§ 2.30 p.m.
§ THE MINISTER OF STATE, BOARD OF TRADE (LORD BROWN)
My Lords, I beg to move that this Bill be now read a second time. I find myself in an unfamiliar position this afternoon, for I have never before taken part in the annual debate on the Finance Bill. In considering what I should say, it seemed to me that the guts of the situation with which the Bill is attempting to deal is our national balance-of-payments situation. This is the central topic which I think most deeply concerns all of us. I propose, therefore, to focus all of my comments on that aspect. I trust I shall be forgiven, therefore, for failing to deal with the many other subjects which the Bill covers. No doubt some of these other subjects will be raised in debate, but I shall leave it to my noble friend Lord Beswick to deal with these in his summing-up speech at the end of the debate.
On the Monday evening after devaluation had been announced, the "Twenty-Four Hours" programme on B.B.C. started with a black screen on which appeared a vast figure stating total United Kingdom liabilities, but there was no mention of the counter-balancing assets. I must confess to being very angry when I saw that, for the public find difficulty in understanding national financial issues, and to quote liabilities in this way without showing assets is highly misleading. I was in Australia recently and met a large number of businessmen, reporters and politicians, and the picture in the minds of many of them of this country's financial and trade situation I found to be highly inaccurate. It was a much more sombre picture than is justified, and they welcomed the rather more realistic picture which I was able to present to them. These are two instances, but such examples of over-playing the gloom and the false image that this creates abroad abound to-day. They are depressing the spirits of our citizens, our businessmen and even, at times, our own politicians.
A recently published estimate suggested that the United Kingdom ended the last war a debtor nation with short and long-term debts of the order of £5,000 million total. Set against these 305 there were gold and dollar reserves of well under £1,000 million and perhaps £3,000 million worth of overseas investments—a total of £4,000 million.
§ LORD AILWYN
My Lords, I wonder whether the noble Lord would forgive me. Could he speak a little slower? It is a little difficult to take in some of his remarks.
§ LORD BROWN
I apologise to your Lordships. I am afraid it is a fault of mine. I will watch it.
From the 1967 pink book on the United Kingdom balance of payments we find that at the end of 1962, total identified assets had risen to £13,000-odd million and total identifiable liabilities to £11,745 million, giving a surplus of assets over liabilities of £1,355 million. By the end of 1966 our assets stood at £17,800 million, and the balance over liabilities had increased to £1,415 million. An estimate for the end of 1967, taking into account the effects of devaluation on the sterling value of our assets, is not yet complete, but I am advised that it is likely to show that our net creditor position has increased. In other words, since the end of the war we have changed from being a debtor nation to a creditor nation, and this is a fact which comes as a very gratifying surprise to those with whom we trade overseas. I believe it is essential to drive home these facts, for the grossly exaggerated picture of our situation which inhabits the minds of people overseas does damage to our trade relations and makes the job of our exporters more difficult. Those comments have, it is true, to be balanced by some more sombre facts. Too much of our assets is in long-term and too little in quickly realisable investments, and we have incurred heavy, short- and medium-term indebtedness. The need, therefore, for us to earn and sustain a surplus on the balance of payments is paramount. I hope noble Lords will not assume that because I seek a more realistic portrayal of our true position I am in any way depreciating the magnitude and urgency of the task which faces us.
I now wish to draw attention to yet another factor which I think is unnecessarily damaging our imagine among our overseas customers. Noble Lords are well aware that when foreigners withdraw 306 funds from London they weaken sterling, but that nevertheless the act extinguishes a United Kingdom short-term liability, and that if we borrow an equivalent amount, say, from international banking sources to replace the funds wits drawn then no monetary change has taker place on our national balance sheet. I hive no intention of belittling either the assistance provided to the support of sterling by international lending facilities or the seriousness of the situation which has caused us to draw so extensively on those facilities. When, however, I find that businessmen and others all round the world are being led to believe, by the manner in which this subject is being treated in the Press, on television and on radio, not only that such activities to support our international currency are current account transactions—this is the impression which is given—but that we are thinking of enhancing our standard of living on these short-term banking transactions, then I really think that it is high time we attempted to clear the air.
When I visit overseas countries and explain matters in these terms I have evoked surprise and a considerable amount of relief. I am convinced that nothing is so damaging to our exporting prospects as unwarranted gloom or confusion over our own national economic affairs. Misunderstanding of the balance of payments position is also likely to occur in relation to our current earnings. The average deficit per month on visible account so far this year is £70 million. These are the widely-published trade figures, but a more encouraging fact which is much under-played is that whereas in recent years our net invisible earnings have averaged about £13 million per month, in the first quarter of this year they averaged nearly £30 million per month. The visible trade deficit is very serious, but as the House knows it has largely been brought about by a volume of imports which has since devaluation been considerably higher than the Government predicted, some special factors have entered into this; and, moreover, the adverse effects of devaluation on import prices hit us sooner than the beneficial effects on the volume of trade. Happily, June trade figures show a substantial drop in imports, providing some evidence that the measures of the Bill before us to curb consumer spending have at last begun to bite. 307 I believe that we may be observing the start of a favourable trend.
A great deal of advice has been directed to the Government to impose some sort of direct curb on imports. We deprecate this approach. The Chancellor of the Exchequer warned the country from the outset that devaluation would take time to work, but that it will work we see no reason to doubt. Provided we keep to the economic strategy we are pursuing—and this the Government firmly intend to do—we are confident that we shall achieve the balance of payments surplus which we need. It would be foolish in the extreme to be panicked into restrictive measures which would put at risk the expansion of world trade on which our export performance so very much depends.
In the meantime, policies to promote import savings are being vigorously pursued. The Economic Development Committees are devoting much work to the identification of fields where imports could be replaced by competitive home production. The Board of Trade is playing a part in this work. For example, at the request of the E.D.C. for the distributive trades, it is organising a series of meetings between manufacturers and distributors of a wide range of consumer goods. I do not want to attempt to give this afternoon an exhaustive list of all that is being done in this direction, but I can assure the House that much activity is in train.
