§ 11.20 a.m.
§ LORD SANDFORD
My Lords, I beg to move that the Bill be now read a second time. Last October the Government announced in a White Paper (Cmnd. 4516) a new system of investment incentives. This included a cut in corporation tax, the replacement of investment grants by new and improved writing down allowances, and improved grants for buildings in the development areas which give rise to additional employment. The cut in corporation tax was enacted in the Income and Corporation Taxes (No. 2) Act. Proposals for a second reduction announced in the Budget and for introducing improved capital allowances are contained in the Finance Bill now before Parliament. The present Bill deals in Clause 1 with the ending of investment grants, and in Clause 2 with the improvements in the rates of building grant.
I deal first with the way in which investment grants are to be ended. We took the view that the transition to the new system of capital allowances should be achieved as quickly as possible. None the less we fully accepted the need to avoid any retrospection in the arrangements, and therefore our proposals provide that expenditure incurred before the date of the Chancellor's announcement on October 27, 1970, should continue to qualify for investment grant on the same basis as hitherto. Payments of grant towards such expenditure are still being made. We also recognised that there would be firms who were legally committed by contracts made before the Chancellor's announcement to incur expenditure on or after that date. We felt it right that grants should also continue to be paid on such expenditure
We did not feel able in general to extend the arrangements to cover expenditure which was not covered by a contract on October 26 last. Clearly this may lead to certain firms receiving less in grants that they had expected when deciding to embark on a particular programme. However, I think it is right to draw a distinction between contractual 583 commitments on the one hand and other, less binding, arrangements on the other. The principle of confining grants on expenditure incurred after the cut-off date to contracted expenditure is the same as was adopted by the previous Government in 1966, when the transition from investment allowances to initial allowances was made on capital expenditure which was not covered by the Investment Grants Scheme. The only major difference between the arrangements made in 1966 and those embodied in the present Bill is that we have not sought to impose any time limit within which assets must be brought into use to qualify for grant. In other words, the present arrangements are rather more generous.
I turn now to the detailed provisions of Clause 1. The effect of subsections (1) and (2) is to preclude the payment of grant on expenditure incurred after October 26 last year unless the Secretary of State for Trade and Industry is satisfied that it consists of a sum falling due under a contract made on or before that date. There is established law relating to contracts, and this, together with the facts in each case, will provide the Department with an objective criterion against which to decide whether grant may be paid. Subsection (2) also prevents, with two exceptions, the payment of grant if the expenditure arises as a result of something done by the applicant after October 26, 1970. The aim of this provision is to restrict grant to expenditure which the applicant was on October 26 committed to pay. It rules out, for example, grant towards any additional work added to the contract after that date, or an option exercised after October 26, 1970, even where this may be provided for in the terms of the contract.
Subsection (3) departs slightly from the White Paper as issued last October. Circumstances may arise where an applicant, having made a contract before October 27, finds that his supplier is either unable to meet his obligations under the contract or wishes to transfer to another supplier the obligation to supply goods to the applicant for grant. In these limited circumstances we felt it right to allow a replacement contract to rank for grant. Before paying grant, however, the Secretary of State must be satisfied that the goods, works or services 584 supplied under the replacement contract are genuinely in substitution and of substantially similar description to those to have been supplied under the original contract. Grant will be paid only on the amount of expenditure which would have been incurred under the original contract and not on any increase above that figure. The subsection makes similar provision to deal with the case where a contract is varied after October 26, 1970.
Subsection (4) deals with the special position of the shipping industry. In recognition of the industry's special international trading position it was accepted in another place that grant should be made on a ship as an entity, provided that a contract for its construction had been placed before the cut-off date, and any extras ordered after that date are delivered not later than the time the ship itself is delivered.
I will not go through the remaining subsections of that clause, but will move on to Clause 2, which deals with building grants. This is at first sight a very lengthy and complex clause. I should therefore explain first of all that many of its provisions are not new. The basic provision for making building grants in the Local Employment Act 1960 was amended and expanded by the Act of 1963 and by Part II of the Industrial Development Act 1966. The present Bill restates the relevant provisions of these two amending Statutes, so as to bring them conveniently together and avoid unnecessary reference back.
The main purpose of Clause 2 is to increase by 10 percentage points the rates of building grant payable in development areas. Our proposal to make this increase was announced in the White Paper as one of a number of steps to provide more assistance to industry under the Local Employment Acts. The other improvements, including an increase in the administrative limits regulating the amount of assistance which can be made available in relation to the employment likely to be provided and greater flexibility in using the powers to provide loans in development areas, have been introduced by administrative action under existing powers. But the proposed increase in the rates of building grant requires legislation. The necessary provision is made in subsection (2) of this clause.
