HL Deb 06 May 1981 vol 420 cc136-86

2.52 p.m.

Lord Spens rose to call attention to the need for further assistance to new businesses and for the stimulation of existing smaller businesses; and to move for Papers.

The noble Lord said: My Lords, I thought that I had been upstaged by no less a person than the Prime Minister when I saw her yesterday evening on the BBC television news talking about small businesses and the need very rapidly to encourage them. I understand that this was at a reception which was supposed to start a series of propaganda measures to enlighten the country about the Government's own actions. The papers do not seem to have reported her in any way as avidly as they have reported certain criminal nastinesses today, and so I think that the upstaging has not, in fact, occurred.

However, in the excerpt that I saw, she said that it would take time for new, large businesses to be created and that for the immediate future the need was to encourage small businesses as much as possible. That is entirely the reason that I put down this Motion, which I must claim to be very topical in the light of what happened yesterday.

Accepting what the Prime Minister said yesterday, I want to make only two more introductory remarks. First, to my mind two and a half million unemployed is completely unacceptable. It looks as though we shall have to live with a figure like that for the next two or three years unless something is done. I believe that it warrants emergency measures to try to get that figure reduced. I should also like to point out that I tabled this Motion some days after the Budget speech, so that I put it down in the full knowledge of what the Government propose to do in their Budget. I still do not think that that is anything like enough and I hope that our debate today will bring forward some more suggestions which the Government may find useful.

We are very fortunate in having a number of experts speaking today. The noble Lord, Lord Oram, who is an expert on co-operatives, will, I believe, talk about their role; the noble Lord, Lord Seebohm, who is chairman of ICFC, will talk about that and also about his new and very imaginative co-operative idea, which he has mentioned before in this House; the noble Lord, Lord Schon, who for 10 years has been chairman of the National Research Development Corporation, will talk about what that corporation can do. So I shall leave all that side of it to the experts.

Of the 2½ million unemployed there must be a very large number with experience of the varied skills that are needed to get new businesses started—not only engineering and technological skills, but skills or experience of selling, marketing and administration of businesses. The problem is to get those skills brought together. That is one of the themes which I want to pursue this afternoon. A great deal of very good work is already being done in this field. I hope that the noble Baroness, Lady Seear, who is chairman of our Select Committee on long-term remedies for unemployment, will be able to talk a little about her visits to Pilkingtons, ICI and one or two other places. I do not know whether she plans to do that, but perhaps she will.

I have visited two operations in the South-West: the Aid-to-Bristol Enterprises sponsored by the Imperial Tobacco Company and five or six other local firms, and a small industries group at Watchet, near Minehead, which has an organiser paid for, certainly to begin with, by the Manpower Services Commission. I saw not only those two operations working but also the very great amount of help that was being given to them by Somerset County Council and the various district councils. So I am quite certain that the local authorities have a strong part to play.

Then only last Friday I visited in my home town of Ashford in Kent a person who I think has a very imaginative idea. He is a property developer who has bought up a complex which consists of a series of factory buildings in the middle of which is an old warehouse which had too low a roof for its proper purpose as a warehouse. He has converted that warehouse into 20 or more very small areas, each one not being more than 600 square feet. These he has already put on offer at monthly rentals to anyone who wants to take them up. He told me that if someone came to him with a good idea and could not even afford the monthly rental, if necessary he would see what he could do to get that person started.

I asked him why he was doing this. He said that he felt he had a duty to help the employment problem, but he was confident that he was going to make profit out of it. That is an important aspect. These people who are helping are not doing it entirely for charity, or philanthropically. They believe that their help will enable future profits to be brought about. I want here to be a little unkind to the media. In the case of the Ashford project no one has written that up. On the other hand, the local press has carried banner headlines of various firms which are being closed down. The Ashford operation was reported but on an inside page, and with no enthusiasm. If we are to get anything off the ground we must have the help of the media for this.

I want to deal first with the need to stimulate existing businesses, because they are already operating and therefore can expand much more quickly than anyone else. However, many of them are just hanging on hoping for the economic climate to change, and they may collapse if no help is given to them immediately. They need first of all lower interest rates. Can this not be achieved by more of a two-tiered loan system, or even, for a short time, by a moratorium on the servicing of their present loans? Secondly, they need protection from the soaring increases in local rates. Thirdly, a reduction of the national insurance surcharge. One head of an old-established business in Ashford told me that if that surcharge could be reduced he could take on another two people immediately. Fourthly, alleviation from the burdens of the employment protection legislation. Fifthly, scrapping minimum wage rates for a short time.

I suggest that those five matters could be put into some form of emergency industry Act—I do not know what you would call it—and brought into operation for, perhaps, a period of three years. I choose three years because three years seems to be the Government's idea of what is necessary at the moment, as will come out in some of the things I have to say. There is a sixth point which ought to be happening already, and I am afraid in many cases is not happening, and that is some way to stop the nationalised industries, and even Government departments, from harming businesses in the private sector. That is still going on, and it can be absolutely devastating.

There does not appear to be any sense of urgency within the Government to tackle these problems. I want to give an example which came to my notice over the weekend concerning the local authorities and the Secretary of State for the Environment. The Association of District Councils told me that there had been set up a joint group of central and local government officials to look urgently at the role of local authorities in assisting industry and commerce, paying special attention to small firms. The group was set up in May and it sent in its report in July last year. I am told that that report was published this last week. What has happened to it? Who has been sitting on it? It asks for not very much in the way of additional legislation, but it asks for a little bit. They seem to think now that because it has been sat upon for so long they are unlikely to get this legislation even during the next Session. That is not the way to treat this emergency.

The Wilson Commission on financial institutions produced an interim report in July 1979 on the financing of small businesses. There were 15 recommendations in it, and not many of them have yet been put into effect. But there is one on which Sir Harold elaborated during the debate on the Second Reading of the Finance Bill just before Easter, in which he called for the establishment of some form of development commission which would be similar to CoSIRA—the Council of Small Industries in Rural Areas—which operates, as its name implies, in rural areas. He would like to establish a similar CoSIURBA to operate within the towns. He would like to see both CoSIRA and CoSIURBA given financial powers similar to the other development agencies which exist. That is something I support, and I would hope that theGovernment would see their way to setting about.

I understand that at last night's reception the Chancellor spoke about the new measures that he is introducing in the Budget. Last year he gave some welcome relief to some borrowers who, in turn, invest in small businesses, and 100 per cent. capital allowances for the construction of industrial building to last for three years. This time there is to be a Government backed loan scheme, the Government putting up 80 per cent. of the money, and also what they call a business starter scheme. I want to criticise this latter scheme for being far too restrictive. It takes up 14 clauses in the Finance Bill, most of them of course trying to stop people misusing the scheme. It is not that of which I am critical. I am critical about the fact that its scope is so limited. Its scope is limited to the first three years of the life of a business, and to cover only 30 per cent. of the equity of that business, and it is only for businesses which, among other limitations on their nature, may not deal in goods.

I think that the businesses which need this scheme are those which are already operating but which have come to the stage when they want to expand; they need additional finance, but they cannot afford to get that finance by further borrowing, and therefore they want some means of getting a part of their equity into other hands. Surely, if dealers in goods are excluded from the scheme, the Government are excluding those people who are essential to the new manufacturer, and who are going to market and sell his goods. They must be encouraged at the same time.

I come to the question of new small businesses. What does the small businessman want to help him start? First, he needs suitable premises, or be allowed to work from home, and that is something local authorities can arrange, as well as entrepreneurs like my friend in Ashford. Secondly, he needs information about local requirements and restrictions and whether there are any grants he might apply for. There is a lot of information going around but nobody to coordinate it locally, and therefore there is no one place where the new businessman can go for that information.

Thirdly, he needs finance. There are few with enough capital of their own to cover their initial expenses and provide working capital as well. They do not want to commit their homes as security nor to surrender control of their businesses, and the banks —at present the only people to whom they can turn—are not very good about helping in such ways. Fourthly, the new businessman wants advice, including for example about coping with all the forms, returns and other monstrosities with which a businessman must now deal. I do not know whether noble Lords saw yesterday's Daily Telegraph which contained a whole list of items which must be dealt with by someone employing only one employee. A new small businessman does not want to use most of his working capital paying people to do that, and therefore some form of centralised administration is probably necessary.

I have a suggestion to make which might help overcome some of those problems. First, however, I must point out that a large number of excellent projects are being started up all over the country. The trouble is that they are too haphazard and there is no co-ordination or encouragement on the part of large businesses to start them near their places of work. I should therefore like to see the establishment of catalysts in every local area. I do not know how many one could have, but certainly we need someone in each area able to pull together the various businesses which might be able to give help, somebody who could sort out the unemployed persons who might wish to set up together in business. People wishing to do that would have to be introduced and brought together and be confident that something constructive could be done.

Where shall we find those catalysts? I can tell the House of one syndicate—I will call it that—which has been formed, again in the West, which is doing exactly what I have described. Its director has set up a small company and he has approached various businessmen in his vicinity who might be prepared to put up a little risk capital for him to invest in new ventures. I believe that throughout the country there are enormous numbers of people who would be prepared to take a small risk with some of their capital but who do not know how to go about it and where to start. The man of whom I am speaking started up last year and has already persuaded his colleagues to invest in three different businesses, which are now off the ground, and he is now looking around for more. He believes his idea could be spread throughout the country.

In a way, it is like the syndicates at Lloyds, except that those contributing to these syndicates would be limited only to their contributions and not to anything above that. We should endeavour to inspire the creation of such syndicates throughout the country, and I would call them, "Friends of small businesses" or something of that sort. However, I come up against the law straight away, for I cannot advertise for people of that sort if I am going to ask them to contribute money because under the Prevention of Fraud Act and the Protection of Depositors Act it would be a criminal offence to do so. How can we get round that? Perhaps the Government could help us, and I hope in any event that they will examine my suggestion.

I should like to see my "Friends of small businesses" start, and the first question to consider is how to find the catalysts. Could the Manpower Services' Commission fund them and local authorities choose them? If so, it should be done not by local civil servants; they must be chosen from among businessmen with experience and enthusiasm, probably businessmen who would be prepared to work, at any rate to begin with, for a very low salary. I am certain we could get something of the sort going, provided there was sufficient enthusiasm, and I hope I have given noble Lords some food for thought. My Lords, I beg to move for Papers.

3.17 p.m.

Baroness Seear

My Lords, the House will be grateful to the noble Lord, Lord Spens, for putting forward a Motion on a subject which we agree is of the greatest importance. We also agree that small businesses are important, although that statement by itself does not get us far. This afternoon we need to discuss some of the problems that are involved in attempting to help small businesses to establish themselves satisfactorily and to remain in business.

The need for more small businesses in this country goes without challenge; as we know well, we have a far smaller small business sector in the United Kingdom than exists in any of our major competitors. That is a real economic loss, as small businesses provide a breeding ground for new ideas and, later on, a breeding ground for big businesses, and therefore I would welcome more small, as well as big, businesses. However, there is a certain sentimentality at the present time about small businesses which does not seem to hold water in itself, although needless to say I am in favour of developing more small businesses in Britain.

I wish at the outset in following the noble Lord, Lord Spens, to say, on the basis of some of the work we have done in the Select Committee and of what we have seen, how much I agreed with the tribute he paid to large companies which are taking imaginative and constructive steps to establish small businesses. As the noble Lord remarked, we saw some of the work that has been done in the north-west by ICI and we visited Pilkingtons and other large companies which have studied the question in great detail and have taken a variety of steps to match the need for development in their areas. I can only say that I believe that few things would do more to speed up the satisfactory and successful development of small businesses than if still more of the larger enterprises were to take steps in that direction.

