§ Lord ORAM rose to move, That the Counter-Inflation (Price Code) Order 1977, laid before the House on 29th July, he approved. The noble Lord said: My Lords, this is an order to approve a revised Price Code which came into operation on 1st August. The Price Commission is required to ensure that it is implemented until 31st July next year.
§ The Government's policies for their continuing attack on inflation were outlined in the White Paper published at the end of July. In that White Paper, the Government made clear their view that the mastery of inflation was the pre-condition for success in returning to full employment. Measures were outlined giving effect to these policies. On earnings, the Government stated their clear duty to urge all concerned to base their approach to pay negotiations on getting inflation into single figures. They therefore urged that the general level of pay settlements should be moderate enough to secure that the national earnings increase is no more than 10 per cent.
§ Provided that the overall increase in earnings is held to this 10 per cent. figure during the current pay round, the Government stand by their forecasts, published at the end of October, that the annual rate of inflation will fall to around 6½ per cent. by the last quarter of 1978. This would at last bring us into line with the rates of inflation forecast for the other major industrialised countries. However, this only illustrates how important it is for the future prosperity of our economy, and of everybody in it, that we should achieve moderate results from the current pay round in line with the Government's guideline.
§ The September Retail Price Index figures—the latest available—provide solid 697 evidence that the rate of inflation is on the way down. The annual rate of increase is down to 15¾ per cent. which is the lowest rate of increase this year, and the third successive monthly reduction, I cannot of course, predict what the October figures—to be published tomorrow—will show, but I do not think it will surprise your Lordships if they show that there has been a further fall in the annual rate of inflation.
§ As for the future, one of the best indicators of the rate of inflation in retail prices is the Wholesale Price Index. The prices at which goods will appear in the shops in a month or two's time are partly determined by the prices at which they are leaving the factories today. The Wholesale Price Index for October has been published. It shows that the price of outputs of all manufacturing industry rose by only ½ per cent. in October the second small monthly increase in succession. While the annual rate of increase at 17¾ per cent. is still, we would all agree, high, the solid improvement in this index is shown by the fact that it has risen by only 6 per cent. over the past six months and by just 2 per cent. over the past three months. However, the prices at which goods will be leaving the factories in a few further months' time, looking further ahead, are heavily influenced by the prices at which materials and fuel are entering them today. The Wholesale Price Index for inputs has fallen for six successive months and is just 2 per cent. up on its level of a year ago, reflecting the stability both of sterling and of commodity prices generally.
§ Your Lordships will recall that we debated the Price Commission Bill earlier this year. That Bill, now enacted, confers wider and more flexible powers on a reconstituted Price Commission. Under the new powers, the Price Commission is able to initiate its own investigations into price increases, prices and margins. Price increases may be frozen or partially restricted during these investigations. At the end of an investigation, the Commission may recommend to the Secretary of State that prices or margins should be restricted for periods of up to one year. The Act also allows the Secretary of State to direct the Commission to examine more general matters relating to prices or charges—such as the pricing practices in a sector of industry or commerce—and he 698 may regulate prices in consequence of the Commission's reports. Parallel with these powers of investigation and examination is the duty of the Price Commission to ensure that the provisions of the Price Code are implemented.
§ Therefore, I now turn to the Price Code itself. Because it is only a single component of the wider prices policy machinery, we have been able to confine it to a much slimmer and simpler document compared with its immediate predecessor. I am sure your Lordships welcome that. We are now in a transitional period, and it is right that we should retain for a further year some broad controls contained in the Price Code, while the more flexible and selective policies set out in the Price Commission Act are beginning to take effect. The proposals for the Code were first issued as a Consultative Document, and all the representations received, whether or not they were accepted, were considered most carefully.
§ Your Lordships will wish me to draw to your attention the principal changes which have been made. The principal change made in the Code is the removal of the provisions imposing cost-related controls on manufacturing and service firms. This means that such firms are now subject only to the profit margin controls. The removal of the cost-related controls is permanent and Section 15 of the Price Commission Act contains a requirement to that effect. There is no doubt in our minds that the continued application of the cost controls would have meant rules which were inevitably arbitrary and indiscriminate.
§ Modifications have also been made to the margin controls. Paragraph 22 renews the Price Commission's discretion to permit revised reference levels for enterprises if it is satisfied that a change is justified. In exercising this discretion, however, the Commission is now required to have regard to the criteria listed in Section 2(2) of the 1977 Act. A similar provision in paragraph 40 requires the Commission to have regard to the same criteria in considering requests for adjustment of gross percentage margins for distributors.