585 Our plans for applying the new rates of grant in development areas were explained by my honourable friend the Minister for Industry in another place on October 28 last. He indicated that they were intended to apply, generally speaking, to projects started on or after the date of the White Paper. This intention would be implemented by subsection (7) of the clause, which sets out the circumstances in which a building in a development area will receive only the old rate of grant. In most cases the new rates will not apply if work on providing the building was done on the site before October 27, 1970. But there are slightly different criteria for certain cases where the general rule might not be appropriate—for example, where the applicant is purchasing a new building.
My honourable friend also made clear last October that although implementation of the proposed increase must await legislation, firms which had previously received offers or payments of grant at the existing rates for buildings started after the relevant date would be able to benefit from the new rates in due course. Subsection (10), the last subsection, gives the Secretary of State a measure of discretion and would permit him to make adjustments in these cases.
Subsections (5) and (6), which deal with transitional arrangements in the event of future changes in the coverage of development and intermediate areas, are also connected with the increase in the rates of building grant in development areas. They replace the existing transitional provisions relating to building grants in Section 21(4) of the 1966 Act, which naturally did not contemplate a situation in which there would be different rates of grant in development and intermediate areas. These provisions do not affect the present powers to make changes in the coverage of the assisted areas. They are concerned only with the effect of such a change, taking place at some future time, on projects which had been put in hand while the site was still in a development or intermediate area.
The only other significant new provision in Clause 2 is one which is independent of the increase in development area rates. Subsection (1) alters the basis of calculation of building grants in both development and also intermediate areas. 586 At present the grant has to be based on the actual cost of providing the building after excluding certain specified categories of expenditure. The clause would remove the statutory obligation to exclude expenditure of specific types, which entails a great deal of detailed investigation of individual cases. Instead, the Secretary of State would be empowered to decide how much of the actual expenditure should be approved for the purposes of grant.
I can assure your Lordships that my right honourable friend has no intention of making any major changes in the range of costs which are taken into account in calculating the grant. The purpose of the new provision is to make it possible to define more precisely the expenditure which will be eligible for grant and in more generally applicable terms than at present. This will both clarify the basis of calculation for applicants and also enable the processing of applications to be simplified and expedited.
My Lords, with that explanation I commend the Bill to the House. I fully accept that not all noble Lords opposite agree with the decision to replace investment grants with new improved writing down allowances. I am sure, however, that your Lordships will all welcome the provision of improved building grants ill the development areas. I have no doubt that it is generally recognised that the new package as a whole will greatly encourage overall industrial investment, and investment in the development and assisted areas in particular. I beg to move.
§ Moved, That the Bill be now read 2a.—(Lord Sandford.)
§ 11.31 a.m.
§ LORD BROWN
My Lords, I am grateful to the noble Lord, Lord Sand-ford, for his clear explanation of this Bill. If I may, I will deal with the Bill "upside down", as I should like to deal first with Clause 2 and then go on to Clause 1. In general, we welcome Clause 2 as it increases the assistance available to those who build factory premises in development areas; and it is an unexceptional clause in many respects. But I should like to draw attention to one matter which is of concern to us, and to use the occasion of the discussion of this Bill to make a point which may lie a little outside the ambit of the Bill.
587 In Scotland, England and, I believe, in Wales, we have industrial estate corporations. I have noticed in the past that there is a good deal of fear engendered in the minds of those who run these building corporations if there emerges a surplus of vacant factory capacity. This has been expressed in the past particularly by the English Estates Corporation. I would draw the attention of the Government to the fact that one of the greatest factors in encouraging companies to transfer some of their activities to development areas—which is now becoming more desperately necessary than ever—is the availability of vacant premises of a suitable kind in those areas. If they have to wait a year, 18 months or two years for such premises to be built it is common to see them make other arrangements.
Clause 2 refers to the building of factory premises in development areas, and I thought it would not be unreasonable to make that point and ask the Government to note that when the resurgence in activity comes, which I am sure they hope for—and which we devoutly hope for—and when more people are to be employed, more premises will be required; and if we get them in development areas the building will have to be available there. Otherwise makeshifts of a less desirable sort will be resorted to with a consequent loss of employment in these areas and the generation of over-employment in some other areas.