I say that partly because they are already in the field and they understand the problem, but also because they are able to provide something which is very greatly needed in the establishment of small businesses. A great deal of enthusiasm, a certain amount of romanticism, and considerable effort is devoted by a number of people towards getting small businesses going. But the fact of the matter is that, to be successful, a small business needs financial knowledge and management skills among other things and that these are in very short supply; far shorter supply than are good ideas about products which might be produced or the desire to set up in business. In my view it is only by linking the expertise that exists in the large companies to the people who want to set up the small enterprises that small enterprises which can survive are likely to be established on a large scale.

So the first point that I would make relates to thanks for, and encouragement of, greater effort by the large companies already working in this field. I wish also to say how glad many of us are—I am sure that the noble Lord, Lord Seebohm, will be saying more about this when he speaks; and he is of course in a far better position than I am to speak about it—to see that in many parts of the country the banks are now taking an increasingly constructive part in the establishment of small businesses.

However, what I suppose we are primarily concerned with this afternoon is to discuss what Government can do, and for my part what Government cannot do, in this field. What kind of help do small businesses want from Government in order to get going and to remain in being? Here I am afraid that first I must cross swords with the noble Lord, Lord Spens. He believes that some relaxation of protective legislation is necessary if small businesses are to flourish; and that in particular they should be let off some of the provisions of the Employment Protection Act beyond the relaxations which have already been granted. For my part I do not believe that this is a wise policy.

In the first place I think it becomes extremely difficult to draw the line between the company which is exempt from provisions of this kind and the company which is allowed to take advantage of them. This is a problem which arises whether special provision is made for industries and concerns operating in a particular geographical area or whether the concerns are of a particular size. I say that because there is always somebody who is just over the border—just over the border of size or just over the geographical border—who quite justifiably feels extremely hard done by if he sees a competitor quite close to him who has benefits which he cannot enjoy, as he would see it. This is an extremely important point, and a point which I should have thought would have been much borne in mind by people who are pressing, in my view rightly, for the stimulation and competition that comes from the establishment of small businesses. One really cannot talk about on the one hand the advantage of competition and on the other hand the giving of special concessions to people who are trying to compete.

I also believe that in so far as protective legislation is desirable—and most of it I believe to be desirable—I see no reason why employees employed in small concerns should not have the protection that is given to employees employed in larger concerns. I have in mind, for example, the maternity benefit provisions. I would draw your Lordships' attention to the fact that in so far as research into this matter has taken place, and in so far as we have evidence rather than hearsay for making up our minds about the effect of protective legislation, in fact it has not been an inhibiting factor for the development of the small firm.

I have said before in your Lordships' House, and no doubt I shall say again, that what I believe is needed is much better information to employers on how the legislation operates. The widespread belief that it is impossible to get rid of anybody in employment because of the unfair dismissal procedures is complete nonsense, in that far more employees when they go to the tribunals lose their cases than win them. That is a fact which people refuse to believe, and the provision of facts and figures about it seems to make no impression when the matter is being discussed. But it is in fact the case. So that information about how the legislation operates, rather than propaganda in order to try to get rid of it, seems to me to be what is required in this particular.

Having said what I for my part at any rate do not want the Government to do, I turn now to the question of what do we want the Government to do? I feel that in a sense I must apologise to your Lordships' House if I am sounding a little critical and negative. But what I believe is immensely important to realise in the development of the small business—and this is a theme to which I think we shall return again and again in discussing the measures necessary for improving the employment position—is that conditions in different parts of the country differ very greatly. The needs of one part of the country are not the same as the needs of another part of the country. In a great many cases a national detailed plan for assisting the development of small businesses will not fit in the particular areas in which it is desired to give help.

What I am really saying is that we need to operate the assistance for the development of small businesses as near the grass roots as possible, with the greatest amount of flexibility, and that any attempt at something which looks like an inspiring national plan that is to provide the same sort of provision for everybody will in the end suit nobody. I know that this view runs counter to some of the most deeply-held beliefs about Government in this country. In fact, it runs counter to control over public expenditure. But what we are talking about is development—development of new businesses under new conditions; and development money is by definition risk money. Unless Government are prepared to commit money for risk purposes, then they are not going to help small businesses. Therefore they must not tie down their money in a way which will make it increasingly difficult for the people who want to take advantage of it to do so.

I do not know, I cannot say, how exactly that can be worked out, but I am sure that what are needed are agencies, as near as possible to the start-up place geographically, which will have the maximum amount of discretion for helping in the provision that they give. If that provision differs somewhat in the North-West as compared with the North-East or the South-West, so be it, because the problems of the North-West, the North-East and the South-West are different one from the other. The advantages which they already have and the disadvantages under which they already suffer are different in each case. That being so, if there is a real equity in this matter, there must be a difference of treatment.

But that means that our friends in the Treasury must be prepared to see committed some moneys for which they will not get precise accountability according to rules and regulations laid down at the centre. They must trust that that money will be wisely handled by people out in the sticks, because that is what we need. I know that there is the feeling that all public money must be properly accounted for according to regulations. But if there is drawn up in detail a national scheme which does not work in a great many places, a great deal of public money is wasted. If there is a scheme which allows much more discretion locally and in some cases things go wrong, some money is also wasted. My contention is that either way money will be wasted, but one is much more likely to be effective if one gives the maximum amount of flexibility at local level and accepts that there will be some failures, that things will go wrong. But that is the price that one pays for getting really appropriate, constructive schemes at the place at which they need to be handled.

What the administrative mechanism is for doing that, I do not know. I can only say that as we from the unemployment committee have gone round we have found that in one part of the country premises are the trouble, while in another part of the country it is finance. The priorities of the difficulties and the obstacles are different in different parts of the country. I see no way out of that unless one is prepared both to see it as a development exercise and to put risk money into the development of the new business without strings being attached to anything like the normal extent.

In addition to this there are, of course, other things that the Government can and should do. The noble Lord, Lord Spens, referred to the problem of the startup, and there is no doubt that this is a major difficulty. Some enterprising people have solved the problem of the start-up in a way which may not be altogether commendable but which is very effective. They start up while they are still employed by an existing employer. They test out as a secondary job the state of the market by what is normally known as moonlighting, and they do this while they are still being paid by their employer. After all, some of them have a desk, they perhaps have a telephone and they have heating and lighting provided by their existing employer. Then, when they find that the enterprise is a viable one, they break off and set up on their own.

These are real entrepreneurs. They may be, from the employer's point of view, not totally admirable employees, but these are the sort of people from whom new business is coming. The message which comes from this is that they need something which is the real equivalent of equity capital for a long enough period to find out whether the business is going to be successful, and then to let it run to a point of success for some years to come. I do not believe that the provisions that the Government have so far brought forward provide this equity capital which is absolutely essential if the small business is ever to get under way. So the start-up period, in my view, requires a very great deal more attention. I know that attempts are being made in the present Finance Bill to do something along these lines, but I would agree with the noble Lord, Lord Spens, that so far not enough has been done to give the necessary boost or to enable the required effort to be sustained while a business is being set up in those first, very difficult three or four years.

I should also like to make the point that the establishment and the running of a small business requires skill and knowledge, which requires training. People do not just suddenly turn into successful entrepreneurs. So far as we have evidence about it, the people who are being successful are, on the whole, the skilled men who then start up on their own. Skilled men, or people in specialist activities, like the computer people who have found ways of setting up their own business, have already acquired a skill; they are trained people. They need to have skilled knowledge about something or other which they wish to market as a business.

They also need the kind of knowledge which is involved in running a business. We all know, I suppose, the number of failures there have been among small building contractors, and I understand that a lot of this is due to the fact that they lack adequate financial knowledge. There is a real training problem in getting people equipped to run small businesses successfully themselves. Surely special attention could be provided inside the training services that the Government make available, to enable people more effectively to run their own businesses, and, through training courses, imaginative schemes for helping people who are already embarked on the development of small business.

May I also say that I think the need to provide training for people who are going to set up on their own is a very good argument against the people (too many of them in government) who believe that you should provide training only where there is a specified job in paid employment likely to be waiting at the end of the training period. On the contrary, I would argue that if, in training—and I wish we could drop the phrase "speculative training", which has a prejudiced note about it before you start—you could think about training for stock, and could train beyond the obvious demand immediately at the end of the training programme, quite a few of the people who go successfully through training programmes of that kind would be the very people who use the skills that they have acquired in order to set up their own businesses. Because one thing that is absolutely certain is that the kind of person who attempts to set up his own business without any real knowledge or skill is a person who is doomed to disaster; and to build the training component into this is, I think, of the very first importance.

Having said this, clearly the establishment of more small businesses is a matter of very great importance, but we are seeing it, I think, not just because we believe we need more small businesses in this country but also as a contribution towards reducing the level of unemployment in the United Kingdom—a level of unemployment which is likely to be with us for far too long. I hope that the Government will recognise (as I am sure they do) that small businesses are only one way in which we can help to alleviate the problem of unemployment; and that, indeed we can get too optimistic about what can be done by the establishment of small businesses. When you go round and see a number of small businesses being set up, and imaginative schemes being put into effect, you can get very enthusiastic about it, as indeed we all do. But then you go another half mile and you see a larger enterprise which has just declared 1,000 people redundant, and you ask yourself, "How many successful small businesses is it going to take to use the people who have become redundant in this way?" It is going to be a very long time before the start up of small businesses in that particular area is in fact going to absorb the people who have become redundant. So it is a contribution, but it is only a relatively small contribution to the solution of the total problem.

Of course, one has to add (again to desentimentalise the argument) that, while it is not so difficult to set up a small business—though some people find it hard enough—it is all too easy for small businesses to die. We have heard a great deal from the United States about the number of new jobs created by the establishment of small businesses, but people often forget to add the other finding in that same report—the rate of death of small businesses, which is also very high. This is why I have been urging that in the work that the Government should be doing to help small businesses they must take every possible precaution to see that only those which have a really good chance of continuing life really come into being.

That being so, I want to ask the Minister this question quite specifically. There is nothing in the new enthusiasm of the Government—there is nothing new, that is unfair, but we understand that the Government are about to tell us something about more help for small businesses coming from the Government. May we have an absolutely categorical assurance from the Minister that this will in no way affect the money which is going to be put into community enterprise, another area which will do something towards reducing unemployment; that the promise given to us about (I think it was) £77 million for community enterprise, plus the £2 million programme for partnership schemes that the Secretary of State talked about in the autumn, stands completely, whatever else is being done for small businesses?

May I also ask the Minister what action is likely to be taken on a most interesting report about the initial capital community venture which is being studied and which has gone to the Manpower Services Commission, I understand? That is work which was done by Mr. Colin Ball, and which showed, from what I have learned about it, very great scope for the development of community enterprise, which needs to run in parallel with the work of setting up small businesses of a more traditional kind. Because, while supporting in every way the need for more small business, I must underline that it is only one contribution, one area in which we can deal with the problem of unemployment, and that we need approaches from a number of different areas, of which the community enterprise area is one. The noble Lord, Lord Seebohm, will no doubt be talking about job ownership development, and other noble Lords will be talking about cooperative development. It is a multi-pronged approach that we need, in which the small business plays a part, but only a limited part, in contributing to the reduction of unemployment.

3.40 p.m.

Baroness Sharpies

My Lords, I am truly grateful to the noble Lord, Lord Spens, for choosing to debate smaller businesses today, and I was extremely interested in what he had to tell us. Fifteen months ago we debated the problems facing small businesses, and many things that we talked about on that day are coming about. As the noble Lord mentioned, starting on 1st June is the Government-backed loan guarantee scheme, which in many ways is similar to that in America, under the Small Business Administration and the SBIC, the Small Business Investment Corporation—a genuine, over-the-counter market for obtaining equity capital from the public through the Stock Exchange. The noble Baroness stressed the importance of equity, and I entirely agree with her.