All work which the Government are doing to encourage a general improvement in the efficiency of British industry is also relevant to import saving. The spate of amalgamations of firms, much aided by the efforts of the Industrial Reorganisation Corporation, is rapidly leading to the existence of a larger number of companies who have the leadership and the resources to increase their investment in the better design and marketing of goods. This leads to more determined efforts not only in export markets but in the home market also. This should lead to reduction of imports. The efforts of thousands of our smaller companies, which have been gaining momentum over the last six years, to market their goods with more sophistication is also enabling them to compete better with some of the very well 308 marketed imported goods which crowd our shops. I visit, in the course of my duties, a large number of small industrial companies in all regions of the country and though this is a sample selected because they are better than average I am deeply impressed with the changes which are taking place.
Turning now to exports I should first like to mention the Export Credits Guarantee Department's activities. Frankly, I believe that we have in E.C.G.D. the most extensive and efficient department of its kind in the world. It is flexible in its attitude and is continuously planning adaptation of its policies and new types of policies to meet the changing situations of world trade. Recent developments in the granting of lines of credit to overseas countries, in collaboration with the City, will allow our bankers to play an ever greater part in assisting our exporters. I make mention of this subject with caution, for their negotiation and operation involves the attention of highly skilled and experienced officials, of whom we have too few at present, and a cautious rate of development is therefore called for.
In May there were placed in the Printed Paper Office of your Lordships' House copies of documents detailing Government export promotion activities. I would recommend Members who have not seen this to obtain it. It is short and factual. The main theme which emerges is the greatly increased extent to which Government services are being used by our exporters. Here are a few statistics to demonstrate the point. The number of inquiries to our Export Services Branch has increased 20 per cent, since devaluation. There are now 110 export officers in the nine Board of Trade Regional Offices making 1,500 visits each month to individual firms, and there are now 36 well-established export clubs in the country. There are 690 commercial officers entirely engaged on export promotion work in our 200 posts overseas.
Here are a number of comparative figures referring to the changed situation between 1965 and 1967. Joint ventures supported by the Board of Trade at trade fairs exhibitions increased from 70 to 241; the provision of British pavilions from 5 to 11; store promotions from 58 to 309 230; inward missions from 28 to 46; outward missions from 45 to 103; and market research missions from 30 to 74.
The very important trade promotion activities of the 230 business men who serve the 12 area committees of the British National Export Council are extremely important and are growing. What is not so fully recognised is the part played by senior chambers of commerce, trade associations and export councils in promoting visits overseas by groups of exporters. Their activities now reach formidable proportions and are growing rapidly.
In the field of consultancy, constructional work, and capital equipment we want our exporters to have the fullest possible support in tackling the great opportunities presented by major projects overseas. We have therefore set up an Overseas Projects Group in the Board of Trade. An operations room is now centralising all information from all available sources about projects overseas. This will build up a comprehensive picture of opportunities for projects and allied consulting work and of how we and our competitors are tackling these opportunities. This will help us to ensure that prospective openings are brought to the attention of those best placed to exploit them and that all the agencies which can assist in securing contracts are rapidly and effectively co-ordinated.
The Overseas Projects Group is presently discussing with the nationalised industries and other Government Departments which are major purchasers in our home market how they may contribute or still further develop their present contribution to aiding British companies to win major contracts overseas. We intend to harness the considerable technical expertise and experience of these national users in combination with private independent consultants in support of the export drive.
A crucial problem facing manufacturers who wish to exploit a new market is the difficulty of finding good agents overseas. Moreover, there are few major manufacturers who have not at least some unsatisfactory agent in some markets. Good agents are scarce, and with the growth of technology and of new sources of supply they are becoming progressively scarcer. Here, then, is an important gap to be closed, and the Board of Trade have devised a scheme, known as the export representative scheme, which has the 310 object of facilitating the format on of groups of manufacturers of non-competitive products who will set up, on a joint basis, their own selling organisatior overseas or, in the case of smaller firms, who will share the cost of employing a direct sales representative in overseas markets.
We are at present exploring the scope for its application in two selected markets, and I feel that this scheme has exciting prospects for increasing exports. There are 700 merchant export houses in this country.
§ LORD BROWN
Touché! I have a certain sympathy with them. We have been attempting to sort out this problem, so far unsatisfactorily.
One estimate suggests that these export houses are handling or financing £1,000 million worth of exports each year Unfortunately, they are a somewhat amorphous profession, and it is difficult to identify which export houses can be of specific service to particular would-be exporters. The Board of Trade are financially assisting them to carry out a complete survey of the profession as a means of getting more explicit knowledge of the precise contribution made by each firm and this, they believe, will lead to a situation where many would-be exporters can take far more advantage of their great experience.
As will be seen, the Government already have extensive services for helping exporters and would-be exporters. All this involves the spending of considerable sums and the employment of numerous officials at home and overseas. But not all firms can benefit from the use of these services, and too often time and money which would be of great help to serious exporters are spent trying to help those who are not effectively organised to benefit from that help. Because it is the aim of the Government that the country should get value for money, in the shape of increased exports from the use of these services, problems of priority can at times throw up worrying situations as the load on these services increases.
Exporting is not a haphazard business into which anyone can fall; indeed, some who treat it this way lower the prestige 311 of the great bulk of our exporters by failing to perform efficiently in overseas markets. Before a manufacturer can benefit from Government services he must take stock and prepare himself. There must be the right product, the right attitude to marketing, the right organisation and sufficient production capacity, or the ability to create it rapidly, to see the thing through. If a company does not really mean business on these counts it could be working against the general interest by asking our Government services to invest scarce time and resources which it is not equipped to exploit. Because of this the Board of Trade officials and commercial officers overseas have been instructed to use their efforts to the best export advantage, and if necessary to seek evidence, before providing assistance, that it will not be wasted. I think, therefore, cases are bound to arise where it will be necessary to indicate to some would-be exporters that it would be better that they delay their attempt until they have prepared themselves better, or to seek the services of export merchants with their experience to carry out exporting on their behalf. This is the policy of increased selectivity in the provision of Government services and I think it is a little new in that respect.