My Lords, having said that, may I turn to Clause 1. I doubt whether any clause in any Bill has ever had such wide economic implications as this clause has. All Parties in Parliament, I believe, want to see more industrial investment. Certainly they all want to see more industrial prosperity and this, therefore, is not a political issue. It is an argument about ways and means, but I am quite amazed at the argument used in another place in favour of Clause 1; and I am impressed by the fact that the noble Lord, Lord Sandford, did very little to support the purposes of the clause. What we heard was an explanation of how it would work out, and a mere assertion that it would encourage investment. I happen to hold precisely the opposite point of view and I want to talk at some length on this subject.
588 My Lords, the Government at present appear to be resting on the laurels gained by the previous Government for their export surplus. But they will not be able to go on doing that for ever. I should like to remind Her Majesty's Government that the really important sector of our exports which has supported us in the past and the sector with the greater potential for supporting the balance of payments in future is in our heavy industries—the technological industries, those which make heavy chemical engineering plant, machine tools, process plant and many other forms of plant. The homes of many of these industries is in the North, in Scotland and the North-East, and other places away from the South-East of England. These are the industries, or many of them, which for a century or more have been exporting 50 per cent. to 80 per cent. of their products. These are the firms which will be successful exporters in the years ahead when we shall not be able to go on exporting consumer goods in growing quantities because other countries can make such goods for themselves. But these are the companies which to-day, in the presence of something approaching 15 per cent. inflation in wages, are in a most appalling difficulty over making profits.
I wonder whether anyone to-day realises what it is like to run one of these industries and have to quote a fixed price now for a contract worth millions of pounds, without knowing where wages will stand by the time the product comes to be manufactured in a year, two years, or three years hence? It is an appalling problem for these firms. Many of them are making very little money, or none, and some are making losses. These are the firms which are included in the category referred to by the Minister of Trade and Industry as "lame ducks". These are the firms which ought to be investing very heavily to get themselves out of difficulty and to make themselves less dependent on employing so many people, in order that this fighting fund for the export drive may become efficient. Yet many of them are just those firms which will lose any help in their investments which was previously available under the investment grant system. Now, all they can do is to write off the allowances against profits, if they have any—and such profits are usually very small in 589 relation to operations to-day—or increase the apparent loss they are making by writing off the investment allowances and so enlarging the loss. So this very important sector of our economy, which is in a ghastly difficulty very often through no fault of its own, is now to be put under a further burden because investment grants, which were of very great assistance to them, are now not available to them.
Added to that is the stigma, quoted by Sir John Eden in another place during the debate on this Bill, that profitable investment is efficient investment and the other kind is not. The whole inference of his speech was that the firms making profit were efficient and any firm that was not making a profit was inefficient. This is the dogma of the Government at the moment. This is the stigma of "lame ducks". Those of us who have had experience in industry know very well that there are many highly efficiently run firms which, from time to time, make losses; and equally, there are many firms which are managed extremely badly but which make very large profits. If you happen to catch on in the luxury market with some absurd product it is not difficult to make profits, even though you may be of very poor calibre as a manager. If you happen to be in ship building or heavy engineering or machine tools, you have a job on your hands today, however efficient you may be. This is not to say that many managements could not do better—I do not want to overstate my case. But to suggest that all those who fail to make profits should not be helped, should be allowed to die, is totally absurd and highly damaging to the future of our economy, and selectively damaging to the part of our economy which is going to be of most support to us in the years to come.
It is on these grounds that I question the whole economic basis of the Government's change from investment grants to investment allowances. The effect on the transfer of firms to the development areas is going to be very serious indeed. I spent five years at the Board of Trade and know something about the effect of investment grant incentives. A large number of American and other foreign firms, who invested in Scotland, Northern Ireland and elsewhere, were attracted 590 there by investment grants. They were on generous terms, but they were in the interests of the community and particularly of the development areas. That has gone now. We all know that when a new firm is started, the first two, three or four years are unlikely to be profitable. It is a fact of business life. So at this early stage when one needs support, one does not get it under this new form of so-called investment incentive. The change from grants to initial allowances is an investment disincentive, not an incentive, and I think that the development areas are going to be gravely affected by this.
The effect on smaller firms is serious. Although the Government have paid a great deal of lip service, and when in Opposition paid still more, to the interests of small companies, the fact is that the director-controlled company is unable easily to go to the City and get money. The investment grants were a means of helping them to finance the expansion of their activities and very often they were attracted to the development areas by the 40 per cent. (at one time 45 per cent.) grant on capital expenditure.
§ LORD ORR-EWING
My Lords, is it not true that in the time of the Labour Government a Minister said that it cost £100,000 of the taxpayers' money to create one extra job in a development area? Therefore, though I do not disagree with many of the arguments of the noble Lord, that past solution was not an ideal way of creating extra jobs in the development areas. It was very expensive and not very productive.
