HL Deb 04 February 1975 vol 356 cc850-7

7.50 p.m.

Lord JACQUES rose to move, That the Counter-Inflation (Price Code) Order 1974, laid before the House on 17th December 1974, be approved. The noble Lord said: My Lords, I beg to move the first Motion standing in my name on the Order Paper. I would express regret at the need for a second Motion. On the day when the Order was placed before the House the attention of the Department was directed to an error. The error leaves an opening for an argument as to whether the Stage 3 Code is, in fact, revoked. Obviously it was intended that the Stage 3 Code Order should be revoked, and the purpose of the second Order is to close that opening.

Back in July the Government gave notice that they were to have a thorough review of the Price Code. They had in mind two objectives: first, to see whether any changes could be made which would encourage efficiency and, in particular, manufacturing investment; and secondly, to clear up any anomalies or difficulties which had been identified by experience. The review has been very thorough. There have been widespread consultations. The Government's conclusions were, first, that the Code war too severe in the present circumstances, and, secondly, that there could and should be within the Code encouragement to invest; and these conclusions were reflected in the provisional proposals which were published on the 12th November. It is calculated that the Order which is now before the House will allow industry and trade to take an additional £1,000 million per annum from the market.

I will now deal with the principal changes which have been made. In paragraph 79 the investment relief is dealt with. This paragraph means that firms will be entitled to recover from the market 17½ per cent. of their firmly-budgeted investment expenditure on plant, machinery and the construction of industrial buildings and warehouses. This provision will be carefully monitored by the Price Commission to ensure that the investment actually takes place. Firms that invest will obtain this new pricing freedom; firms that do not will not. It is as simple as that.

The new rate for the productivity deduction is dealt with in paragraph 34 of the Code. Briefly, we are cutting the standard rate from 50 per cent. to 20 per cent. with effect from the 1st November. The question of safeguards featured largely in our consultations. The safeguards which have been improved are as follows. First, in paragraph 39, for manufacturing firms there is a safeguard in that paragraph for cases where the profit margins on a particular product or group of products have fallen significantly during the period of price control. In response to many requests, this new provision is additional to the equivalent provision in the Stage 3 Code, now paragraph 38, but firms will have to choose one or other and stick to their choice. The second safeguard is that where the old Code had a special rule for cases where a particular activity was being carried on at a loss the new Code goes further. In paragraph 37 it gives a guarantee that prices can always be pegged at a level to cover costs plus a 2 per cent. margin.

Thirdly, in distribution the Code is perhaps at its most complex. In distribution there is control by the gross percentage profit and the net percentage profit. The position before this new Order was that the larger distributors were able to pitch their prices so that they took not more than 90 per cent. gross profit margin ; by 90 per cent. I mean 90 per cent. of the reference level. But there was a safeguard, and that safeguard was that distributors could go beyond 90 per cent., provided that were necessary to maintain their net profit margin at 75 per cent. of the reference level, but they could not go beyond 100 per cent. of the gross reference level. That safeguard has been strengthened. To maintain a net profit margin of 80 per cent. of the reference level a distributor can increase his gross profit margin up to 105 per cent., so that instead of 75 per cent. of the net reference level it is now 80 per cent.; instead of 100 per cent. of the gross reference level the safeguard is 105 per cent.

Finally, on the safeguards, low profit firms in all sectors stand to benefit from the changes introduced in paragraphs 77 and 78. The old Code made special provision for cases where profits represent a return of less than 8 per cent. on capital or 1½ per cent. on turnover. In the new Code these figures have been raised to 10 per cent. and 2 per cent. respectively. The Government have tried to respond, where possible, to points raised by industry, and, as an example, I might mention the rule in paragraph 29 of the Code which sets three months as the normal interval between price increases. This has been amended for cases where the pressure of external costs is abnormally high. In such circumstances, price increases at more frequent intervals will be permitted. At the same time we have tightened the Code where necessary, and where the old rules have been shown to have loopholes. For example we have amended paragraph 17 so as to require, so far as possible, that the appropriate provisions are applied to each of the business's activities; that is, manufacturing, distribution or whatever it may be.