The Government have been criticised for acknowledging too little the great help given to our economy by our bankers, merchant banks, insurance companies, shipping companies, international traders and others who earn so much foreign currency for our invisible account. Such criticism is certainly not justified by our current attitude. We are participating in the work of the Committee which has been set up under the chairmanship of Mr. Cyril Kleinwort to keep a close and continuous watch on the whole field of invisible earnings, and we are continuously mindful of the fact that since the second half of the 19th century we have almost always had a surplus on our invisible account.
The average monthly exports over April, May and June of 1968 were £488 million as against the average for the whole of 1967 of £419 million. This represents an increase in value this year of 16½ per cent. British industry and commerce is, I think, to be congratulated 312 on this increase, but it is clear that this is a good start to an effort which must go much further. I have now little doubt that this effort will succeed. I have sought this afternoon to show the active part being played by the Government in providing assistance to these industrial and commercial efforts. I fear I have detained the House overlong but I thought it was worth while grasping this opportunity to inform noble Lords of what is going on in support of exports.
§ Moved, That the Bill be now read 2a.—(Lord Brown.)
§ 2.53 p.m.
§ LORD ERROLL OF HALE
My Lords, it is customary for the speaker from this side of your Lordships' House to convey his thanks to the noble Lord who has introduced the debate, and naturally I do so this afternoon. But I do so with particular sincerity, because I think we have listened to an extremely interesting account of the nation's affairs delivered in a very excellent style—perhaps a little fast for some of the noble Lords on the Benches behind me. But the noble Lord spoke at his own pace—and it is a crisp and exciting pace—and I am sure that Machrihanish will expect Kilmun to reply in suitable terms. I should like to congratulate the noble Lord on a very fine discursion on the problems of Britain, and particularly on the opportunities which his own Department is creating. I feel a natural affinity for his present position because I occupied it myself some years ago, and therefore I am particularly delighted that he is carrying on the tradition of what I believe to be an important Office of State in furthering exports by all the means within the power of the Government of the day. So we are truly grateful to the noble Lord for what he has said.
Of course, my Lords, the noble Lord left a lot of things unsaid. It is hard to believe that although we are to pass the Finance Bill through all its stages this afternoon, the noble Lord made no reference to the Bill at all. However, I admire the fact that he was able to refer back to our international position for many years ago and produce new figures which we shall study with care; and was not content to deal merely with the present situation. He tried to set the matter in perspective, and he paid particular attention to the central problem of the balance of payments. Indeed, 313 when I was preparing myself to address your Lordships this afternoon I wondered how far back to go. I also wondered whether I should make the balance of payments, which I believe to be crucial to the situation, the theme of what I am going to say to your Lordships. The noble Lord, Lord Brown, has given me the perfect opening.
I am prepared to go back a little way, and I shall make the balance of payments the central theme of my remarks to your Lordships. To understand the present economic situation—and that is what we are debating this afternoon—I think it is probably right to go back to exactly 12 months ago. Then we were shaken out of our complacency. We had had Mr. Callaghan's "steady as you go" Budget, then suddenly in the middle of July—it is almost hard to remember, but it is true—there were rumours of a serious crisis. Ministers were seen bustling and hurrying about. They took up their usual panic stations. We were told that severe but well-planned measures would be announced, and before we knew where we were we had an economic crisis on our hands with important and severe measures announced in accordance with what we had been told. That was July. So we waited for the gold and dollar reserve figures for August 1 to appear.
In fact, they appeared on August 2, and we learned that the reserves had fallen by a figure of about £66 million, which was not excessive for one month, on a basic total of about £1,000 million. A number of people asked what all the fuss was about. Why had the Government had to take these restrictive measures when the reserves had fallen only by a tolerable amount for one month's trading? Well, my Lords, the answer was in the forward rate, and this was something which was very well concealed at the time.
I hope that noble Lords will forgive a moment's explanation as to how my simple mind works, because I have to put these things in simple terms—not necessarily with the aid of matchsticks, like my friend Sir Alec Douglas-Home, but in simple terms. The Bank of England is concerned basically in regard to its foreign exchange reserves with what I would call a "cash box" position. The gold and convertible currency is a 314 label on a particular cash box. During any particular month all our overseas earnings across the exchanges come into the cash box, and during the month all our overseas dues are taken out. At the end of the month the figure in the cash box is published as the figure of the gold and convertible currency reserves, and that figure goes up or down in accordance with the transactions of the previous month. So, if one looks purely at this gold figure which is published on the first or the second of each month, one can draw certain conclusions.
But there were other forces at work. We have to realise that in that month of July, when the crisis arose, many people over the world feared devaluation of the pound. So what they did was to sell sterling forward, and British importers bought foreign currencies in advance of their requirements. This was the new factor in the situation. The normal corrective, of course, is to allow the forward rate to reflect the hopes, the fears and the anxieties of traders in world markets. If the forward rate falls enough, it is not worth the expense of insuring against possible devaluation in this way and the situation is self-corrective. But for the first time in its history the Bank of England decided, on this particular occasion, to support the forward rate by pledging (and I put it in simple terms) what was in the cash box.
Within a few days during the middle of July of last year the total contents of the October cash box were already committed, and that was why everybody was running around Whitehall deciding what should be done to deal with the crisis, although it was not a crisis that any outside observer could possibly appreciate or understand. Clearly, with such a severe drain on the October cash box at the time of July, that state of affairs could not go on, and the publicly announced emergency measures were designed to prevent this situation from continuing.
Perhaps I may say that the lessons of this sorry and largely forgotten story are clear and have great relevance to our debate this afternoon. First of all, it is clear that if we are to succeed in the years to come with all the efforts of the noble Lord's Department and other Government agencies, the contents of our cash box must increase month by month—the receipts by way of trade must increase 315 and invisible earnings must exceed payments for imports and Government expenditure.
Secondly, if the world lacks confidence in Britain and the British Government, as happened last July, we can go bankrupt very quickly, because of the slender position of our reserves in ready currency. So the balance of payments, as the noble Lord, Lord Brown, indicated in his opening remarks, is the central feature of our economic situation, and that is why this afternoon I shall devote some time to the various forces which come into operation on it.