We asked that independent companies should be allowed to buy back their own shares, and there is now a promise by Her Majesty's Government of tax changes to do so. In America this has not been abused, and has attracted a great deal of private capital into their independent businesses. I noted that the noble Baroness also talked about the worries of the Treasury, perhaps, about tax-avoidance, but I think they are unduly worried. We have had a promise, too, that independent companies will receive a fuller and increasing share of national and local government contracts; and this, I feel, is extremely important.

Then there is the income tax relief on up to £10,000 investment of risk capital in new companies, already mentioned by the noble Lord. I feel that here again there is undue concern about possible abuse. In another area, the time taken to deal with appeals against adverse decisions by planning authorities in rural areas, which affects many small businesses wishing to set up, has been speeded up, and I am delighted to have been told so by Her Majesty's Government.

Her Majesty's Government have helped small businesses in many ways, but these small companies have many problems. Not least is the continuing practice by only a few large firms of not settling their accounts, in some cases for up to 90 days or even (and I have the evidence here) for much longer. Small businesses are combatting this either by charging interest on overdue accounts or by using recorded delivery to ensure that their invoices do not go astray, as claimed by some large firms, or by not releasing goods if they are dealing with a persistently slow payer. I appreciate that legislation in this area would not be appropriate, but I feel very strongly that unfair treatment such as this should be condemned.

The closed shop affects small businesses, which are usually not unionised, when union members in a customer's or supplier's business threaten to black their goods as they do not originate from a business which employs union labour. Then there is secondary action which is taken by workers in dispute, again against the goods of small firms whose employees are prepared to continue working. Surely this blackmail is morally unjustifiable, and I would ask my noble friend to say when he comes to reply whether he would not consider that legislation might be needed to right these wrongs.

At least eight organisations representing small firms have formed a loose-knit alliance to help them in their approach to government, and this can only prove helpful to all. I wish both sides success, and we know that the will is there. There are many experts who today will be speaking in detail on the financial problems which face small businesses, and I would not dare to trespass on their territory. I should merely like to finish my few remarks by repeating what I said in my speech in our debate last year, because I think it is very appropriate now; that is, that Her Majesty's Government should concentrate on promoting an equity-owning democracy.

3.45 p.m.

Lord Oram

My Lords, I, too, should like to thank the noble Lord, Lord Spens, for giving your Lordships a further opportunity to discuss the subject which the noble Baroness, Lady Sharples, introduced a year or so ago. I recall that during that debate, towards the end of the short speech that I contributed, I suggested that the small co-operative business was particularly worthy of attention and encouragement, and I should like to take this opportunity today to develop that theme rather more fully.

I am prompted to do so, my Lords, because during a more recent debate—during the Committee stage of the Companies (No. 2) Bill—we had a most interesting discussion, initiated by the noble Lord, Lord Seebohm, in which he described to your Lordships the great success of the industrial co-operatives in the town of Mondragon in Northern Spain. I recall that on that occasion, during that debate, there was a ready response to the noble Lord, Lord Seebohm, from all quarters of the House; and that to me, as a dedicated co-operator, was a very heartening experience.

But during my own speech on that occasion, on the Companies (No. 2) Bill, I made the point that though Mondragon had recently and quite rightly attracted a great deal of public attention, there were many other examples in other countries of Europe, particularly in France, in Italy and in Denmark, of successful enterprises owned and controlled on a democratic basis by those who worked in those enterprises. For example, if any of your Lordships should be flying into Orly Airport in Paris, and if you should be using the facilities of the Hilton Hotel at Orly Airport, you will be staying in a magnificent building which was built by a worker-owned co-operative in Paris; and many other important buildings, particularly in the Paris region and the Lyons region, are the achievements of worker-owned construction enterprises. It is the case that co-operative societies of this kind have not developed in this country to the same extent as in other countries. But it is not always sufficiently recognised that we do have worthwhile and long-standing experience in this country of successful small businesses which are owned and controlled by the workforce and which are organised and operated according to the principles of co-operation. Indeed, it is the theme that I should like to urge upon the House today that we have already in this country sufficient experience in these matters for it to be the basis on which many more businesses could be successfully formed.

I suggest that if we are looking for growth points in the economy, gleams of hope, as I would call them, in a picture of general decline, then the recent growth of small industrial co-operatives in this country deserves our close attention, because that is indeed a growth point. These societies are now being registered under the Industrial and Provident Societies Act at the rate of two a week, and there are now more than 400 societies engaged in providing a very wide range of goods and services. Perhaps I may give a few examples of those which have been registered in recent weeks, and these examples, I suggest, illustrate the wide variety of businesses which can take the co-operative form.

In recent weeks, for example, there have been registered as co-operatives two groups of architects, three building firms, three engineering businesses and three printing and publishing organisations; and the growth of this kind of small business has been particularly marked in the last 10 years or so. If one goes back beyond that point, one could find perhaps 50 such societies. Now, as I have said, there are 400. During that period, much experience has been gained and there are many encouraging stories to be told about them if one meets the people who have set them up and who have conducted them. These are stories of enterprise and initiative; stories of hard work, stories of persistence against adverse circumstances and, above all—and this is the essence of the co-operative principle—they are stories of teamwork in enterprise.

Although I said earlier that there has been too little recognition in this country of what is growing up within our country, I should also acknowledge that in recent years—recent months perhaps—there has been a distinct improvement in this respect. I would say that that increased recognition is to be found at the ministerial level. The Secretary of State for Industry, for example, has on several occasions paid tribute to the co-operative form of enterprise in the industrial sphere. Currently there is a very interesting series of television programmes at a rather inconvenient hour on Sunday mornings which I have been following and which are telling the co-operative story in a vivid, inspiring and practical way. There are still two or three in the series yet to come and I recommend that if you are up and about at 9 o'clock on a Sunday morning in the next two or three weeks it would be worthy of your Lordships' attention.

During one of these programmes—I think it was two weeks ago—the Secretary of State for Employment, Mr. James Prior, gave his warm support to workers' co-operatives particularly because he sees them as groups of workers creating their own jobs, providing themselves with employment—as indeed they are. He sees it as Minister of Employment and he sees it rightly as a job-creating mechanism. I was glad to learn also that one of Mr. Prior's ministerial colleagues at the Department of Employment, Mr. David Waddington, paid a visit to an old-established workers' co-operative in South London called Metropolitan Cabs. This co-operative society has for more than 50 years been successfully organising a sizeable fleet of taxicabs that serve the London area. I do not know whether Mr. Waddington had the chance when he paid the visit of meeting the society's most famous member, but the Brain of Britain, Mr. Housego, the taxi driver who won the Mastermind Competition on television, is a keen co-operator and is a taxi-driver member of the taxi co-operative, Metropolitan Cabs.

Since I have already—and this is an unusal experience for me—praised a number of Ministers, I suggest that it would be remiss of me not to mention the Chancellor of the Exchequer and the Minister of State at the Treasury, Mr. Peter Rees. In the Finance Bill now being considered in another place, the Chancellor is ensuring that industrial co-operative societies receive equal treatment with companies and with partnerships in respect of money borrowed by shareholders for investment in the enterprise. That of course to co-operators is a very welcome development. It also illustrates the general need for equal treatment between co-operatives and companies, and that historically has by no means always been the case. Since co-operatives are registered under a different legal code from companies and have a different financial structure compared with companies, vigilance is always needed when fiscal or administrative changes take place to ensure that perhaps quite inadvertently anomalies do not creep in because the two codes are not seen to be matching one with another. It is particularly important that this vigilance should be exercised at a time when, as we have heard already, many proposals are being put forward by the Government and by others for special treatment of small businesses.

I should like now to deal with a most important feature of co-operative businesses which should commend them to all those—and I hope this includes all your Lordships—who are concerned with areas of special economic and social deprivation such as the inner areas of large cities and the remoter rural areas in our country. That feature of co-operative societies to which I wish to call attention is that by their very nature they have close ties with the life and people of the communities in which they are situated. The people who establish them are local people. Those who work in them live in the locality. The control over the business decisions is exercised democratically by the workers, and those business decisions can therefore be expected to be made in the interests both of the members and of the community in general.

This is very clearly seen in the so-called "community co-operatives" which are beginning to bring new life to the Highlands and Islands of Scotland, to Western Ireland and to North Wales. There is a fascinating and most encouraging development in those areas. It is well known that such areas have been areas of special deprivation with specially high levels of unemployment and with an ageing and declining population because the young people move out to seek work elsewhere. These remote rural areas lack basic services and amenities such as roads or piped water, electricity; and very often these days they even lack shops and post offices. Housing is inadequate and they have very few recreational facilities.

The character and problems of these areas are well recognised. But it is less well known that community co-operatives are beginning to change these conditions. Public authorities like the Highlands and Islands Development Board in Scotland are encouraging the establishment of these societies and they serve a great variety of economic and social purposes. Because they have their roots in the community, and because in a variety of ways they harness the skills and resources of the local population, they are bringing hope to these islands and remote communities where before it was a situation of hopelessness. They are bringing production in the fields and in the workshops where before there was sterility. They are bringing welfare where before there was a situation of deprivation.

It may be thought—and I know there are some people who say this—that the kind of regeneration to which I have called attention by the co-operative method is suited only to the special rural communities. I do not share that view. Superficially, the problems facing people in the Outer Hebrides may seem very different from those in a blighted city area, but I suggest that many of the problems are fundamentally the same: it is the same lack of jobs, the same inadequate housing, the same ageing and declining population and the same neglect of human skills and resources. I believe, therefore, that what is required in an area of industrial blight in a major city is basically the same solution as is being proved in practice to be necessary and salutary, for example, in the Hebrides: that is to say, by co-operative methods, the mobilisation of local skills and resources, the creation and servicing of local markets, the partnership between workers needing jobs and representatives of the community which needs to have those jobs done. I see it as a sign of hope in the present industrial gloom that there are groups of people around the country—I know of some 20 or 30 such groups—who see things this way and who are devising co-operative schemes of considerable variety so that the needs of the deprived communities can be dealt with.

Having introduced this link between the enterprise and the community, may I give one example of how these two parts, the workers and the community, can help one another? I go to Skelmersdale. There, some four or five years ago, there had already been a serious unemployment problem. It was made worse by the closure, first, of Thorn's factory and then soon afterwards by the closure of Courtauld's factory. Some workers and some of the local leaders decided not just to bewail their fate but to do something about it, and a number of community leaders, including people from the established co-operative movement, together with a group of redundant workers, set about establishing several co-operative enterprises.

One was a furniture-making workshop; one was a light engineering works and a third was a training workshop under the Youth Opportunities Programme of the Manpower Services Commission. Each of these enterprises had its own separate co-operative identity, but the interesting thing is that they were linked together in a holding company, which was the means of bringing in the personalities from the community. Since they were established in this way the group has provided work for more than 120 people and has now a combined annual turnover of more than £1¼ million. The noble Baroness, Lady Sharpies, mentioned the need and the desirability in connection with all businesses that local authorities should give contracts. I thoroughly agree with her, and in the case I am now citing an important factor of community help which led to the success I have described was a bulk order from the Lancashire Council for school furniture. I am sure that is the kind of thing the noble Baroness had in mind. That is one example, but there are a number of other similar activities and plans for other areas in the country. For example, in Fife, there is something similar, and in Northern Ireland there is a longer-established success story that I could quote. In Hartlepool plans are being made along these lines and also in several London boroughs.

