 own exports. Nevertheless, as has repeatedly been made clear, the taking of power to restore rebate is a purely precautionary move: the present rebate scheme will definitely end on March 31, in accordance with Clause 2 of the Bill, and the Government are not committed in any way to the automatic reintroduction of rebate under the powers in Clause 3 in any circumstances. In the event of protectionist measures by other countries, the Government would need to consider all the factors very carefully before any decision was taken to reintroduce rebate.
The Financial Secretary made clear on Second Reading in another place that the Government had no intention of breaching their obligations under GATT. In view of this, and of the argument that in certain circumstances selective reintroduction of rebate would not be regarded by the contracting parties as incompatible with GATT, all that is really at issue is whether the Government need these powers at all. It is clear that without such powers in the present Bill the reintroduction of rebate by Order could apply only to all those exports eligible under section 7 of the Finance (No. 2) Act 1964, as amended by the Finance Act 1966, which does not itself contain power to select particular countries of destination, except that rebate is not payable on goods for which EFTA tariff treatment is claimed on importation in to an EFTA country.
Clause 2 refers mainly to goods exported on sale, but export rebate can apply also to goods exported for hire abroad. The Schedule, therefore, in its paragraphs 1 and 2 extends the provisions of Clauses 2 and 3 to goods exported on hire and qualifying for export rebate. Paragraphs 3 to 7 of the Schedule contain the machinery provisions to enable the Board of Trade to certify pre-devaluation contracts, while paragraphs 8 and 9 provide for the Customs, if they see fit, after a date fixed by Treasury Order, to anticipate, where possible, the completion of outstanding contracts and to pay an amount equivalent to the rebate which would be payable on the completion of the contract. The purpose of this provision for compounding payments and winding up the scheme is to enable the Customs as soon as practicable to cease employing staff on the payment of the rebate. Paragraphs 10 and 11 are minor 717 machinery provisions aimed at easing, for exporters whose claims for export rebate will be tapering off after April 1, 1968, the existing requirement that at least £2,000 of goods must be exported in a year before a claim for export rebate can be made. My Lords, I beg to move that the Bill be now read a second time.
§ Moved, That the Bill be now read 2a.—(Lord Bowles.)
§ 3.40 p.m.
§ THE EARL OF DUNDEE
My Lords, this is another Money Bill, and after Clause 1 the rest of the Bill is also a Supply Bill, which it is not possible for your Lordships to amend: we can only discuss it in general. We could, in theory at least, amend the first clause which deals with the selective employment tax premium. We could not amend the subsequent clauses which deal with the export rebate. Unfortunately, the first clause is the one which we do not particularly want to amend, because we are quite content to accept it, mainly on the ground that we on this side of the House think that the whole machinery of selective employment tax is wholly misconceived and injurious to our economy, and the more it is whittled down the better.
According to a recent Parliamentary Answer, the gross yield of the tax for the year 1967–68 was estimated at £1,100 million, of which about £924 million would be refunded, leaving a net yield of £176 million. But, in my view, the way in which the money is distributed does not achieve the purpose which the scheme is said to be designed to achieve, because so much of the premium and refund goes to manufacturing industries which are not manufacturing anything of economic importance, and the people who are hit in the service industries are very often doing far more than many manufacturing industries to earn gains for our national balance of payments.
The noble Lord has mentioned that under this Bill the premium is still payable in the development areas. But even there it is not achieving its purpose. In Scotland, at least—and I am pretty sure in most of the development areas—we should be far better off, and our economy would be in far better position, if we had neither any premium nor any tax. This tax is a large net loss to the Scottish 718 economy, even with the premium. So we all hope very much that at the earliest possible moment this tax will be abolished and will cease altogether to be part of our fiscal furniture.
With regard to the two remaining clauses of the Bill, one of them takes away the export rebate, and the other enables us to put it back again, if it is necessary to do so, for the purpose of retaliation. I did not quite agree with the noble Lord's description of the economic background in which this is being done. He gave a number of official figures, which I think I have seen before, showing that the gain to our export industries from devaluation will be substantially greater than the loss which they will suffer, not only by the removal of this export rebate, but also by the new taxes which are being imposed as part of the post-devaluation package deal.
The noble Lord did not mention that as a result of these measures the total increase of taxation in the last three years will now amount to fully £1,300 million, of which nearly half will fall directy upon industry. And as for the noble Lord's contention that this is a method of escaping from the economic straitjacket which we have never had an opportunity of doing before, we did have an opportunity, I think, in 1949; we devalued then, but it did not lead to any enormous improvement in our economic situation. Now we all want, if we can, to make this devaluation lead to an improvement in the economic situation. But I have often tried to put it to your Lordships—and I put it to your Lordships again—that we cannot have economic growth, which is the first necessity to an improvement in our economic situation, if we continue with our present stifling load of taxation. We must have economic growth if we are to get in balance; and we cannot have economic growth, in my submission, so long at the principle prevails that industry exists simply to provide more and more money in taxes for the Treasury. I quite see the point about reciprocal trading; that it may not be a good thing always to have these export rebates if we find that other nations to whom we send of our exports take retaliatory measures which may make it not worth our while to continue the rebates, because we are rather more vulnerable than most countries in this respect. We depend so much on our 719 exports, and that is the reason why we have to be careful in applying all measures of this kind. But I do not agree that this is a particularly appropriate time to take off the export rebate, and I think it will have a bad effect on our balance of payments next year.