We got through July and we departed for our summer holidays, as we always do, but the next crisis of confidence occurred in October-November. The run on the forward rate in October-November was such that devaluation was the only course open to the Government. I heard that a number of important British firms who had never before bothered to buy their foreign currency requirements forward on this occasion did so, and that imposed a great strain on our position. But whatever else might be said about devaluation, I agree that it was inevitable at the time because of the lack of confidence in our position.
Devaluation, I should hasten to add, was not necessary for our exports, because we were capable then and indeed were successfully selling our goods abroad at current prices in world markets at a very high level indeed, so there can be no case for saying that devaluation was necessary to help exporting. It was simply because the world at large, and indeed our own importers, no longer had confidence in Her Majesty's Government to maintain the value and position of the pound. The proof of this is to be found in subsequent events.
Though devaluation occurred on November 10 or 11 last year, it did not do the trick. As observers have pointed out, two devaluations since the war by Socialist Governments was one too many. So immediately, and I thought unfortunately from the point of view of our country, there was talk of a third possible devaluation. Ministers and Members of the Opposition and I, in particular, did our best to discount the possibility of a third devaluation. I still subscribe to that view. I am sure there need be no 316 third devaluation if we all do the right things. But it was the talk about a third devaluation which did so much to undermine world confidence in the value of the pound sterling.
After the devaluation, the Bank of England produced a different policy. They allowed the forward rates to fend for themselves and so they reached a record discount by February-March of this year, because people were taking out, in effect, insurance policies against the possibility of further devaluation and the discount—premium, I might call it—for such an insurance policy became so expensive that not everybody was prepared to go along with it. Nevertheless, the situation regarding the forward rate—I stress that it is the forward rate that we must always be looking at—had become so serious that there had to be a scurrying off to Stockholm for another "save Britain" exercise in March, 1968. This staved off the immediate difficulties, because the forward discount fell substantially after the Stockholm agreements were made.
That was all right in trade matters, but in the meantime another situation adverse for Britain was brewing up. Many overseas nations and individuals deposit their money in London, either through sheer force of habit or for the high interest rates obtainable, or for both. For instance, Arab Sheikhs, for whom usury is against their religious code, nevertheless like the high rates available in London. This total—and it is a very big total—is called the sterling balances—that is, the monies which lie here in London, earning good interest, but which can be withdrawn at short call by customers of the Bank of England; in other words, monies that can be converted into another currency across the Exchanges at will.
After November last, many of these holders of sterling balances were still smarting from the losses which they incurred through devaluation. They were worried at the prospect of a further devaluation and some indeed threatened to withdraw their funds. So, hurriedly, the Governor of the Bank of England went off to Switzerland to meet the international bankers, and he came back only a few days ago with a medium-term credit, or standby, of 2,000 million dollars. This will help us to pay out those who no longer want to hold sterling, 317 but to the extent that this is done, to the extent that it is being used, Britain will be saddled with further and substantial debt.
The Basle arrangement, as it is now described, while it is a technical triumph for Sir Leslie O'Brien, the Governor of the Bank of England, is in fact nothing for the Government to be proud of; it is merely an overt expression of lack of confidence on the part of the world in Britain's management of her affairs. Therefore, this standby, important as it is for our sterling balances, does nothing to help our trade and commercial accounts. It is an attempt to allay the new suspicions of holders of sterling, and it will have been achieved at considerable cost if the facility has to be used.
§ LORD BESWICK
My Lords, I am trying to follow the noble Lord. Can he explain to me how we increase our indebtedness if we exchange one debt for another?
§ LORD ERROLL OF HALE
My Lords, it is interesting that the noble Lord should be bold enough to ask this question. It was touched on by the noble Lord, Lord Brown, in his interesting observations. What the noble interrogator is in fact admitting is that a number of holders of sterling balances want to get out and make use of this new facility.
§ LORD BESWICK
My Lords, the noble Lord is twisting in a rather unsavoury way. I asked him to explain how, if we exchange a short-term debt for a long-term debt, we are adding to our indebtedness.
§ LORD ERROLL OF HALE
My Lords, we hoped that as a short-term debt it would never be withdrawn, but apparently the short-term holders are now going to withdraw their balances and switch into a long-term debt in a form which we shall have to repay to an international monetary organisation with funds which it will be difficult for us to earn.
§ LORD BESWICK
My Lords, would the noble Lord answer a straightforward question? Does it or does it not increase our indebtedness?
§ LORD ERROLL OF HALE
My Lords, it does to the extent that it is used, because otherwise it would not be 318 necessary for the facility to be made available.
§ LORD RHODES
My Lords, may I be bold enough also to ask a question? Is it not right that if this standby loan takes the place of the sterling balances, which at present are held here on fairly high interest rates, it is possible that we should save money, in the long run?
§ LORD ERROLL OF HALE
My Lords, I am sure that the noble Lord, Lord Beswick, will deal with this point adequately in his winding-up speech. I am quite prepared to debate it but I lave a speech to make, and the noble Lord, Lord Brown, was so good in making a crisp introduction, that I do not want to be too long.
§ LORD BESWICK
My Lords, I am not asking the noble Lord to debate it. I am asking him to be good enough to withdraw an allegation which is shown not to be substantiated.
§ LORD ERROLL OF HALE
My Lords, when the noble Lord comes to wind up and if he convinces me, I shall be glad to withdraw then, but certainly not before.
The position is that, even if the standby is not used, Britain has a total of about 7,000 million dollars worth of short-term debt to clear off in this next seven years, mostly contracted in the last three and a half years. This means that we need to have a balance-of-payments surplus—a surplus in the cash box—of about £400 million in every one of the next seven years if we are to clear off the indebtedness, quite apart from whether this standby facility is wed or not.