May I, in conclusion, try briefly to suggest why there is this increasing interest in co-operative development and why I am able to point to a promising growth of small co-operative enterprises all over the country? I believe it is because there are many people who want to establish their own business and thus provide themselves with jobs, but either do not want to or may not have a sufficient range of expertise to do it themselves as individuals, or perhaps have not the financial resources to do so as individuals. But in a team, in a co-operative, they find it practicable to get into business and they find the co-operative method of working to be more attractive.

There is plenty of evidence to this effect. I suggest that the co-operative method of business, because it pools the financial and human resources of its members, enables more people to become entrepreneurs than would otherwise be the case. You have, in any case, to have seven to register a co-operative society, so it brings in seven rather than perhaps two or three in a promising project. It is because there are many people around with this kind of outlook upon work and society that I think there is proof that the co-operative method works both in other countries and to a considerable degree in this country, and that such people and such methods deserve every possible encouragement by all concerned.

4.6 p.m.

Lord Seebohm

My Lords, I must make it clear to start with that I am no longer chairman of ICFC. I retired last year and handed over to the noble Viscount, Lord Caldecote, who is very sorry that he cannot be here. He has, however, authorised me to speak on the various figures—I hope not too many—regarding the present experience of ICFC.

I do not believe there has ever been a reliable definition of a small business. The Bolton Committee had a shot at it and I think they made a ruling that companies with less than 200 employees would be "a small business". But with the advance of modern technology a company with 200 employees can be a very large company indeed, with a turnover of millions. So I should like to concentrate on what I consider to be a meaningful description of an "owner-managed company". This is where I think we shall get the growth and where we really must try to reinforce success. I shall give some illustrations later, but recently the Government have made some useful changes and more are proposed in the Companies (No. 2) Bill and in the Finance Bill. Earlier concessions to such companies, or rather their proprietors, included quite major concessions on the incidence of CTT and CGT. These concerned on the whole existing businesses and helped the proprietors, but they are not really, I think, having a very great influence on starting up or encouraging new businesses to expand.

I wish to refer to the business start-up scheme in Clauses 50 to 63 of the Finance Bill, which makes investments in start-up situations tax-deductible up to £10,000. While welcoming the Government's initiative in this area, the legislation as at present drafted is unlikely to achieve the objective of attracting risk capital for new businesses. The proposals are at variance with commercial realities, failing that most basic of legislative requirements; certainty as to entitlement to the relief.

The success of a new venture can be better assured if, in addition to finance, a business has access to management expertise in the particular industry. One absurdity of the present proposals is that the very people who are best qualified to provide the management expertise—that is, the directors of companies engaged in a similar trade—are ineligible for relief under the scheme. The proposals also contain an unfortunate flavour of niggardliness in withdrawing or abating the relief on death or on the divorce of a husband or wife after a transfer of the shares. In seeking to prevent abuse, the scheme is so tightly drawn as to be of very limited value. To enact the provisions as at present drafted would be to miss an opportunity to inject both finance and management expertise into this vitally important sector of the economy.

As I read the Bill—and I stand to be corrected on this—if you make an initial investment of, say, £5,000, then at a later date you are prohibited from making any further investment which would attract tax relief. If that is so, it seems to be a great disadvantage, because one of the most difficult things I have experienced is working out an accurate cash flow for the first year of a new business. I see the noble Lord, Lord Bruce of Donington, with his chartered accountant knowledge, nodding very satisfactorily. If this is true, then it seems to me that a very simple amendment that could be made would be to allow anybody to continue putting in money up to the £10,000 limit, at least during the first year and possibly extended to two years. That would be a great advantage. I could be wrong on this, but this is how I interpret the Bill.

I would make a few comments on another clause, Clause 25, on limited partnerships. This is a very tricky area. It extends interest relief to money borrowed for investment in partnerships, even where the individual, though a partner, has not personally acted in the conduct of the trade carried on by the partnership. However, limited partners will be excluded from obtaining interest relief on their borrowings. This exclusion is surprising at a time when the Government are initiating a public debate, through their Green Paper on the subject, on the most appropriate form of incorporation for small firms. Presumably, it is not the Government's intention to discriminate against limited partnerships.

The tax rules for limited partners raising capital should be no less favourable than those applying to shareholders borrowing to invest in a close trading company. Since the Finance Act 1980, shareholders need not work for the company in which they invest to obtain relief for their borrowings. Limited partners, who are prevented from becoming involved in management on pain of losing their limited liability, should be similarly treated. That is my first moan against the Government, but I want to make it clear that, though I shall have another moan later, I do not in the least think it is the Government's responsibility solely to pull small businesses out of trouble. I believe that the main responsibility is, and always will remain, on the private sector and businesses themselves to produce their own solutions to the various problems. The private sector has still a long way to go to improve the situation, and the people in that sector are the only ones who can help.

I shall, therefore, now move on to the private sector, which presents a particularly interesting situation at the moment. Since the recession started, the number of small companies coming to the ICFC has increased very rapidly indeed. It really started with the increase in unemployment, which is rather surprising. At the moment, the ICFC has £370 million invested in 3,400 different investments. These firms employ around 300,000 people. I shall not go through any of the details of where this money is, but there is about £43 million in engineering and other manufacturing, which is quite a good start; agriculture has £11 million; distribution and services have £40 million and so on.

The actual numbers and amounts of investments are fascinating. In the year to 31st March 1978, we financed 518 new investments and put out about £50 million. In the following year, when the situation began to deteriorate, we financed no less than 733 new investments, with a total of £67.5 million put out. In 1980, it was 920 new companies with £104 million put out; and in the first eight months of this financial year, which ended on 31st March—and I do not have the latest figures—we had 973, compared with 920 in a full year before, and put out £100 million. This is quite an astonishing growth, and shows what a certain amount of ingenuity and encouragement can do in the private sector, alter 30 years of experience.

Your Lordships are probably more interested in start-ups, and here the record is rather interesting. A start-up, in our definition, is a company that does not have more than three years' track record. In 1978, we did only 88; in 1979, it was 112; in 1980, it was 309 and the estimate for this year is 400. Of the 1,000 start-ups that we have done since 1978, 406 are absolutely new, green field companies with no records at all. Another company with which I have been associated, Barclays Merchant Bank, has recently done over 100.

The other development in which I am sure your Lordships are very interested, and which I have mentioned before, is the growth of management buyouts. This is really almost in the co-operative field. This is where a company has got tired of its subsidiary and wants to get rid of it, needs the cash, or thinks that it is going to fail. Instead of just selling it to another company, we worked out in 1978 a system whereby we could really strongly support management who wanted to continue the business, had faith in it if it was under their own control, without going to a distant headquarters, and if they could take it over. This was not easy and was made particularly difficult by Section 54 of the Companies Act, which I have talked about previously in this House.

We did only 10 in 1978—that was a start—and our lawyers were pretty busy working on this matter. In 1979, it was 20, which was not an enormous increase. But in 1980 the figure jumped up to 49, and I estimate that this year, ending on 31st March, there will be about 70 new ones, which is roughly one and a half a week, on which around £15 million-plus will have gone out. We are now averaging about £250,000 per operation. In several cases, we have put up 90 per cent. of the money, and still left the equity control in the hands of the management, and 75 per cent. to 85 per cent. is fairly common.

This seems to me to be one of the areas which seriously needs looking at and encouraging, and this is where, if we had got away with giving statutory recognition to job ownership companies, it would have accelerated growth quite remarkably. I believe it was a tragedy that we missed that opportunity in the Committee stage to make this quite flexible suggestion, which I put forward and which would have given great help to what I call the new industrial structure. Similarly, Section 54 appears now as Clause 42 of the new Companies (No. 2) Bill and is doing more harm than good, but I think we have an assurance that the Government will produce a new amendment in another place. So far as Section 54 is concerned, I am sure that, in order to avoid abuse, innocent parties are being thoroughly penalised.

On the ICFC side, all I really want to do is to refer again to the question of the recession. As I said at the start, it is very interesting how our growth in the ICFC began when the recession began to be serious. It is too early to know to what extent small businesses will survive the recession. Often it is cash problems associated with the upturn that cause more trouble than in a decline. However, the ICFC's experience is that, because small firms are flexible and innovative and decision-making is fast, they tend to react quickly to economic changes and are adept at surviving. In our experience, failures have generally stemmed from weaknesses that we identified long ago and there are few instances now where good management has failed, even in the current climate.

Another interesting development, which could well be the pattern for many others, is the London Enterprise Agency which we call LEntA. This is a consortium formed under the initiative of Shell (UK), plus Barclays Bank, British Oxygen, BP, GEC, IBM (UK), ICFC and the Midland Bank. It is a pretty formidable consortium. This agency was launched in 1978, mainly to provide help with inner cities' problems, recognising that a gulf had arisen—this is absolutely true for the whole country—between the large firms and the community, including local government. It was actually set up as an independent offshoot of the London Chamber of Commerce and Industry. It is my hope that the other chambers of commerce throughout the country will take steps to follow this initiative and to re-organise themselves in order to become really effective in bringing together local industry and local authorities. Although there are some admirable exceptions, I must confess that I have been bitterly disappointed in the chambers of commerce who seem to be very poorly supported by local industry. This problem could be met by the points which have been made both by the noble Lord, Lord Spens, and the noble Baroness, Lady Seear. In so far as the London agency is concerned, in the period April 1979 to mid-March of this year, 2,400 inquiries have been received, 550 cases have been dealt with and 1,800 jobs created or saved. Plans are also in hand to build quite a lot of small workshops.

Help for small companies falls into four areas. The first is the counselling provided by the LEntA staff, which has also been referred to by previous speakers. The sectors covered by LEntA include marketing, finance, innovation and premises; secondly, a training and development programme to which the noble Baroness referred for start-ups run jointly with the GLC, consisting of one-day start-your-own-business conferences held every six to eight weeks in conjunction with different London boroughs and a four weekend intensive course over a period of three months; thirdly, a marriage bureau business link service to bring small firms together with private sources of finance and potential partners; and, fourthly, exhibitions and trade shows to help small firms get into new markets. This includes exhibitions for overseas buyers, joint ventures in United Kingdom and overseas trade fairs and joint shows with bodies like the Design Council. Efforts are being made to find better ways of linking purchasing officers of large companies with small firms. It is the view of the agency that public-private sector co-operation in this kind of way is only just beginning.

Finally, I believe that it is necessary to change the attitude—perhaps I am sticking my neck out here—of our educators towards commerce and industry, and there should be some restructuring of the education system itself. But this should probably be the subject of a separate debate. However, unless we can produce more craftsmen for industry, whether great or small, we shall not be able to expand. The apprentice system seems to be failing, but others will know more about that subject than I. What I know full well, however, is that there is a gradual disappearance of craftsmen in rural areas, despite the fact that they can have a prosperous, satisfying and very useful life. Perhaps it is this aspect of society that we should look at to cure the British disease.

4.24 p.m.

Lord Vaizey

My Lords, I should like to thank the noble Lord, Lord Spens, for initiating this debate which has already brought forth a number of contributions which are of interest and importance and which will be useful in the further deliberations on this important topic which will take place outside this House. I have a few observations to make, which I hope to do relatively briefly.

First, it is worth recalling that, as I understand it, Her Majesty's Government are as a matter of general principle committed to the idea that competiton is a relatively good thing in bringing about a greater degree of efficiency in the economy. That, generally speaking, as I understand it—though perhaps the noble Earl the Minister will correct me at the end if I am wrong—is one of their general philosophical tenets. As a matter of fact, in actuality in manufacturing industry in this country we have a middling condition: neither a monopoly nor competiton. It was christened by economists some 50 years ago as "oligopoly"; that is, a mixture both of competition and of monopoly. It will be generally agreed that this is a fairly accurate description of what most branches of British industry are actually like: not totally competitive, not totally monopolistic but somewhere midway between the two.