I come now to the public sector. Our general intention has been to treat the public and private sectors alike in so far as this was reasonable and practicable. But it has to be recognised that the powers and obligations of the nationalised industries are not the same as the private sector companies, and Ministers are, in the last resort, answerable to Parliament for their pricing policies. With this very brief canter I hope that I have said sufficient for the House to accept this Order. I believe that it does substantially improve the former Code. My Lords. I beg to move.

Moved, That the Counter-Inflation (Price Code) Order 1974, laid before the House on 17th December 1974, be approved.—(Lord Jacques.)

7.59 p.m.

Lord ABERDARE

My Lords, these are very complicated matters which I think my noble friend Lord Drumalbyn understands a good deal more than I do, but I am very grateful to the noble Lord for having explained them concisely and simply in so far as they can be simply explained. I quite understand the reasons for the second Order, on which I have no comments. This, of course, is a Statutory Instrument which we have no powers to amend; we can only accept or reject it, and naturally we would not dream of opposing anything such as this Order which in fact relaxes the Price Code as it stands at present.

The criticism which I have of the Order is that it has come too late and gives too little. It is true that the present Price Code was introduced by us as part of our counter-inflation policy in April 1973, but the situation is completely different now. Then our economy was growing at 4 to 5 per cent.; now it is stagnant. Then industry was making profits and had plans for increased investment; now industry is short of liquid cash and investment plans have been severely curtailed. Above all, then there was a Pay Board and a pay policy; now there is a Social Contract that sanctions wage increases of 20 per cent. and over. It is quite illogical, as we have said all along, to have rigorous control of prices and to let wages go rip. To carry the Government policy to its logical conclusion they should have a Social Contract on prices with the CBI just as they have a Social Contract with the TUC on wages —not a Prices Commission. As it is, industry is forced to pay greatly increased wages but is unable to make a full adjustment in its prices.

No wonder, my Lords, that liquidity problems have arisen, especially as at the same time industry has been required to pay increased taxation and increased Social Security contributions. The result is that the Government are now having to find vast sums of money to bale out firms who would otherwise go bankrupt, and if we are to believe what was in the papers the other day it was alleged that Sir John Ryder, the Government's industrial adviser, said that this is not the end by any means and that more firms will be applying to the Government for help. To do this the Government are running a huge Budget deficit which in turn only adds to the inflationary fire.

Surely it would be much better to allow industry to adjust its prices and return to a position of company liquidity and profit. One cannot but wonder in the present circumstances whether any form of price control is really necessary. In the present depressed state of the market, competition alone might provide a control of prices more effective and far less bureaucratic than the present system. If some price control is still desirable—and it may well be—we do not believe that the amended Price Code relaxes the present control sufficiently. Would not profit control alone be sufficient in the present circumstances? It maybe would lead to a small rise in prices but it would give a powerful boost to business confidence.

As for the individual parts of the Order which the noble Lord has mentioned, the standard productivity deduction of 20 per cent. in present conditions of rapid inflation and low growth is more severe on companies than was the 50 per cent. deduction at the start of Stage 2. Price control would still be tight even if this productivity deduction was abolished. We are glad to have some investment relief, but it is not of so much value at a time when most companies have been forced to cut back on their investment plans, and we are disappointed that it does not extend to commercial vehicles.

We welcome the new proposals for a safeguard related to individual products, but we are not happy with the figure of 30 per cent. erosion of the net profit mar-gin since 30th April 1973. We believe that 20 per cent. or 25 per cent. would be a fairer figure and better related to the alternative safeguard available of 10 per cent. erosion of net profit margin for the enterprise as a whole.

Finally, my Lords, it seems wholly illogical that for purposes of the Code stocks must be calculated on a historic cost basis, when for taxation purposes the Chancellor of the Exchequer shows his willingness to move towards a replacement cost basis. This is obviously much fairer and much more realistic in the present inflationary situation. We there-fore criticise this Order as being too little and too late, but as it is at least a relaxation of the present Code we shall accept it graciously.

Lord JACQUES

My Lords, we inherited the Code; we did not invent it.

Lord ABERDARE

I said that.