The question I submit to your Lordships this afternoon is: Can we do it? Can we have a £400 million surplus in each of the next seven years? The monthly figures for the reserves for the last six months show virtually no improvement—indeed, there is a small decrease as compared with the position in December, 1967, and that as announced for June of this year. I will deal with the important question of our trade receipts and our import Bill in a moment, but what particularly depresses me in seeing that there is no improvement in our reserve figures is that over the last three and a half years the Treasury and the Bank have been making strenuous efforts, 319 by legislation, by Statutory Instrument and by regulation, to reduce the outflow from our reserves and to increase the inflow.
May I suggest one or two examples? As to the improvement of the inflow into the cash box, a great effort has been made by the Bank for the repatriation of company funds held abroad. That has been going on for years. Also, the Bank of England now require that no less than one-third of profits earned overseas must be repatriated as soon as they have been declared. This was never necessary before. On any sale of a dollar security for reinvestment in another dollar security by those people and organisations who hold dollar securities, 25 per cent. of the proceeds of each sale must be repatriated into the cash box. Beneficiaries of overseas wills were formerly allowed to keep those receipts in the country where they had accrued to them. Now they must all be repatriated. On the outflow side, capital investment abroad, the tests for capital investment in non-sterling area countries are now so severe as to make it practically impossible for any investment to take place overseas. The test is that the investment must yield profits within three years sufficient to equal the total cost of the investment.
§ LORD BESWICK
My Lords, I am sorry to interrupt the noble Lord again, but did he happen to hear the speech which my noble friend Lord Brown made, in which he gave the figures of the increase in our capital investment overseas?
§ LORD ERROLL OF HALE
Then I can only say that the Government's policy is failing, because the tests are really so severe that nobody can invest abroad. If they are investing abroad, that represents an outflow from the reserves which the Government have been doing a great deal to try to protect. The trouble with this Government is that when presented with a choice of evils they always choose both. They try to stop everybody from investing abroad and try to make a virtue out of the fact that everybody is succeeding in doing so. The noble Lord will be able to clear up this absurd situation when he comes to wind up.
§ LORD BROWN
My Lords, the noble Lord is being very controversial, and that may be a good thing, but is he prepared to support the thesis that to condition investment overseas on the basis that over the next three years it should be recoverable with increased exports is a reasonable proposition, in the light of the amounts that are being considered for this purpose? Is it not the opinion of the business community that this is an extortionate demand to make for this provision to export? I think it is a pity to present it as a ridiculous condition when in fact it has been welcomed by industry.
§ LORD ERROLL OF HALE
Perhaps I should make it plain that I was saying that the profit must equal the investment; not that the amount of exports must equal the investment. There is a difference and a distinction in those two. I was trying to give a few examples of the strenuous efforts that the Government have made to increase the inflow and restrict the outflow. The fact remains that the outflow has been strenuously restricted. There is, furthermore, a restriction of capital investment in the developed sterling area. The sterling area is no different really from the non-sterling area, because any movement across the exchanges has to be repaid by the export of goods and services from this country. Thirdly, the Government have made a great thing of the travel allowance of £50 per annum. This is a determined effort to restrict the outflow of funds across the exchanges. It has been in existence since October, 1966, and we have not yet been told what the effects are.
Surely, taken together, all these efforts on the part of the Government to repatriate funds, on the one hand, and to restrict the outflow, on the other hand, should have made a considerable impact on the figure of our gold and dollar reserves. But they have not; they have not made any impact at all. I hope that when the noble Lord comes to wind up he will be able to give us an explanation. He was kind enough to ask me what I was going to say in my speech this afternoon so that the could answer me, and I gave him notice of that point. I studied the Bank of England Review. It is an excellent Review, but it remains 321 quite silent on this subject, though it is very voluble on many others.
What is the combined effect of this restriction of the outflow and scooping in of the inflow? I suggest that it certainly ought to be by now, after three and a half years of persistent and calculated effort, no less than £200 million per annum. Where is it all going? If it is not coming in, why pursue the measure? If the restriction of the travel allowance to £50 does not make any difference, why have the restriction? If it makes a big difference, then let us know the value of the restriction, so that it may become slightly more tolerable to the British public, who resent it very much. I suspect that this £200 million a year is disappearing into the hands of those who wish to reduce their sterling balances. That is a figure that has not so far been made public, but I hope that it will be before this debate is finished.
We are left with the contribution of Britain's invisible earnings. Here I am grateful to the noble Lord, Lord Brown, for having informed your Lordships that invisible earnings are running at the rate of £30 million a month this year. I appreciate very much that the noble Lord has admitted at long last, on behalf of Her Majesty's Government, that invisible earnings are of real value and are making a substantial contribution.
I turn now to the trade figures and the trade matters about which the noble Lord told us so clearly this afternoon. While the exports are at a high level, it is worth remembering that, despite devaluation, the June trade figures are still below the figures of January, 1968. Of course it is important that Government assistance in a number of different forms should be given to our exporters, and the noble Lord was eloquent on the variety of measures which are being given. Nearly all of them, of course, were started by the previous Administration, but I am glad to see that they have been added to and strengthened by the present Government. I appreciate particularly his reference to senior chambers of commerce, and what they do, because I am personally involved in that particular capacity. But let us not imagine that because the export figure has gone up by £9 million from May to June our exports are yet doing brilliantly, after the stimulus that devaluation was 322 supposed to give them. They are still at £492 million for June, some £8 million below the figure for January of this year. In any case, their high level and what is being done is largely thanks to private enterprise firms who in very difficult conditions seek out these contracts and this business round the world.
As regards imports—and, of course, a fall in imports is just as valuable to the balance of payments as a rise in exports—it is interesting to know that there has been a small fall for the first time this year, between May and June, of just under £40 million. Nevertheless, the import bill remains at over £600 million for June, just as it has for every month of this year. So we welcome this drop in the figures, which, as I say, have been and still are, over £600 million for each month of this year. But I am not one who believes that the import figures are likely to fall very much. Why should they? Food, raw materials, semi-manufactures, which come mainly from countries which have not devalued, are going to cost more, not less, than they did in the past. Nor is their volume likely to be reduced, except only on the margin. I think the important alleviation is in the devaluation of New Zealand. New Zealand butter costs no more; and the Danes have partially devalued. But, for the rest, we are having to pay more in terms of imports of the same amount than we did before. We are a country that makes specialised machinery which goes to many countries abroad. Equally, we buy from advanced industrialised countries their specialised products, which now cost us more. There can be no import substitution here. We simply have to pay more for the same things that have been on order and which we must have now and in the future with which further to modernise our industry.