§ LORD BROWN
My Lords, the noble Lord has not quoted his authority for saying that and has not said which Labour Minister said it. I do not know who said it and I should question the validity of the figure of £100,000, which seems to me enormous, because the average capital investment per head of people employed in British industry as a whole runs at something between £2,000 and £5,000. I very much question the figure the noble Lord is quoting. However, neither of us quotes authorities and we shall have to leave it at that for the moment.
591 This new investment system will, by and large, benefit those who are making the profits, so we are going to see most of the benefits arising from this form of investment accrue to those engaged in the luxury trades. If you are in breweries or newspapers or fashions or gambling machinery, commodities which are confined largely to the home market where there is less difficulty in getting profit margins, then you are more likely to benefit from this investment incentive than if you are involved in the much more serious work of earning the living of this country overseas.
If you couple with this new system other measures the Government have taken, such as the quite arbitrary increase in the rate of interest on credit from 5½ to 7 per cent., which they did at a stroke of the pen soon after they became Her Majesty's Government and which has now put our heavy industries in a non competitive situation with their overseas competitors and is going to make it much harder for them to get export contracts; if you add to this increase of the cost of credit, the effect of the inflation which the Government do not seem to be able to control, and add to that the reduction of the support for export missions recently announced and the abolition of the British National Export Council, it seems to me that the Government have turned their backs, temporarily at least, on the need to support and succour those industries which are earning our living for us overseas. They are going to see that those industries which trade in the home market and spend the foreign currency which the serious companies earn overseas, get the most benefit out of this system of investment allowances.
In my view, the Government stand accused of a very serious conceptual error. They have often accused the Party to which I belong, quite erroneously, of spurning profit. We do not; we never have. But this Government are now making a god of profit. They have gone so far as to imply that those who make profits are efficient and those who fail to do so, for whatever reason, are inefficient. This underlying motive, which is so seriously wrong, benights the economic basis of the Bill now before us. We do not like Clause 1 of this Bill. We think that it is going 592 to damage investment rather than encourage it and we would much rather have seen the investment grant system retained. If it were not for the custom of this House whereby we do not vote against Money Bills, I would have divided the House on this Bill, but of course I cannot do so. I hope that I have expressed my strong disapproval and have made it clear that I do so not on Party lines but on strictly business lines, based on economic facts and on experience of what this will mean to business.
§ 11.48 a.m.
§ LORD TANLAW
My Lords, in following up what the noble Lord, Lord Brown said, with special reference to the development areas, I do not intend to take up more than a few minutes of your Lordships' time at the end of what has been a busy week. However, there are two points which I consider worth drawing to the attention of the noble Lord, Lord Sandford. The first is that, while commending the businesslike approach he has taken towards the whole problem of encouraging capital investment by means of the investment incentives outlined in the Bill, based on the White Paper presented in October last year, I feel that there still could be some misunderstandings about its intentions in those regions mentioned by the noble Lord, Lord Brown, farthest away from the Ministry of the Environment, which are in the greatest need of economic stimulus.
I mean by this, in terms of general accountancy, that both Government and industry can benefit by the Bill under review. On the Government's account, the table in Section 34 of the White Paper anticipates savings to the Exchequer of up to £150 million per annum by the year 1974–75; and for industry, profitable companies with good accounting systems should consider tax reductions and investment allowances as both fairer and more efficient than the previous device of investment grants. However, small companies operating in a development area, such as Scotland, may not have an accounts department and may be in need of advice and assistance as to their entitlements under the Bill, or indeed the one that has been in operation until now. An example of this has been brought to my notice from friends 593 in the other place. In this case the businessman concerned was unable to obtain advice locally in Scotland and entered into correspondence with what was to him a distant Ministry in a foreign land, which could not identify itself with the relatively small and local problem that he had raised. In the end, after a month of abortive letter writing, he resolved the situation by making a personal visit to London at his own expense.
The purpose of this simple illustration is to suggest that in the development areas instances like this are the rule rather than the exception. If a real stimulus is to be achieved and the investment climate improved in the areas where it is most needed, like Scotland, would the noble Lord, Lord Sandford, consider the setting up of regional offices to assist and advise such cases as I have quoted? Furthermore, I should have thought it quite practicable for such offices to be empowered to improve incentive plans of up to, say, £50,000 per annum, with a minimum of delay and without reference to London. The Bill, as it stands, is, I believe, a fine piece of fiscal machinery to help the Government balance their books; but if it is also to improve the investment climate in the development areas, as is intended, then some form of local identification with this aim is in my opinion essential.