Lord JACQUES

My Lords, when my right honourable friend moved this Order in the other place she said: The Price Code is not the only system for dealing with prices and price policies; there are other systems. She went further and said that she was not even satisfied that a price code was the best system for dealing with it but, having inherited the Price Code, in the immediate future we had no choice but to adapt it, first, to changing circum-stances, and, second, to other economic and social policies. That was the way which would give us the greatest speed.

So far as being too late is concerned, the Government have not yet been in Office for 12 months. They came into Office only last March. In July we announced a radical review of the whole of the Code, and by November we had already published our provisional findings which are very much the same as the Order before the House. Even before this change, we made other changes which gave some relief. For example, in the case of distribution, where the distributor was restricted to a gross margin of 90 per cent. of his reference level, we introduced a safeguard. He could go beyond the 90 per cent. and up to 100 per cent. if need be if that were necessary to maintain his net profit at 75 per cent. of the reference level. That is the kind of change we were making before last July. We felt that there had to be a radical change and that has taken some time. I was surprised that I should be told that it is too little. The amount involved is £1,000 million and in November the Chancellor of the Exchequer made fiscal changes which gave to trade and industry a further £800 million, so these two together are giving to trade and industry an additional £1,800 million. I doubt whether anybody could really say that that is too little.

Lord DRUMALBYN

My Lords, the noble Lord is not adding apples and pears. He is talking in the one case of a straight gain in the matter of net income; on the other hand he is adding the gross income (is he not?) that is to be taken at £1,000 million which must be the gross income and is the extra income firms are going to get from the Market.

Lord JACQUES

My Lords, the £800 million dealt with by the Chancellor of the Exchequer came in less taxation. The changes in the Code allow trade and industry to take an additional £1,000 million from the market, if they can.

That brings me to the next point about taking it if they can. We are told that competition could look after that, but that is not what was said when the last Government were in Office; it has been said only since last March. We inherited the Price Code and we are using it and relaxing it. Even if competition can take care of the position, people who allow it to happen are not affected by the Code if their profits are less than those permitted by it; they can forget the Code. For example, it is now stated that the profits of the principal companies are well below the reference levels. If they are, then the Code is having no effect. There cannot be any real objection to the Code. It is not preventing their taking money oue of the market; it is competition which is preventing firms taking more out of the market. I do not think that the Code should be blamed for something which it is not doing.

According to the figures that is the position both for the principal companies in manufacture, and for distribution as a whole. For example, the estimated net profit at the reference level was about 6 per cent. of turnover. The net profit is now estimated at about 3½ per cent If that is so, then it is not the Code that is restricting trade and industry from taking money from the market; it is, as I said, competition that is doing so. Over the greater part of trade and industry, profits would be what they are now even if there were no Code.

Lord ABERDARE

My Lords, I am grateful to the noble Lord, Lord Jacques. He is making much more brilliance of the point which I was trying to make, that there is no need for a Code if you control the margin of profits alone.

Lord JACQUES

My Lords, there is probably no need for a Code, but because a large number of firms are being prevented by competition from taking too much out of the market, it does not mean that the others who are able to take more than they should do ought to be allowed to get away with it. In order to prevent them we are continuing the Opposition's Code relaxed to the extent of £1,000 million a year, which I suggest is a very substantial relaxation.

Lord ABERDARE

My Lords, the noble Lord keeps saying it is our Code. But we had a Pay Code, too, which made a hell of a difference, if I may use an un-Parliamentary expression.

Lord JACQUES

My Lords, whether or not it is a Pay Code does not make a great deal of difference if the additional amount which is paid can be charged as a cost before profits are calculated. When in Government, the Opposition made the figure 50 per cent. but we reduced it to 20 per cent. In the great field of distribution the whole of the costs are allowed, and that includes increases in wages. Therefore, they are not affected by the Pay Code. I do not think it is a strong argument to say that the Price Code is all right when it is a Pay Code, but all wrong when it is not. We are now in a position where the relaxation on profits is at least as great as the relaxation that we have had on pay, as a result of the transfer from statutory control to the Social Contract.

On Question, Motion agreed to.