We are left only with the narrow field of so-called luxuries and non-essentials. What is a luxury and what is a non-essential? I mentioned this point in the debate on the Prices and Incomes Bill a fortnight ago, so I will not elaborate further. May I give an example? Three months ago I went to a departmental store in one of the provincial towns of Sweden, and in that departmental store they had a "Carnaby Street" corner, where we, the Britons, were selling very skilfully our "trendy" export clothes— 323 a very good export and unnecessary luxury for Sweden, as the Swedes might argue. In the Strand, at a menswear outfitters, I saw on my return ready-to-wear men's suits, and the label said: "Precision-built in Sweden". Another unnecessary luxury import. But this is what trade is all about. So do not let us get too excited over the marginal fringe of so-called luxury or inessential imports, because in fact we shall go on having these imports if we are to retain the freedom to export to other countries on uninhibited terms.
The noble Lord, Lord Brown, was frank enough to admit this important matter, and his colleague, the President of the Board of Trade, I thought, made a very courageous speech in the other place last week, saying that there was no question of an imposition of import controls by Her Majesty's Government. I should like to congratulate him and the Government on a statement which is courageous in the present circumstances. I apologise to your Lordships for being so long, but I have been interrupted far more than the noble Lord, Lord Brown, was.
I now think it is important to turn to the post-devaluation policy of Her Majesty's Government, because it is that which governs the economic situation to-day. Once they got over the trauma of devaluation they sat back and did nothing, except make warnings about a painful Budget to come. It was going to be advanced from April 5 to March 19. All that time we were told that severe and painful measures were going to be taken. So what did the public do? They went on a spending spree, because they knew it would be worse after the Budget than before. It is very interesting to notice the difference between a Tory Administration and a Socialist Administration, because our great trouble was that in the months from January to April the retail and manufacturing interests came to us and complained that nobody would buy anything because they were expecting taxes to go down in the next Budget and they would therefore wait. Nowadays, every year there is a spending spree between January and April, because everybody knows that taxes are going to go up. It has happened each year without any exception. The noble 324 Lord, Lord Beswick, can refute that, if he dare, when he comes to wind up the debate this evening. So, of course, we have a spending spree. We always do under a Socialist Government before a Budget.
However, after four months' waiting a Budget was introduced, and a very serious, tough Budget it was, because it increases taxation by, in round figures, £900 million in a full year. The theory behind this—and it is a theory which I am sure all economists would regard as eminently acceptable—is that consumption in this country will go down because of the higher taxation, for two reasons. Individuals and companies will have less money to spend and, on the other hand, prices will be allowed to rise as devaluation works through the economy, in addition to rises due to tax increases, and the result will be a lower level of home demand and therefore a lower level of imports—good for the import figures—and more domestic goods thereby freed to increase our exports. That is the classical and traditional way of looking at things. And I must admit that the June trade figures show the first faint glimmerings of this trend, but it is much too soon to he certain—
LORD ERROLL or HALE
I like it very much. I am not one of those "sour" members of the Establishment of whom the Prime Minister was so critical. I think that the noble Lord, Lord Brown, would agree that I do a great deal of work to help our export drive. So if the noble Lord is shooting at me on this, he is shooting at the wrong target.
I say that it is much too soon to be certain, and for very good reasons. The Chancellor of the Exchequer says that prices must be allowed to rise, and in that I would agree with him. On the other hand, Mrs. Castle's Department, "Min. Prod."—[Laughter.]—Well, the Ministry of Technology is called "Min. Tech."; that is what the Minister of Technology called it. Why should we not 325 call the Ministry of Productivity, "Min. Prod."? Mrs. Castle's Department, "Min. Prod.", is working feverishly to keep prices down, and with the help of the Prices and Incomes Board is trying to get reductions, and, loud hurrahs!, they have succeeded, with all the apparatus of P.I.B., in all these years of existence of the P.I.B. in getting one price reduction—in soap powders. Congratulations to Her Majesty's Government!
Secondly, the first test of the wage freeze "Mark III," namely the rail go-slow, found the Government putting pressure on British Rail to concede an inflationary increase. The "wreck of Penzance", as it was described in the Economist article last week. I should be too long if I were to go into this matter, but it is quite clear that this was an inflationary wage increase conceded by Her Majesty's Government. Thirdly, I should like to know, and I am sure that other noble Lords on this side of the House would like to know, what Her Majesty's Government are going to do with the extra £900 million they are collecting out of the public in the first full year after the new Budget increases. It is one of Parkinson's lesser known laws that expenditure always rises to meet income—although it is a well-known law to any husband who is rash enough to tell his wife that he has had a pay rise. With all this extra money coming into the Treasury and into the Government Departments, will they really have the willpower to resist spending it? What are they going to do with the surplus? Lock it away in the vaults of the Bank of England? Of course not. They will be spending it before very long.
LORD ERROLL, OF HALE
We should not have created a situation in which it was necessary for this sort of taxation increase to have occurred. My noble friend Lord Dundee will deal more particularly, I think, in his winding-up with the question of the impact of Government expenditure—
§ SEVERAL NOBLE LORDS: Hear, hear!
§ LORD ERROLL OF HALE
Well, I want to leave him with a few points. But at this stage I would ask the Government this question. As unemployment 326 rises during this winter, will they be strong-minded enough to resist reinflationary measures by means of increased Government expenditure in order to bring the unemployment total down? Will they? I leave the noble Lord who is to reply to answer that question.
In the debates on the Finance Bill in another place a great deal of emphasis was placed on personal savings, and what has emerged from the debates there, and indeed from those in your Lordships' House, is that personal savings are well down on earlier years, and lukewarm support— no more than that—has been given by the Chancellor of the Exchequer to personal savings. All he offered in the Finance Bill was an increase in the value of certain Premium Bond prizes and a proposal for a national lottery—a proposal which was firmly turned down in a later debate in another place. Of course, with the prospects of higher prices in future it is far better to buy now than to save now. This is one A the Government's dilemmas.