§ These amendments go some way to aligning the principles governing the implementation of the Price Code to those 699 underlying the 1977 Act. For manufacturers and service firms seeking relief for low profits, paragraph 23 provides that, as an alternative to a 12½ per cent. return on capital, a firm may have a reference level which would permit it to obtain a return on turnover of 3 per cent. instead of 2½ per cent. which it was under the earlier Code.
§ Additional changes have been made for distributors, principally in order to deal with specific difficulties which have arisen from the operation of the gross margin controls. The safeguard for net profit margins is improved to allow them to set gross margins up to 115 per cent. of base-level margins in order to obtain 85 per cent. of net profit margin reference levels. These figures compare with 110 per cent. and 80 per cent. respectively in the former Code. The definition of small distributors exempt from the 10 per cent. cut in gross margins has been revised so that retailers with annual sales of less than £600,000 and wholesalers with annual sales of less than £1,200,000 will now be exempt. The previous exemptions were set at £500,000 and £1 million respectively.
§ A limited number of prices and charges have been added to those already exempted from the Code and certain changes have been made to the investment provisions to take account of the ending of cost-related controls. Investment relief has been extended to the acquisition of existing industrial buildings, warehouses and shops which are for occupation by the enterprise claiming relief.
§ Finally, the Code contains a revised pay sanction. It provides for the disallowance of excessive remuneration in determining profit margins under the Code, where the pay limit has been exceeded. The pay limit in this context is the 12-month rule set out in Annex A to the White Paper The Attack on Inflation after 31 July 1977. Breaches of the previous pay limits are also subject to the sanction, but before applying it, the Price Commission is required to refer any question whether increased remuneration exceeds the pay limit, to the Secretary of State for Employment for determination.
§ My Lords, this order is intended to cover the period up to next July. Noble Lords will know already that, if the Government should wish to impose a 700 statutory Price Code beyond that date, they will have to put forward proposals for new primary legislation: the 1977 Act makes quite clear that the Price Commission's duty to ensure that the Code is implemented does not extend beyond that date. In the meantime, however, we shall have an opportunity to assess the results of the Price Commission's wider work on investigations and examinations carried out under its new powers. For the current year, this order is an essential element of our counter-inflation policies. We have gone a long way to easing the straitjacket of the earlier price controls by removing the cost-related provisions of the Code. We have also effected improvements to the margin controls. We believe that we have reinforced the principle of en-deavouring to restrain prices and, at the same time, safeguarding and encouraging investment. My Lords, I beg to move.
§ Moved, That the Counter-Inflation (Price Code) Order 1977, laid before the House on 29th July, be approved.—(Lord Oram.)
§ 3.55 p.m.
The Earl of GOWRIE
My Lords, dearly as I should like to do so it is certainly not my intention to turn this matter into a full-blown economic debate, because we had one of those only last week. However, under the cover of his normal clarity and courtesy we have, during the past 14 minutes or so, heard from the noble Lord, Lord Oram, a tremendous symphony of wishful thinking. If the Government look upon a falling rate of inflation based upon 15 per cent. or higher—those are the noble Lord's figures, not mine—as encouraging, I suggest that they need psychiatric rather than economic advice.
As the noble Lord has told us, the order substitutes a new Price Code for the previous Code which operated from 1st August 1976 to 1st August 1977. The legislation is, therefore, retrospective to the extent of three and a half months and it would be better, I suggest to noble Lords opposite, if we were able to consider these matters on a slightly more topical basis.
As is widely known, we on this side of the House oppose the principle of the Government's Price Code and its subsequent 701 extension. In our view the Code has been shown to have had virtually no effect on prices and it is distributors rather than manufacturers who suffer. Although I agree with the noble Lord, Lord Oram, that we must welcome the Code in so far as it relaxes some of the provisions of its predecessor, we are extremely disappointed not to see more relief being given to distributors. Therefore, we find it damaging not only to general business confidence, but damaging in that it is highly selective. I suggest that the Code is especially dangerous during a period of high wage increases, that is to say of wage increases of about the 15 to 20 per cent. margin. We agree on all sides of the House that in the past two years profits have taken the greatest battering on record and that, of course, has had the predictable—and from our point of view the predicted—effects on unemployment.