Over the years, legislation has been introduced, by the Attlee Government among others, to increase the degree of competition in those industries which were in private hands. I think it will be widely agreed among economists that the usual effects of an oligopoly are to make prices relatively higher than they ought to be and to lower productivity below what it would be if competition prevailed. There are exceptions to that generalisation but that would be widely accepted. In particular, an oligopolistic structure in industry has one great disadvantage. It actually breeds bigness. I personally think that we ought to look with great care at the virtues and vices of bigness not only in our industry but throughout society.

The noble Baroness, Lady Seear, said that we are in grave danger of sentimentality when we speak about the small business. We have to be very careful about worshipping bigness for itself. It is often inhuman, and very frequently it is deeply inefficient. I wonder, too, whether the structure of the economy that we have now, both public and private, is flexible enough to meet the extraordinarily difficult, internationally competitive situation which will become more difficult and not less difficult over the coming 20 years.

If, for example, we look at the banking structure of this country, we find that we have four big banks. As noble Lords know, in the United States it is illegal, I think, under federal law for banks to operate across state borders—at least, in many cases. There are many more banks in the United States than there are in the United Kingdom. I cannot help feeling that this is one of the main reasons why the United States has four times as many small businesses per head of the population as has the United Kingdom. Therefore I think we ought to look very carefully at the worship of bigness. I regret deeply that the Bank of Scotland is subject to this takeover bid to become yet another giant bank. Are we satisfied that our existing high street banks are the epitome of efficiency? I for one certainly am not.

I would also say that, leaving aside the virtues or otherwise of public ownership as such, the existing forms of public ownership, of large statutory corporations running hundreds of individual units, is extremely unwise. I think that it has outstripped the supply of managerial talent in the United Kingdom to administer very large organisations. As a Londoner, I ask myself this question. We know that in London Transport they find it difficult enough to run the buses. To add to that the task of running the Tubes as well seems to me to be asking a very great deal. Why on earth can we not have in London two public corporations, one for the Tubes and one for the buses? It is not a law of nature that anything which is public transport in the capital should be run by one organisation rather than by several. Therefore I think that there is a great deal of evidence, both anecdotal evidence and academic evidence, that bigness in itself may very well be one of the reasons why this country has relatively handicapped itself in the productivity race, compared with other nations. That is without respect to whether or not you happen to believe in public ownership, in community ownership or in co-operative ownership, as the noble Lord, Lord Oram, mentioned.

Against this, there is something else I want to say as my second point. I am not only doubtful of the benefits of bigness in itself. The trend of the economy—in manufacturing industry, anyway—is against bigness. If we look at the share of the national income generated by manufacturing industry, it is higher by a very long way in this country than it is in the United States. The share of manufacturing industry in all the advanced industrial nations is declining, and the share of big manufacturing industry in that share is in turn declining.

We are seeing a movement from mass manufacturing which employs thousands and thousands of people in individual industrial units. We are seeing, first, it being "robotised". That is to say, industries are being mechanised in such a way that they require many fewer hands on the production line than they did previously. Furthermore, this kind of business is drifting towards the third world countries like Brazil, Taiwan, Korea and the flourishing nations of South-East Asia. It is a reasonable prediction, I think, that the age of mass manufacture in North-West Europe is largely over, and that over the next 20 years we shall see a further decline, again irrespective of the political atmosphere which may prevail in this country, or in France, in Germany or in any other country.

If what I have been saying is so, we have handicapped ourselves in two ways: first, by the cult of bigness for the sake of bigness and, second, because we have had a very heavy investment in this country historically in the mass manufacturing industries, which unfortunately to a large degree are on their way out. I think many of us would feel that therefore the future of employment and the future of our country from the point of view of enterprise, depends to a very great degree upon the support and the effectiveness of small business. I do not think this is a matter of sentimentality; I think it is a matter of hard economic fact and a matter of the way the economy is going.

Even now, in what one hopes is the depth of the depression—although, heaven knows! worse may be coming—I understand that the small business sector is still growing. It is the mass manufacturing sector which has suffered the radical decline. As the noble Baroness, Lady Sharples, pointed out, I think with some force, the Government have already taken a great many steps in support of small businesses and I was also very struck—as I am sure all your Lordships were—by what the noble Lord, Lord Seebohm, said about what ICFC and other corporations are doing in the City. That is work which is wholly to be encouraged, but I share with the noble Lord, Lord Seebohm, astonishment at the way in which the Government's initiative has been sabotaged by the drafting of the Finance Bill. It seems to me to be quite astonishing that an idea that we should support small businesses should be agreed by the Cabinet and then a Bill should be presented to Parliament which quite clearly, in my opinion, is designed to be unworkable.

I support strongly the idea of the noble Lord, Lord Spells, of supporting Sir Harold Wilson's call for a CoSIURBA to support the development of small businesses in the urban areas, as the Development Commission does in the rural areas.

Therefore, towards the end of my speech, which is a short one, I want to come to what I take to be the essential question raised today by the noble Lord, Lord Spens. ft is the relative lack of small businesses in the United Kingdom compared with our major competitors, which the noble Baroness, Lady Seear, referred to as something which is now well known. It may be well known but it is still something which is not adequately explained, nor, which is far more important, is it something which has yet been remedied. I think that the Government, the ICFC and other organisations are doing a very great deal already. I profoundly agree with the noble Lord, Lord Seebohm, that we must look closely at the education system, and particularly at the further and higher education system, and ask ourselves what it is that is going wrong.

Here I will refer back to the question of bigness in the private sector. When a young man or woman graduates from a university and goes to look for a job, he or she can look for a job in the bureaucratic hierarchy of the public sector and, broadly speaking, know the satisfaction which comes from such a job: a carefully articulated career which brings substantial financial rewards and very great rewards in public esteem. I think the paradox there is that if one goes to any university appointments board one finds that there are the private bureaucratic structures. ICI, Unilever, the great commercial banks differ not one wit in the satisfactions they offer, in the career structures they offer, or in the public esteem which they eventually offer to those who clamber up the ladder to success.

A person who becomes a director or the managing director of one of the great private corporations is sure to have an income which is established by the top salary review board, much the same as that of a permanent secretary, give or take a few thousand pounds; he is fairly sure to get the same degree of recognition in the Honours List as the permanent secretary gets, and his career will be extraordinarily little different from that of someone in the public sector.

How very different is the career of the young man or woman who leaves the university, perhaps with a bad degree and a bad record, having played in the jazz band or something of that kind, and who sets up in his or her own business. Such a person might become a Tim Rice or an Andrew Lloyd Webber and "make it" that way, or might fail. We wholly support the people who want to make their way up the bureaucratic structures, but I do not think we support those who do not want to make that particular type of career their route but want to find their own way and found their own business. We lack not only the technical skills which the noble Lord, Lord Seebohm, referred to; we lack particularly something the noble Baroness, Lady Seear, referred to—financial and management skills.

There are many attacks in the press and publicly on the business studies faculties of our polytechnics, for example, and on sociology and all those things, and no doubt they are well merited, but the fact of the matter is that somebody who is trained in technical skills without acquiring also the skills of social manipulation, and of marketing and of accountancy is somebody who sets out quite incapable of earning his own living outside a bureacratic structure. Personally, I believe that the future of this country depends upon the people who are prepared to make a living outside the bureaucracy rather than within the bureaucracy, public or private. It is for that reason that I am so grateful to my noble friend Lord Spens for having raised this question in your Lordships' House today.

Lord Rochester

My Lords, before the noble Lord sits down, I wonder whether he would agree that perhaps some distinction can he drawn between some of our large basic industries, often in the form of state monopolies, and those large companies in the private sector which, precisely because of the point which the noble Lord has made, are concerned with this factor of size and in many cases are doing a great deal to make their component units smaller in the interests of better management and to improve their productivity by reducing over-manning. Does the noble Lord not also agree, on reflection, that it is very largely on some of great companies—as a former employee of one of them, I should perhaps acknowledge the fact—that the creation of our future wealth still so largely depends?

Lord Vaizey

My Lords, I think I shall have to give great thought to the question the noble Lord has raised, but I am sure it is a valuable and important contribution.

4.38 p.m.

Lord Schon

I should like to join those noble Lords who have thanked the noble Lord, Lord Spens, for introducing the subject which we are discussing—always of great importance but particularly at this time of economic difficulty. I will restrict my comments to a few general remarks about the stimulation of small businesses, but I should like to start with the effect of the rise in energy costs. The resulting increase in freight and distribution costs may make local business viable in areas which were previously covered by bigger suppliers from further afield. The saving in distribution costs may in some cases begin to outweigh the economies of scale.

When looking into the general subject of small firms there is a tendency to talk about them as though they are all the same. There are in fact several types of small companies and each has different problems and different needs. I will give your Lordships a few examples. A small company may be set up to own or manage a small piece of property or some investments. This is simply a financial or legal vehicle. Secondly, a businessman may set up a firm to run a garage, a few small shops or a laundry: this is a service business or a distributive trade. Thirdly, there are small firms like bakeries, engineering shops and small builders; in other words low technology, manufacturing and construction. Fourthly, a firm may be set up to develop and manufacture products incorporating new technology, for example, scientific instruments. That is what one would describe as a new technology-based firm, sometimes referred to at present as an NTBF, a new technology-based firm.

The problems and needs of these different types of company, and the factors affecting their success or failure, are different. They each have to be analysed individually. Because of my past experience in setting up my own company, in which development Lord Seebohm's firm, ICFC, has made a major contribution, and later as chairman of the National Research and Development Corporation, I have a particular interest in, and knowledge of, these new technology-based firms, so I should like to say a few words about them.

New technology-based firms are particularly important because they can play a leading role in industrial innovation. They have three particular features which deserve attention. Firstly, they involve technical risk. Ordinary businesses have general commercial and financial risks, but technology-based firms have technical risks in addition, and these necessarily increase the total level of risk for the entrepreneur and the investor. This additional risk factor is extremely important.

The second point is the long time-scale for development work, which in itself is difficult to forecast. If you have a non-technical product you can normally get it on to the market relatively quickly. If you have a high technology product you do not know whether the new technology is going to work, or when the development phase is going to be completed; there is normally a long period during which you cannot expect a positive cash flow, because the research and development period has to be added to the usual time it takes to launch a product onto the market.

The third important point is that technological innovation is an international activity. Consequently, someone who is trying to advance the state of the art will find himself necessarily competing with foreign companies from the beginning. At the same time it is also essential to protect the intellectual property which has been created. This again is quite different from a non-technology company—for example, a bakery or a garage—which is in geographical but not international competition. Moreover, some of our international competitors are more aggressive than we are.

There is a lot of activity in this area now, and I am pleased to see the great increase in the awareness of, and sources of finance for, these new technology-based firms. In particular I would mention the efforts of the National Research and Development Corporation. Under the terms of the Development of Inventions Act, NRDC can invest only in the development and exploitation of new technology. NRDC is the only British organisation that has all the skills and resources under one roof: patent agents, lawyers, accountants, scientists, engineers and people with commercial experience. And I must add that in its 32-year history there has never been a case of indiscretion or breach of confidence of any kind on the part of the staff. In my opinion this unchallenged reputation is one of NRDC's greatest assets.

I retired from the chairmanship of the NRDC just over two years ago. Forgive me for saying so much about NRDC, but I had the privilege of serving the corporation for 12 years and being 10 years its chairman, an office which I very much enjoyed. I understand that the corporation has at present a portfolio of about 300 investments in industrial projects: 180 of these are with small firms; 60 are literally start-up situations, where a company has been set up by an individual or a group of individuals in order to exploit an invention or a new technology.