But this is only part of a situation which I see to be most unfavourable and unsatisfactory. The fact is that savings and personal wealth are now under attack. Why should this be so? In the Finance Bill we have a retrospective extension of estate duty from three years to seven years, diminishing after five. We have aggregation of income of minors with that of parents, creating many extremely hard cases which the G3vernment have done nothing to all,wiate, except possibly in the case of the thalidomide "babies. We have the special levy on savings incomes, which is of course really a wealth tax. We are told that it is to be once-for-all, but we realise full well that this is only a trial run for a permanent wealth tax.
Why are the Government doing all this? Not because the money is needed —because they are going to have £900 million extra a year which they do not propose to spend. It is not because the unions will moderate their pay delmands—because the Government are doing this to those who have savings. Oh, no! We already see from the settlement of Penzance that this has nothing to do with it at all. They are doing it for a quite different reason. The Government are in fact using Britain's economic troubles, which are of their own creating, as a 327 cover for their basic socialist policy, to destroy private savings, private wealth and private companies, little by little. Noble Lords opposite may laugh, but the Minister of Defence gave the game away at Leeds on March 24, when he said that the 1968 Budget wasthe most socialist one since the war".That is from the Yorkshire Post of March 25—I always believe in quoting my references. That was Mr. Healey; and only Mr. Healey—not one of the Economic Ministers, by the way—has had the honesty to state the Government's real intentions in this Finance Bill.
If this were a private quarrel on a self-sufficient island in the Pacific it would not matter so much. It would be only a matter of the natives' redistributing the palm trees and the coconuts between themselves. But the countries which have lent us, or promised us, so much money are watching us, and this is why I have dealt with this matter in some detail. These other countries believe in the creation of private wealth through savings and wise private investment. They practise vigorously the system of private enterprise in industry and commerce. However, they see a British Government which denigrates private enterprise, and which uses the false cloak of economic necessity to destroy private savings and private wealth. Small wonder that they have little confidence in the present, and temporary, Government! Certainly, we on these Benches have none.
However, in this situation there is nothing wrong with the British people.
§ LORD BROWN
My Lords, is the noble Lord aware that the percentage of the G.N.P. raised in Germany and France in tax is higher than in this country?
§ LORD ERROLL OF HALE
Oh, yes: very much indeed. I am fully aware that we are not the most highly taxed nation in the world, as the Prime Minister himself said. But where he mistook the point is that we have the highest rate of marginal tax, which is quite a different story. If the noble Lord would like to pursue the argument I can show him that we have a far higher rate of marginal tax in this country, and that is what really affects enterprise and initiative.
§ LORD BROWN
It was just that the noble Lord did not use the word "marginal" when he spoke about taxation previously.
§ LORD ERROLL OF HALE
Then the noble Lord's intervention will of course set the Record right. I was about to say that in this situation there is nothing wrong with the British people.
§ SEVERAL NOBLE LORDS: Hear, hear!
§ LORD ERROLL OF HALE
The nation's resources may be slender, but the "all doing spirit" of the first Elizabethan era can be re-created and suitably rewarded—and at reasonable marginal rates, too. All that is needed is leadership of courage, imagination, purpose and compassion.
§ 3.34 p.m.
§ LORD BYERS
My Lords, I sense that the House is in rather a naughty mood this afternoon and I shall have to tread warily, but I should like to thank the noble Lord, Lord Brown, for the way in which he has introduced this Bill this afternoon, and also for the fact that we are having this debate, because it gives us an opportunity of hearing the maiden speech of the noble Lord, Lord Balogh. How he is going to keep his maiden speech non-controversial is something which I shall be awaiting with the greatest possible interest, although I am sure he will.
The Finance Bill comes to this House so long after the Budget that it is probably better to look forward to the next Budget rather than to job back to the old one, but I think it shows that the Government can at least claim that some effects of devaluation are beginning to bite, and some of the Budget measures are having the deflationary effect which was intended. I am glad, as is the noble Lord, Lord Erroll of Hale, that the Government are eschewing import controls, but the fact is that benefits in the form of lower imports and better exports appear to be beginning to flow. This tempts one to ask two questions. First, why was devaluation delayed so long? Secondly, why was the spending spree between December of last year and the Budget allowed to continue as it did?
As to devaluation, this poses a serious dilemma for all responsible leaders of all political Parties. I do not think it 329 is any secret that we in the Liberal Party were under very strong pressure indeed from all our young economists, almost without exception under the age of 35, to come right out in favour of devaluation from late 1964 onwards. If we had done so, we should have been accused of rocking the national boat and therefore causing a flight from the pound. Therefore we did not do it, but surely the Government were in a better position to judge than we were, and with hindsight it certainly seems that putting off devaluation and imposing instead the most severe deflation we have had since the war produced the complete industrial stagnation which we suffered in 1966 and 1967. I am sure anybody can make an error of judgment, but one cannot help feeling that an examination should be made of the way in which Governments are advised in these matters, because as a result we lost a tremendous potential growth. If we assume a growth rate of only 3 per cent. per annum in each of those years, we can reckon the loss in production at something like £2,000 million. That is the whole of the defence budget for one year or about one-third of the money we spend on our welfare services. On top of this, heavy international debts have been incurred, which must inevitably retard our economic growth for some years.
Given that this is the cost of not devaluing earlier, I still fail to follow the Conservative line, which seems to be that we should not have devalued at all, which presumably would have meant over one million unemployed. From what the noble Lord, Lord Erroll, said, I gather that this is Conservative policy, although perhaps I misunderstood him. It seemed to me that he was wanting more unemployment this winter, whereas personally I should like to see more people gainfully and efficiently employed. But I cannot see how one can sustain the argument that there should be no devaluation.