Ministers have given frequent assurances that the last year of the Code was supposed to be its final year. The Secretary of State for Prices, Mr. Hattersley, has said that another year of margin control was to be a quid pro quo for a pay policy with the Labour unions. My Lords, there is not much of a pay policy left. During the economic debate last week I asked the noble Baroness, Lady Birk, whether she would give me details of any settlements whatever on any significant scale which had been achieved at under 10 per cent. She said that she would do so. However she has been unable to do so.
We also believe that the Price Code is operating ineffectively as regards its own costs. Will the Minister say whether he is satisfied with the cost effectiveness of the administration of the Code? Are any outside bodies—bodies which are not staffed by the Civil Service—involved in the administration and the financing of the Price Code and, therefore, adding to its expense?
§ 4 p.m.
§ Baroness SEEAR
My Lords, we on these Benches should like to give a welcome to this Code, believing, as we do, that it is necessary to have control over prices, particularly during this period. We are glad to hear from the Minister the extent to which prices are falling, but we would strike a note of warning about the level of pay increases.
702 We must remind ourselves that the original intention was that, on average, no pay increase should exceed 10 per cent., and that means that the basic pay increases should be in single figures. It does not appear that, in fact, that is happening. It is now assumed that there will be a minimum increase of 10 per cent. for everyone. If this goes on, the optimistic figures which the Minister has given us are not likely to be justified, for prices can rise again only if pay increases rise very much above 10 per cent. For that reason, we are glad that the Code includes the possibility of a sanction on prices where the 12-month rule has been broken. In our view it is a pity that such a sanction cannot be operated where the 10 per cent. is also broken, because the failure to control rising wages could put the whole exercise and all that we have gained into reverse.
Although, of course, part of the reason for the pay increases above 10 per cent. is undoubtedly pressure from trade unions, there is no doubt that, in some circumstances, it also comes from a too easy—indeed, a willing—acquiescence by employers for the sake of convenience.
§ 4.2 p.m.
My Lords, I should like to thank the noble Earl, Lord Gowrie, and the noble Baroness, Lady Seear, for their response to this order. The House will be grateful to the noble Earl for not wishing to launch upon a major economic debate. However, I shall reply briefly to some of the points that he made and make one brief comment on what the noble Baroness said.
The noble Earl suggested that I was engaging in wishful thinking on the basis of a level of inflation of 15 per cent. I did not base my optimism about the future on the existing level of inflation; I based it on the rate at which the situation is improving and I spelt out a number of statistics which indicate that that improvement is real and justifies us in looking to the future. Given the reservations to which the noble Baroness referred, we can look forward with optimism to an increasingly improving situation.
When the noble Earl referred to the necessity or otherwise for a Price Code this year, he overlooked the fact that we are in a transitional period with respect to prices policy. We are moving from the 703 one system, which was a system of rather rigid controls, to the system based upon investigations and examinations by the Price Commission, which is a much more flexible system. But that system will need to take some time before it becomes fully operative and I suggest that there is the necessity for a Price Code during this current year to take account of the transitional situation.
The noble Earl then used the phrase, "There is not much of a pay policy left". I would at least urge him to consider that the 12-month rule is a very important element of pay policy and that continues. That has the support both of the Confederation of British Industry and the Trades Union Congress and, to my knowledge, there have been no significant breaches of the 12-month rule. Therefore, to that degree I believe that he was wrong in suggesting that the pay policy had pretty well disappeared.
He then asked about the administration of the Price Code. As I indicated in my opening remarks, it is the responsibility of the Price Commission and I suggest to him that as the Price Commission is newly constituted—it will shortly be reporting on the first three months of its work—before criticising it for being unduly expensive, bureaucratic or any of the things he was hinting at, we should allow a little time to see how it is working.
I thank the noble Baroness, Lady Seear, for her remarks and would agree with her that any optimism that I expressed with regard to the future is, of course, entirely conditional upon continuing success in achieving restraint so far as wage claims and settlements are concerned. I am entirely with her in that. Indeed, I think it is well known that my various ministerial colleagues have always stressed that. They have made it very clear that, although' we can see the probability of progress in relation to the cost of living, if there are excessive pay claims and pay settlements, then, indeed, inflation will begin roaring again. So far, we are holding the ring and we believe with confidence that we shall go on doing so. However, I accept what the noble Baroness says: it is a condition that there should be continued pay restraint.
§ On Question, Motion agreed to.