Six months ago NRDC set up the Small Company Innovation Fund, which they now refer to as SCIF. This is a new fund which has been set up to invest in small firms where the business as a whole is innovative. In its first six months SCIF has already authorised about a dozen new investments. The size of the individual investments is up to £60,000. I would add that about half of NRDC's investments are individually less than £30,000, and thus NRDC is really providing small sums of money for investment in small companies.

Let me conclude by saying that, from my experience in industry in this country and in NRDC, we can hold our own against anybody, provided we are pulling together. Without wanting to get into politics, being here on the Cross-Benches, the most important thing is for us to stop arguing with each other, get on with the job and get on with business.

4.46 p.m.

Lord Granville of Eye

My Lords, we are grateful to the noble Lord, Lord Spens, for having introduced this debate, and also to the noble Baroness, Lady Seear, for her considerable knowledge, and the noble Baroness, Lady Sharpies, who introduced the subject, I think, a year ago. I agree with Lord Vaizey that it is certainly a long way from the executive suite to running a small business of your own, and this is one of the problems that many find when they have the initiative to attempt to do this. There have been many speeches today extolling the virtues of small businesses, which we all support, which depend for their survival upon enterprise. My mind went back to a lunch at the Reform Club with Sir Will Beveridge the day after he introduced his great social scheme, when he said that he hoped it would not discourage the spirit of enterprise and make this country too security-minded. I wonder whether he was right about that.

The Prime Minister last night, the Government in another place, announced that they have proposals which they hope are going to help the small business. Many speakers in your Lordships' debate have referred to the problems involved with paperwork, certainly in the development areas, the delays in approaching the bank and the difficulty of getting support, referred to by Lord Seebohm, and the committees which you have to get by. I hope that the Government are going to take this into consideration and try and cut through that, to enable the small man, when he is launching an enterprise, to get support and help sooner than he can at the present time.

It is all very well to talk about starting a new business. Anyone who has tried to start a new business knows what the road is like. It is not always easy. You have to consider whether your product is going to sell. You have an idea, be it a carpet sweeper, something new, something different, something revolutionary; is it going to sell, does the market want it, do people want to buy it? Then, if you have small capital, you have very small machinery; can you produce competitively? If you are successful, will the big boys cut you out on the market if you have really produced a winner? That does happen. Also I hope the Government will bear in mind that many of these small enterprises when they come to the problem of engaging labour have this, probably unwarranted, fear of the overall problem of redundancy.

Then, as the noble Baroness, Lady Seear, said towards the end of her speech, there is a problem, although I would not word it in quite the way in which she worded it. Indeed, I think that the noble Earl who is to reply referred to this fact in a speech he made a long time ago. Can the service and consumer goods industries in this country really take the place of the great producing industries of the North and maintain a good standard for a population of 56 million and also deal with imports from the EEC? I should like to suggest to the noble Earl that serious consideration should be given to according some kind of priority to small businesses or to small enterprise products which are for the export market. So I repeat that the industries of the North are having a bad and difficult time. We hear of redundancies all over the place. Can we as a country live by taking in each other's washing and maintain our standard of living? We may be able to south of the Trent, but we are of course at present witnessing the watershed of inflation and over-manning.

We have had a little boom of small businesses. In 1975 there was a so-called wage explosion and there was money in the pockets and purses of those in the factories, works and so on. New shops were set up everywhere to deal with the sudden increase of purchasing power in 1975 and 1976. New shops and new businesses were springing up all over the place. There was the compulsive drip, day by day, of compulsive retail consumer goods advertising on "the box"; people were urged to buy this and to buy that and to have a fortnight abroad. One could have a car, a colour television and so on. Whether we recognise it or not, all of that was creating something of a retail boom at that time. The Americans call it chasing a fast buck or taking in each other's washing.

Of course, there is at the present time an outcry from the City to the small shops and small factories who were supplying the small boom. The people who were involved were told that it would go on, but now they are protesting because inflation-wise the balloon has burst. I ask myself: who were the guilty men who told them then that it would last and that they could invest their money and be sure of a ten-year turnover?

What about the large industries referred to by the noble Baroness, Lady Seear, in her very interesting speech today? What about the silicon chip? By all means let the Government give all the help they can and set up an organisation to help the little men and to steer them into the export market if possible and not just let them take in each other's washing. Each time I hear a speech on unemployment, or see a photograph in the media of a march against unemployment, I wonder what will happen when the chip considerably reduces manual labour. Who will be the first out then? Already our national overheads as a trading nation are too high. There are too many involved in the labour market—there are too many to carry. It seems to me that no one—including the Government—has a policy to deal with the tremendous problem that will arise when the silicon chip and its technology begins to displace manual labour.

What are we to do? Do we plan our future as a nation by taking in each other's washing, as an artisan state in the North Sea and because of our lower productivity have the lowest standard of life in Europe? Is that our future?. Maybe the policy which the Government are to announce—and some of it was put forward in the Budget—will help. But if we are on the verge of state capitalism, as many believe, with the great industries of the North—iron. steel, the motor-car industries and so on—we need a plan and above all we need a policy which should have begun in 1946 when we came out of the war. Then we failed to rebuild, to modernise and to reorganise some of our great basic industries in the North. Whatever we may think about the extension of small businesses—whether they are to take up the slack or to enable us to maintain our standard of living for a population of 56 million—we may have to resort again to the great national industries in the North.

4.56 p.m.

Viscount Hanworth

My Lords, most of my speech will be concerned with what I would term the "Hadfields" case. Hadfields are not a small company in the accepted sense, but they are when compared with British Steel. I think that some useful conclusions, which are relevant to this Motion, can be made.

Before considering this case I should like to emphasise the importance of the small business in the national economy. Most of the points which I wish to make have already been made, but I think that it is perhaps worth making them in a slightly different way and in my own words. The smaller companies are the seeds from which large trees often grow. They can provide an opportunity for exploiting new ideas and techniques which, at the start, are on a scale which does not interest the larger companies. They are not hide-bound by the rigidity of a larger organisation, nor by the dead hand of the Civil Service and the Treasury, or, hopefully, by the shifting sands of politics, as are nationalised companies. Moreover, at this size real worker participation is possible—a thing not easily realised when union shop stewards dominate the scene.

It could well be in aggregate that small businesses are one of the most important factors in providing employment certainly on a local scale, and in the future probably on a national scale, because as the giants decline in industry and grow old and produce what is no longer required or at a price which is uncompetitive, the smaller growth organisations can take over. As has been said already in this debate, it is significant that many other countries have a much higher proportion of small companies than we do. I think that West Germany is a case in point.

Returning now to the Hadfields case, the company had a profit forecast for 1976–77 of £5 million but was very badly affected by five strikes in other industries and the general recession. In fact, the company who acquired the business have injected a further £13 million of capital. During the steel strike early in 1980 representatives of the company saw the Minister because they were worried that the British Steel Corporation would start a price-cutting campaign to win back lost customers. They were assured that this would not happen as the Government would impose stringent cash limitations on the nationalised industries, and that the Government were adamant that a support sum of £450 million would not be exceeded. In fact, this figure has been increased to well over £1 billion and it is estimated that this gives a subsidy to British Steel products of at least £125 per tonne of steel, which has been used to undercut Hadfields prices.

Between July and November representatives of the company held several discussions and meetings with representatives from the Department of Industry and were told:

  1. "(a) that the private steel-making sector would be rationalised and completed by not later than Christmas 1980;
  2. (b) that no steel-maker—(public or private)—would be allowed to go into liquidation;
  3. (c) that Government money would be available at the front end of the rationalisation, as once and for all payment to ensure a viable industry for the future, with the emphasis being on viability;
  4. (d) that the ultimate shareholdings of the various parties to the rationalisation … would not necessarily be reflected by their current net assets injected into the business;
  5. (e) that the Department of Industry would be making the decisions—not the British Steel Corporation".
In June last year the company asked British Steel either to put up selling prices or to take over the company, but both these propositions were rejected. In October last year Mr. MacGregor visited Hadfields and suggested a deal, but its terms were rejected by the Department of Industry. At a later meeting the company was told that British Steel wished to acquire Hadfields but on condition that they ceased steelmaking and steel processing, and made all employees redundant at the company's expense. During the last year the company has done everything suggested by the Govern-for survival, including reducing the labour force by over 50 per cent. and closing the die-forging activity.

What general conclusions should be drawn from this sorry story? First, I think that it is one long case of broken Government promises. Almost everything that has been done is against the avowed aim of the present Government, who are wedded to free enterprise. Surely it is time that we had in power a party which does not pretend to the electors that it has all the answers and then has to rat on most of them. I have given the Minister notice of this point, so I hope that he can briefly reply to the Hadfields case, even if he only says that it has all been force majeure.

Secondly, the state of British Steel is, to a very great extent, due to adversary politics—nationalise, denationalise, renationalise. In these circumstances what hope is there when a company meets a difficult situation? It is long past time that we got away from these politics, and that is why I now speak from these Benches.

If the Government sincerely believe in free enterprise, then they must help the growth of small businesses—not by large cash handouts, but simply by making life as easy as possible for them. A number of ways in which this can be done have been suggested today, and I think that this debate will serve an extremely useful purpose if these points are seriously considered. However, I am afraid that in at least some areas actions which could have been taken have not been taken. The Association of District Councils is anxious to help, but enabling legislation is needed, and still nothing has materialised.

Finally, I must make the point that nothing should be done for nationalised industries which will hurt the private sector. We now have companies of both types and we shall have them in the future, but I think it would be quite wrong to land ourselves in a situation where helping inefficient giants leads to destroying other small companies which may be doing extremely well.

5.5 p.m.

Lord Davies of Leek

My Lords, I have sat through the debate and it has been full of constructive ideas. The House is grateful to the noble Lord, Lord Spens, for his enthusiasm and to the noble Baroness, Lady Sharples, for her enthusiasm in getting together small groups of people who are interested in the problem of small businesses. Some of those groups I would want to make even smaller.

First, I should like to point out that the Investor's Chronicle was rather hard on the Government. I thought that that publication would be regarded as more authoritative than quoting, say, another newspaper, because it spoke of the Government "clobbering the private sector" and of all hopes of the success of the Budget being shattered. It then said that it was, "a body-blow to industry". I will tell noble Lords why I have quoted that phrase in a moment. The Investor's Chronicle says: The combination of high interest rates and an over-valued currency has dealt a body-blow to industry. By giving foreign companies a competitive advantage, the strong pound has prevented British companies from raising prices". In fact, it has done more than that. This House and all political and non-political parties on both sides of the House and on the Cross-Benches are today urging, as they have urged before, that more encouragement should be given to small businesses. Indeed, small businesses have the greatest record of bankruptcies. When local government and the public sector in general is prosperous, despite much criticism (some of it very ill-informed), they supply for the small entrepreneurs tens of thousands of jobs throughout the country; for example, decorators, builders and small contractors, working particularly during the winter when small companies of plumbers and others are needed.