On the question of the spending spree, the House may remember that I put down a Question at the beginning of February, asking whether some action should not be taken before the Budget to stop that spending spree. I received the surprising answer from the Government that a spending spree was not taking place at all. How can a Government be so badly informed? I believe 330 the answer lies in the tremendous delay in getting the official statistics. They were about three and a half months too late, and the result was that although I could see people buying cars and washing machines, the Government statistics did not reflect that. Therefore, I should have thought there was a case to look back to that period to see why the Government were not properly informed as to what was happening in the shops and the motor car salerooms. At any rate, I hope sincerely that the national outlook is getting better and that we are beginning to overcome our problems.
May I now ask what exactly is the measure of the international indebtedness which we now face? How big a burden is it likely to be on our efforts to achieve a plus balance of payments? I believe that the balance of payments is so crucial to this country that we ought to have the facts and not make Party play over this issue. We ought to stop pulling the rug from underneath one another at unstrategic moments. I was indeed glad to hear the noble Lord, Lord Brown, if I understood him correctly, say that we had got ourselves into the position of a creditor nation; that our assets were in excess of our liabilities. I am glad that in saying that he took credit for the overseas investments. I wish he could persuade some of his Left Wing friends in another place that it is a good thing to have overseas investments. Not only do they help on the credit side of the balance sheet but they also help British exports in countries overseas.
On the other side of the balance sheet, may I ask whether we are making any progress towards relieving this country of the full responsibility of acting as the banking trustee for the sterling area? I do not understand the argument that was put forward by the noble Lord, Lord Erroll. I should have thought that the new Drawing Rights at least broadened the base and took some pressure off this country so far as meeting the sterling balance problem was concerned. But I have said for some years now, id so have my noble friends, that we think it is very unfair that Britain should always "carry the can" for the sterling area. Would it not be possible to move forward, now that we have got these Drawing Rights and have established the principle of international self-help, and get 331 a much broader based reserve currency which is not always going to provide a problem for this country alone?
I should like to turn to the future, and particularly the future of the taxation system in this country. I believe there is a pressing need for reform and simplification of the tax system. We have got to the stage now where the tax system of this country really is a "dog's breakfast". It has been built up over many decades by all Parties; everybody has had a go at it; and there are so many different bits and pieces now that it takes a pretty experienced accountant to find his way through, or quite often around, the system. I believe that one of the difficulties is that to get a firmly based new system will probably take anything from five to seven or even ten years. But it will be worth it; and if it takes that long it is likely to span the life of several different Governments. I ask, would it not be possible to try to get this on to an all-Party basis, to set up an all-Party Committe working with officials, taking advice where they wish to take it, to see whether agreement cannot be reached on the main taxes which are appropriate for this country? If we could get that agreement on structure, different Governments could very the rates of different taxes, they could alter the incidence, but at least we should have a clear system and preferably a simple one.
My own preference would be to keep the taxes to the minimum types, and I hope that the main indirect tax might be a value-added tax, one which taxes business costs as well as profits. If this were taken at a reasonable rate, something similar to that in the Common Market, it would enable income tax and corporation tax to be reduced, and purchase tax and stamp duty to be abolished. There is a great deal to be said for abolishing the selective employment tax. I should like to get rid of National Insurance contributions and substitute a social security tax on payrolls, which could be varied according to regions and according to the incidence of unemployment. But these are my views; others will be put forward. What I am saying is that I believe it would be possible to get all-Party agreement on a simple, understandable tax structure in this country.
332 I believe also—though this may be more controversial—that the time has come to abolish surtax and to iron out the sharp steps in income tax as income increases. Instead of the irregular increases in the marginal rates which exist at present, there should be a smooth progression towards higher rates based on a simple percentage system. This would avoid what is happening now, where the weight of the income tax burden is being placed so firmly on the shoulders of people with incomes between £800 and £1,500 a year. In addition the tax rates should also be reduced at the surtax level, and I think it would be possible to bring the upper limit down to something like 70 per cent. This would cause very little drain on the Exchequer, because the existing revenue from surtax is only 2½4 per cent. of the whole, but it would reduce the disincentive to work which undoubtedly occurs from the high top rates which prevail at the moment. What I am pleading for is that the tax system should be looked at as a whole and should be looked at from the point of view of the national interest, not something which one dresses up in a Party manifesto and tries to use as a vote catcher. This is too basic for the whole future of this country to have it as a platform for each Party to bid against the other for better and lower taxes.
In considering variations of the tax system I believe that there are many ways of creating additional incentives and tremendous scope for improving efficiency in industry and business and increasing profitability, by the judicious use either of income tax relief or other forms of encouragement by the Government. I should like to see much more study made of schemes which permit employees to become shareholders in a company or firm. One method which commends itself to me, one of which I have some experience, is where the employee sets aside a monthly sum from his salary or wages to purchase employees' loan stock with a guaranteed rate of interest. He can either retain the stock or convert it at a previously agreed price, and if it is a growth company, with luck it will eventually be advantageous to him. This provides a form of compulsory saving with a reasonable rate of interest.
333 I believe that we should consider allowing, even now in a period of wage restraint, a number of salary and wage increases to take place, so long as that increase is ploughed into something like an employee loan stock, something that will take that spending money out of the market for the time being but will allow a rate of interest to be taken as income and will allow for the stock itself to grow over a period. There is no reason why employees should be confined to taking shares in their own company. It may be much better to encourage them to start up funds in which shares can be taken in investment trusts, units trusts and so on. The Government should give consideration now to the various plans which are being thought out, some of which are in existence, others which are being put forward, to encourage savings. Various schemes have been put forward by the Wider Share Ownership Council, by my own Party and by individuals. I know the C.B.I. has done a great deal of thinking in this direction. I am convinced that the Government have a wonderful opportunity here of looking more closely into schemes to encourage savings, preferably from salaries and wages. I believe the old slogan, "The more we save, the less we have to raise in taxation" is true. Moreover, it is another painless way of inducing people to save rather than to spend, and to reduce consumption when we want it reduced. I believe the Government have a great opportunity for laying the foundations of a new, simple structure for the tax system, coupled with the encouragement of savings among our people. I hope they will take it.