My Lords, there is one final point that I should like to put to the Government, and it is this. The rebate continues, of course, in respect of all contracts which were made up to November 19 last year, and it is removed only in respect of contracts which have been concluded since that date. In another place, Mr. Iain Macleod pressed very strongly on the Government, I thought with justice and sense, that irrevocable tenders which had been made before November 19, and from which the exporters who had made them could not retract, should be allowed to receive the export rebate if they were accepted (as they sometimes are months later) after November 19, because the irrevocable bids had been made in the expectation that the export rebate would be received, possibly in circumstances of tight competition, and the rebate might have made the difference between being able to undercut a competitor and not being able to undercut. If there is a delay of three or four months between making the irrevocable bid and its acceptance by a foreign purchaser, it seems to me that the exporter who has won the contract on this basis should get the export rebate, because his tender was made before November 19, the dateline which is laid down. I do not accept that the Government are incapable of drafting an Amendment to the Bill which would give effect to this, in my view, obvious piece of common sense. We cannot in this House amend it because this part of the Bill is a Supply Bill, but I would strongly urge the Government to reconsider this matter and see whether they cannot do something to put it right.
§ 3.51 p.m.
§ LORD BOWLES
My Lords, I am grateful to the noble Earl, Lord Dundee, for his interesting and reasoned speech in which he set forth clearly the position of his Party, about which we have heard him speak before and which we understand well. On the point he raised about Scotland being a net loser on S.E.T. and R.E.P., in the time at my disposal 720 since he made that statement I have not been able to get out the figures, but I will let the noble Earl have them because I am sure that he would like to know the real position of his country in this respect.
As regards the danger of removing the rebate it seems to us that the rebate fulfilled its purpose adequately. This is well illustrated by the large volume of representations received from exporters when they thought that they were not going to receive a rebate on existing long-term contracts. Many stressed that the rebate played a useful part in obtaining contracts against foreign competition. However, in the context of devaluation, and in the absence of any fresh measures by other countries, the need for the rebate has disappeared. The net advantage of devaluation should in the average case be considerably greater than the loss incurred by the removal of the export rebate.
On the question of devaluation and taxation, may I add that the rebate is intended as a refund of the indirect taxation which entered into industrial costs, but it is open to the criticism that at present it goes beyond the general practice in other countries in refunding indirect taxation. In the context of devaluation British industry has not been put at a competitive disadvantage by the removal of the rebate, so that this contribution to the reduction in Government expenditure will not have adverse effects. If this situation should change the Government could if necessary use the power to reintroduce the rebate.
As regards the noble Earl's question of contracts made after devaluation but based on bids and tenders made before devaluation, a point the noble Earl was kind enough to let me know he was going to raise, the Government realised that this was a real difficulty but were unable to devise an administratively acceptable solution to any such extension, even if it were possible to define closely and exactly what, short of a contract of sale, is an irrevocable tender or bid. This is a question of law and not of evident fact, and accordingly in the last resort it is a question for the law courts, whose function it is neither proper nor practicable for the Board of Trade to answer. It is not long ago since we all lived through the Crichel Down case, and though no Party position was taken up 721 there the whole idea of the Franks Committee, and also the subsequent action of both Governments, has been that civil servants should not be asked to decide questions which are much more a matter for the law courts. In these circumstances, I hope that the noble Earl will realise that the Government have tried hard to meet the point raised by his right honourable friend Mr. Iain Macleod in another place, but I am afraid that we cannot see our way to alter the wording of the Bill in this respect.
§ THE EARL OF DUNDEE
My Lords, do I understand the noble Lord to mean that if the law courts should decide that a certain tender or bid before November 19 was irrevocable in character and binding on the person who made it, and if it was accepted by the purchaser after November 19, it would then follow that the exporter would receive the rebate?
§ LORD BOWLES
My Lords, I think that what would happen is that the exporter would take action against the Board of Trade, suing them for his rebate. If the court said he could have it, then he would have it. It is as simple as that. But I think the noble Earl will agree that it is not proper to place on the backs of civil servants, who are not necessarily lawyers, the making of decisions on matters of such importance to the public funds. The noble Earl will remember the history of this subject over the last 14 years. We are in line with the general attitude adopted by Governments since the Crichel Down case.
§ On Question, Bill read 2a, and committed to a Committee of the Whole House.