In local areas much of the initiative of local government or local authorities is reflected in the national figures. The biggest numbers of bankruptcies that we have had in the last two years have occurred among the small builders and small contractors who have been the essence of British enterprise over centuries. The Investor's Chronicle goes on to say: At the same time its policies have pushed what would have probably been a normal recession into the worst slump since the great depression of 1929–32". A new adviser to the Prime Minister has suggested that the monetarism policy has been too tight—and I shall not make cheap remarks about it. Instead I shall ask the noble Earl, Lord Gowrie, a couple of questions and I know that as usual he will be capable of replying to them. The advice of Professor Walters to the Government was that the pressure on monetarism was too tight. The magazine, Crossbow, has a rather interesting article on this by Patrick Hanagan. I read it with interest because it is good for us to keep informed of intelligent Conservative opposition. The author considers that fears about our industrial decline are exaggerated. Nevertheless the article admits—and it puts it nicely—that we cannot arrest change. It even warns us about reinvesting in industry. That sounds paradoxical, but it is the Crossbowman Hanagan speaking. He says: The political response to the impact of these trends should he defined largely by the changing economic environment. Given a number of years in which to accommodate the trends, they should prove capable"— it is a bit turgid— of being integrated into society. The alternative is to attempt to arrest change for we cannot reverse the process". This is a serious point. We cannot reverse the process. In practice the means available for taking any action are inadequate and a political decision to arrest the trend could well have even more destabilizing consequences of a different nature". Full stop, take your breath, and he says: It would mean sustaining and re-investing in industries which are generally suffering from over capacity and low productivity". I know now that it has become popular, and it is quite jargon, to talk of the new technology and of the new elemental trends taking place. They are taking place so that never again, I believe, can we look at full employment in the same way that we have looked at it in the past. I have said in this House that I believe that on a three-day week colliers with modern mechanisation could cut all the coal we needed, and more. We should have a healthier nation. Therefore, we have to look at the entire economy. A new philosophy must be evolved to look at the economy of the very near future in relation to the silicon chip and in relation to new kinds of investment.

The Investor's Chronicle makes a point that was highlighted in a way by the noble Baroness, Lady Seear, and by the noble Lord, Lord Granville. I will read the little bit: Our other measures to help industry include £1bn spent on public sector investment (not, note, in subsidies…). The Government cut its fixed investment by 15 per cent. in 1979–80 and by another 19 per cent. this year. This is the worst type of economising. Vital investment in drainage, public transport and energy is being held up due to short-term PSBR considerations". This has become a myth. This PSBR has stopped all enterprise. It continues: An additional £1bn on public sector investment will bring much needed help to private industry because almost all of it will be spent in Britain. So will the cut in the national insurance surcharge and the scrapping of heavy oil duty shown in our table". I am glad to see that the derv protest in the other place was a success. That indeed is a help to small industry.

Now I think that to be true. I believe that the Government should change their line if they want to help small businesses. We could begin with local government activities. There we are allowing things to decline—like this building. According to a Written Answer it is going to cost £2 million to repair the roof of this House. To do the whole of the building is probably going to cost £8 million. It ought to have had continuous attention, instead of our making false economies at different times. Small contractors and big contractors ought to have been employed on this enterprise that is worthy of national and international attention.

De-industrialisation is really taking place. Many of the old industrial enterprises will never rise again. Labour, Tory, or any other Government must face this in the new kind of world which we are going to enter. The Crossbow article alleges that manufacturing industry has fallen from 37 per cent. of the gross national product in 1950 to 28 per cent. today. I have seen it at an even lower figure than that. This is the trend in which we are trying to build up small businesses, and it is a trend in which we could do so. But the noble Lord, Lord Vaizey, and the noble Lord, Lord Seebohm—and I agreed enthusiastically—said that we must reassess our spending on education, in order to get people with the know-how and knowledge to be able to enter into this new kind of world into which we are moving. Whatever politics we may have, we will be just daydreamers unless we have the talent brought up in our young to understand the mathematics—it sounds high-faluting—and know-how of the new kind of world into which we are quickly moving. This country ought to be ashamed of itself for the cuts in the educational opportunities, which are creating yobboes rather than talented individuals to meet the future.

Sir Geoffrey Howe, bless him, gave some opportunities. I am going to ask a couple of questions about that. I will get the answers. There is a new loan guarantee which has been mentioned by nearly every speaker in one way or the other, and we are grateful for this. In appropriate cases the Government will guarantee 80 per cent. of the loan. What industries and what services are eligible for this Government guarantee? Has anything been done, or is it too soon to be able to answer that question? What has happened with that? Does it look as though it is going to be successful? What limitations on eligibility are there?

I am pleased to see that there is some relief from income tax, and it is indicated where small business opportunities can get this relief. The Department of Industry is being developed in its offers of help, advice, and incentives to small businesses. Has the Department of Industry started this advice? Has it started this help? At what stage is this intention suggested in the Budget? The new enterprise programme is run by the Manpower Services Commission, which seems in some cases to pay allowances to attend crash courses. That was a point made by the noble Baroness, Lady Seear. They are to attend crash courses in business schools such as those in Manchester and London. I am quite sure that if we get the right selection that is not public money wasted.

Note the warning. There is a little dissension among small painters and decorators about the youth scheme of training, and going around willing to paint and decorate old ladies' houses. In introducing some of these new ideas with the young, we must try not to create a dissension among the legitimate trade union movement. Now redundancy money. In my day a pound was a lot of money. Unfortunately, people today seem to think that if they get £10,000 or £25,000 redundancy money it is going to last a long time. I am pleased to see that lump sums, through Sir Geoffrey's Budget, on top of a pension will be exempt from tax, and that between £10,000 and £15,000—the noble Earl will correct me if I am wrong—is exempt too. This is very worthwhile. I do not know whether it is set out, but for those people who are made redundant either the firms of the local areas should give first-class advice through the banks on how to manage the £10,000 or £25,000, in the hope of their moving into some enterprise.

Being a country bumpkin, I was delighted to see published this week the 30th annual report on smallholdings in Britain. The Minister of Agriculture, Fisheries and Food is required under the 1970 Act to present to Parliament an annual report summarising the situation facing the department and local authorities in relation to small holdings. I will not delay the House by listing statistics; suffice to say that the statutory small holdings are administered under Part III of that Act, and there are in Britain 7,655 smallholdings provided by local authorities showing a surplus worth £3,019,629. That sort of development should come into our consideration of small businesses.

As the noble Lord, Lord Vaizey, pointed out, some things these days are becoming too large, and certainly farming is big business. In the country areas, one of the few ways for a young man to get into farming up to now has been through a local authority smallholding. I hope the Government will take a fresh look at that aspect and encourage local authorities to go in for that sort of project. I need not trouble noble Lords with the statistics on the subject; they can read the report if they wish. When the Government are considering giving help to small businesses I hope they will think of smallholdings, many of which have been going for many years and have been supported by Governments of all complexions. Finally, I wish once again to thank the noble Lord, Lord Spens, for raising this important subject.

5.22 p.m.

Lord Gisborough

My Lords, I too wish to thank the noble Lord, Lord Spens, for bringing this matter to the attention of the House. I must apologise in advance to my noble friend Lord Gowrie in that I may have to leave before he has finished replying to the debate. The Budget provisions for small businesses provided a great step forward, but inevitably there remain, and always will, problems, and I wish to mention a few relating to my area of England. First, there is the problem of existing businesses which so often thrive only to die while so much more help is given to new starters. The provisions of the Budget did much, but mainly for new start-ups. Too much encouragement to small businesses to set up in an already overcrowded and fiercely competitive marketplace may jeopardise the existence of small struggling companies. Therefore help to set up new businesses must be balanced by help for the existing small businesses against whom they are going to compete.

Even though the problem is worldwide, high interest rates are still a major burden for small firms and in the last two years only 30 per cent. loans may be offered by such bodies as CoSIRA, so that 70 per cent. must come from the money market, and that is short-term and expensive. An extended low rate interest scheme could greatly help small firms. And as one job is created for every £5,000 lent by CoSIRA, financial help is soon repaid to the country in reduced unemployment benefits.

In relation to the north of Yorkshire, from where I come, the county structure plan, drawn up at the direction of the Department of the Environment, planned a Development Commission advance factory scheme which would have resulted in over 100 small factories in north Yorkshire by 1986. In 1979, with the structure plan virtually complete, the Department of Trade, almost overnight, downgraded considerable areas which had previously enjoyed full development area grant assistance status.

The problems of obtaining planning permission for light industry in rural areas have diminished as local authorities have become more sympathetic to the needs of widespread light industry, and Department of the Environment circular No. 22/80 will be of further help. But there is still reluctance to allow the conversion of disused farm barns, granaries, chapels and old schools into small workshops, and the main problem seems to be the fear of setting a planning precedent from which subsequent light industry planning applications could not be refused. Perhaps this is an area where the Government could help by allowing permission to be given subject specifically to no precedent being able to be claimed for that site.

With regard to the development of rural buildings sited a long distance from a village—again, for light industry or workshops—there is often a large cost involved in providing services and a subsidy is needed to help developers overcome those special costs. Further, it is the practice of the North Eastern Electricity Board to demand substantial sums of money from the proprietors of newly established businesses in advance of future supplies of electricity; the sums range from £50 to £1,250. Surely that is against the spirit of the Government's intention to help small businesses, and I am not aware of it being done by other boards.

Planning difficulties are also met through objections from the Department of Transport, through the surveyor's department, particularly when change of use is sought. Perhaps the Minister will look into this point. By that means a brake is being put on the development of rural buildings into workshops, perhaps by virtue of inadequate turning circles or suitable entrances, all to meet bureaucratic standards which surely could be reduced in the countryside.

Tax allowances have become realistic and helpful under the present Government, but they are available only for manufacturing industry. Why not for service industry, which is often far more labour intensive? There is the great problem of finding skilled labour for small businesses in rural areas. Their small size allows good training for apprentices, and fine craftsmen can and are trained by small firms. However, the intake of apprentices has dropped alarmingly owing to the high cost of employing young and initially unproductive labour in a very small labour force. If some form of assistance is not given, there will be a serious shortage of trained labour. Even a reduction of the 13½ per cent. national insurance contribution on young employees would be a help and encouragement. The MSC does a great job but tends to be inappropriate bureaucratically for many small firms.

Transport and housing in rural areas are large factors in employment. The Transport Act 1980 has been a great help, with car sharing and community schemes, though the existence of public transport—in North Yorkshire this particularly means the Middlesbrough/Whitby Railway—is a vital link for employment. And with two advance factories standing virtually on the line, the possibility of its closure is causing great concern.

As for housing, while the right to buy council houses must be good, careful watch must be kept in the national park areas to ensure that young people are not priced out of those areas in such a way that they cannot work there. The noble Baroness, Lady Seear, said that employment protection should be extended to small firms. I do not think that is on because, whether or not we like it, the small employer does not and never will understand employment protection and, anyway, he is not prepared to risk it. If he wants to get rid of somebody, he does not have time to prepare a case, attend the tribunal—win or lose—because he must get on with his job, and in any event he does not have the cash to employ a lawyer. The one-man business—the builder or farmer—is loth to employ a man if he is likely to have to face the hassle of having to get rid of him.

I have been as brief as possible and skipped a number of details I would otherwise have given. The present Government have done more to help small business than probably any previous Government. However, investment in successful new ventures and the nurturing of existing ones will be the key to the long-term solution of unemployment.

5.30 p.m.

Lord Sandford

My Lords, I wish to apologise to the House straight away for intervening in the debate —though I shall be very brief—to make only one point, without having put down my name to speak. I have been attending a council meeting of the Association of District Councils, which was fixed a long time ago, and originally I thought that I would not be able to attend any part of this debate. The district councils are intensely concerned in this whole field and are anxious to play a full part, and to have the necessary powers to play a fuller and more effective part.

The particular point that I should like my noble friend to answer, if he can, concerns the prospect of local authorities being given the additional powers that they are seeking. As my noble friend will know, the matter of what powers they have and what powers they needed was reviewed by Sir Wilfred Burns, the deputy Secretary of the Department of the Environment, as long ago as last July; and that fact might already have been mentioned in today's debate. If it has not already been reported, the noble Earl will, I know, be able to say that at last, after nine months, that report has been published. But what we want to know is what action is to be taken upon it? If I may give your Lordships just one example, you will see how urgent and necessary is that question.