This brings me to my second and last point, which is in effect an extension of my first one. In Paragraph 23 of the White Paper it will be seen that the application of these proposals will be discussed separately with the Government of Northern Ireland, presumably because of the different fiscal arrangements that exist over there and not because of the chronically high rate of unemployment. Scotland and Wales have many similarities with Northern Ireland in respect of the need for economic stimulus, but have little to say, as yet, as to the manner in which this is to be best brought about. I do not in any way mean to begrudge the capital sums already spent in those areas; I am merely hopeful that there may be ways of securing a better return on the capital invested in them. For example, according to the Annual Report on Investment Grants, covering the year April 1, 1969, to March 31, 1970. Scotland received investment 594 grants totalling more than £66 million, yet the latest figures in the June issue of the Department of Employment Gazette indicate that out of a total of 1.56 million male population in Scotland between the ages of 15 and 64, 98,013 are registered as unemployed. It is my contention that the fiscal machinery, however efficient and however well-intentioned, cannot alone reduce unemployment or provide economic stimulus to the poorer areas of Britain unless it is linked with some local agency which can ensure that the capital provided is used to the best advantage.
§ 11.54 a.m.
§ LORD SANDFORD
My Lords, I am grateful to both noble Lords for their wholehearted welcome, at any rate of Clause 2, and the welcome from the noble Lord, Lord Tanlaw, for the whole of the Bill. I would confirm that, as he knows, there are regional offices all over the country, both of my own Department of the Environment and of the Department of Trade and Industry. But if the noble Lord has in mind instances in which their advice and assistance has been less than satisfactory, perhaps he will get in touch with me and I can have the matter looked into. The noble Lord, Lord Brown, opened his remarks by mentioning his concern about vacant capacity in factories. I would certainly confirm that it is our view that it is not considered any failure or error of judgment if there is a certain amount—a small percentage—of the total space available left vacant at any one time, because it is necessary for that to be so. About 4 per cent. of the factory space directly owned by the Department of Trade and Industry is in fact vacant at this moment.
When we come to Clause 1, it is no surprise to me, or I think to any other noble Lord, that we come to a sharp divergence of opinion. It was because I thought that to be so well known that I did not seek in my opening speech to rehearse the philosophy underlying the White Paper that was issued last October. We have to face the fact that on this matter the views of the noble Lord, Lord Brown, will not be my views, the views of the Benches opposite will not be the views of the Benches behind me, and the views of his Party will be quite different from the views of my Party. Therefore in my short speech 595 on this little Bill on a Friday morning I sought not to bring about any change of heart among the Party opposite, but just to explain the way in which the Bill would operate. I thought I should be better engaged in doing that than covering the wider field. But as the noble Lord has mentioned the point, I think it would be right for me to rehearse what the Government are doing over a rather wider field.
To date, there has been no reduction in the investment grants paid to industry: indeed, we have accelerated the rate of payment of grants. This is in the calendar year 1971, the year in which two cuts in corporation tax will also take effect. It is estimated that these cuts alone will increase company liquidity by a gross £150 million (or £135 million if the effect of the change from grants to allowances is included). But this is not all. In addition to that help, we have in recent months cut income tax by 2½p in the pound, and we have halved S.E.T.—that is taking effect next week—thus halving the forced loan which manufacturing companies make to the Government and halving the unrelieved burden carried by the service sector.
§ LORD BROWN
My Lords, the noble Lord suggests that cutting corporation tax helps incentive. It helps only those who are making profits. He refers to cutting income tax. It is the shareholders who pay that. He suggests that the Government are helping industrial development by cutting S.E.T. Industry has not paid S.E.T. These are strange arguments to use.
§ LORD SANDFORD
My Lords, I made it quite clear that the effect of cutting S.E.T. is halving the forced loan which manufacturing companies make to the Government and halving the unrelieved burden carried by the service sector. I am only going wider than the Bill because the noble Lord in his speech did so, and if he brings in such facts as he did, it is only right that I should bring in these other factors which are relevant, though not precisely, I would agree, on the Bill itself. In addition to the facts that I have already mentioned, on April 1 we cut the bank rate from 7 per cent. to 6 per cent. Having said that, I fully acknowledge that we are not helping industry in the way that our 596 predecessors sought to do. But my noble friends and I do claim that we not only are helping industry but are providing more help and, in the long term, in a better way.
§ On Question, Bill read 2a: Committee negatived.