The leader of Bristol City Council was talking to me this very afternoon. Bristol is the last authority among our membership to have decided that to get these powers it must promote a Private Bill. Promoting a Private Bill is expensive and therefore is unpopular with the ratepayers. If the Private Bill contains powers which the Government have already indicated they intend themselves to introduce in public legislation, then it is also unpopular with your Lordships' House, because it is expensive in terms of our time, too. If, on the other hand, the Government, having said that they are to introduce legislation, do not in fact do so, and take nine months to publish the report on which the legislation is to be based, then the City of Bristol, and a number of other local authorities similarly affected, are placed in a very considerable quandary as to what action to take. They share our general concern in wanting to help to promote and support industry. They have not the powers needed for that. Sir Wilfred Burns' report has identified what is lacking. What we do not know is when the Government are proposing to legislate. I hope that my noble friend will be able, in this debate, to give an answer which will make decisions by cities, which find themselves in this situation, easier to take than they are at the moment.

5.33 p.m.

Lord Mottistone

My Lords, I should like to make a brief intervention at this stage in the debate. I apologise deeply to your Lordships for being too late to speak earlier in the debate. I had hoped that the earlier speakers would speak a little longer. In any event, I must apologise also to the earlier speakers for not being present at the beginning of the debate. I want to make only two points on this general subject.

First, I applaud the various moves that the present Government have endeavoured to take to ease the position of small businesses. I am sure that the details of that have been touched on by earlier speakers, and I shall not delay your Lordships in that regard. However, I am still deeply concerned about the point that Mr. Bolton made very clear in his report, of which your Lordships will be well aware. Paragraph 8.18 of the report stated: Our rejection of positive discrimination in favour of small firms as being at this stage unjustifiable and impractical does not imply that we are content with their present situation. On the contrary, we believe that they suffer from a number of inequitable and unnecessary disabilities, mostly imposed by Government, which amount to discrimination against them. The fact that this is unintentional is irrelevant". Notwithstanding all the trouble that the present Government are taking to ease this burden, I wonder whether your Lordships recently saw a particular article in the Sunday Times. The article is requoted in the Reader's Digest, for May, and I came upon it last weekend. A person wrote: Responding to the nation's call for small businessmen to reduce the number of unemployed, I recently decided to take on my first employee. I notified the Inland Revenue and they sent me the following forms and pamphlets concerning income tax for my forthcoming employee:

One P24 Two P11
One P24N One P7
One P34 One NP18
One P7X One CF427A
One P47 One CF391
One P46 One P8
Two P45
One Table 'A' One Tables 'B' to 'D'.
My heart sank like a stone as I realised that life might be more difficult with an employee rather than easier, and that some of the time he would save me by sharing my current workload would in fact be spent administering his welfare rather than increasing productivity. Until someone really gets to grips with reducing and simplifying bureaucracy at a day-to-day level, the unemployed are going to remain unemployed and small businesses small". That article was perhaps included in the Reader's Digest to encourage people to laugh, but I think that that kind of situation is a root cause of our problem. The question is, what is a small firm? Mr. Bolton had his views, and I shall not burden your Lordships with what they were. There is obviously a limit by which that extraordinary batch of papers, which I imagine required two postmen to carry it, is relevant and important, but whether that is so, below, say, a firm with 100 employees I would question. Basically—this is Mr. Bolton's point—the system that is evolved by central Government to apply to companies the taxation that is necessary for us all, (as in this case), is designed around a bigger company, because a bigger company employs more people. I believe that about 75 per cent. of the total number of employees are employed in companies with 100 or more employees. The forms are devised for such companies, and those responsible never stop to think that if they send the kind of bumph to which I have referred to a small businessman, he will receive the same amount of material, regardless of whether he employs one person (such as the case I mentioned from the Reader's Digest) or 1,000. Now something is wrong there.

The particular case which I have quoted involved the Inland Revenue, but there are other forms sent out by other Government departments and indeed by local authorities, and in all such cases there is the same basic failing that those responsible do not look at the problem from the point of view of the small businessman. They do not make allowance for him to be treated in a way which enables him to get on with the job (as the quotation mentioned) and to ensure productivity rather than form-filling.

5.39 p.m.

Lord Bruce of Donington

My Lords, the whole House will be indebted, as indeed are we on this side, to the noble Lord, Lord Spens, for having raised this particular subject this afternoon. Although much of the debate has centred around the extremely important question of new businesses, it is necessary for us to bear in mind that the terms of the Motion include existing businesses. We are concerned here today not only with new small businesses, but also with existing small businesses. Of small businesses it must be said that they are vital not only from the point of view of the economy, but also in terms of the larger battle faced by all peoples, in all countries, over the preservation of personal freedom.

Personal freedom needs an economic base and therefore all democratic governments (including our own) of a variety of parties must always seek to ensure that small and independent businesses are encouraged, as far as possible, to operate in all those fields of economic activity where consumer choice has any significance. As the noble Lord, Lord Vaizey, reminded us, the existence of small businesses, particularly on the Continent, ensured that there was a greater degree of competitiveness in industry, in particular in Germany and also in the USA; and he said that the larger corporations were themselves in part responsible for the higher prices that the Community have had to pay for a variety of the products of industry. I think it is of a little significance that in Germany, in addition to the USA which was mentioned by the noble Lord, Lord Vaizey, there are roughly two and a half times the number of small businesses as in this country. It is also important to remember that this is part of the reason why the German rate of inflation has been significantly less than our own, because there is a greater degree of competitiveness.

When we are talking of small businesses, therefore, we ought to remember that the term itself covers a very wide field. The noble Lord, Lord Seebohm, was good enough to define it in rather better terms than it has been defined hitherto (that is, a firm of any number of employees under 200) when he said that it was a business that was owner-controlled. That is a far better way, I think, of defining what we mean by a small business. The term "small business" includes the overriding term, "self-employed people", in a variety of fields, including services. It includes small shopkeepers; small holders, particularly those in horticulture; it includes small building contractors, small wholesalers and small manufacturers. These latter can be classified in two ways: the way in which the noble Lord, Lord Schon, touched on when he sharply differentiated those that were engaged in the new technology. There are small manufacturing firms which do not involve any particular technological skill or technological development and, if I may say so without disrespect, there are those that produce the broad, general run of commodities. Even those can be divided again into sub-contractors to large companies, sub-contractors to sub-contractors of large companies and public boards; and those who supply directly to merchants or, in some cases, directly to the public.

This small business area covers a very wide field, indeed. I would submit that it would be shortsighted of us to discuss it out of context, if we discussed it as though the whole phenomenon and activities of small business was conducted as a completely separate and distinct activity within the economy of the United Kingdom as a whole. In fact, as I shall seek to demonstrate, small business is enmeshed at every point with the whole economic activity of the country. When some parts of the economy suffer or some parts of the economy are restricted, inevitably that has its effect, too, on the small businesses, as such. They cannot be separated away from the unfortunate but very real economic plight of the country at the moment.

What we, therefore, must also consider is the relevance of the steps that have been taken in direct aid to small businesses by a variety of bodies, the relevance of that in terms of real economic effect, the relevance to the way in which the whole of the economy of the country is operating at the present time. As no doubt the noble Earl, Lord Gowrie, will inform us, the Government have taken a number of steps, and these have been referred to by many speakers this afternoon. There is the loan guarantee system which has been worked out in collaboration with the banks by virtue of which some £250 million, I understand, will be made available for loaning to small businesses. There is the business start-up scheme announced by the Chancellor and referred to last night and which is incorporated in Clauses 50 to 63 of the Finance Bill at present in front of another place.

There have been, in the course of one or two Bills which have passed through this House, in the Local Government Bill and in the Companies Bill, certain administrative concessions that have been made to the managers of small businesses in simplifying their administrative tasks as far as their contract either with local government or central Government is concerned. There have been certain extra training facilities made available by the Manpower Services Commission and also, as has been previously announced from the Government Benches, there has been the recommendation by the Government to the local authorities and public bodies that, wherever possible, endeavour should be made to buy British.

All these things are of some significance and have some impact on the fortunes of small business. Then there are the other outside bodies that have been giving aid to small businesses. The ICFC, as the noble Lord, Lord Seebohm, said, has played a considerable role and my noble friend Lord Oram also referred to the activities of the co-operatives, together with the National Research and Development Corporation, the activities of which were emphasised by the noble Lord, Lord Schon. I think that he could have added the National Enterprise Board which also has given certain assistance to small business.

All this is well and good, but how much does it really amount to? I do not want to introduce a jaundiced note in this debate, particularly as the noble Earl, Lord Gowrie, who is to reply, always presents his arguments to the House with a degree of temperateness which I think commends itself to us all. But must offer for our consideration the view—not my own but I want to offer it—which has been put forward on behalf of the National Federation of Self-employed and Small Businesses. Mr. Tony Miller, the chairman of the Federation's taxation committee, is reported in The Times of 29th April, 1981, as saying: The so-called small business measures are merely cosmetics and overall do not contribute an iota to the continuation in business of the existing two million small firms and self-employed people. More advice, more borrowing and more cost is not the answer to our ills. Once again, the Chancellor has diagnosed our ills correctly but has gone on to prescribe the wrong medicine". There is a view that does not come from a strictly political-party source and which shows considerable disquiet. Therefore, let us examine the steps that so far have been taken in slightly greater detail to see their impact. On the question of the £250 million—worth of loan to be made available, we must remember that the interest rate charged, including an extra 1 per cent. for insurance, will be of the order of 14 per cent.; 14 per cent. is not a very advantageous rate of interest and does lend some credence to the suggestion that, I think, was made by the noble Lord, Lord Gisborough, that some kind of businesses ought to be entitled to preferential interest rates, as is the case in one of our EEC partners, France. At the moment, there is a considerable volume of evidence to show—and I can produce it if challenged—or to suggest that there is much borrowing going on at the present time within British industry, not merely to repay previous borrowings but also to repay previous interest that has still not been discharged. The burden of the interest charged at 14 per cent. is very high indeed.

So much for the £250 million loan facility that is being made available for lending out to small businesses. Now I pass to the new business start scheme as incorporated in Clauses 50 to 63 of the Finance Bill. I hope that the Government will take another look at this. The clauses are so technical and are so abstruse that anybody who contemplates taking advantage of the particular scheme offered will have to engage the services of professional accountants and, probably, lawyers before they have their position absolutely clear.

I wonder why it is necessary to exclude relatives from the scheme. Why? Is it because, presumably, they think that relatives are more likely to devise, or be assisted in devising, some tax-avoiding scheme? That need not necessarily be so. When a person is starting out a new business the first persons to whom he will normally have recourse would be members of his own family, perhaps his father, perhaps father-in-law or possibly mother-in-law if she is sufficiently well-endowed financially. Why should they be excluded? If vast sums of money were involved in this particular scheme, I could understand the necessity for having very strict tax-avoidance provisions incorporated into the Finance Bill; but we are talking of £10,000 in individual cases, which is equivalent roughly to slightly under £8,000 as at two years ago. We are not talking of vast sums of money.

Indeed, it is very doubtful whether the addition of this extra money for investment purposes would do more than create one extra outlet of employment, very doubtful. The EEC have had some experience in this in their various job-promotion schemes. They have found that it takes a very considerable sum of money invested to provide a new employment outlet. On the assumption that some 10,000 firms took up this particular scheme, it would create on that estimate some 2,500 additional jobs; and the borrowing of £250 million under the loan guarantee scheme would probably create only another 2,500 jobs. Even on the assumption that I am being too optimistic on that or even a little pessimistic (shall I say?) that it needed 5,000 to create a new job the success of the two schemes combined, to the limit of £250,000 in terms of loan money in one case and in tax reliefs on the other, would still only create some 10,000 new jobs; or if one put it as low as to say it needed only £2,5000 to create a new job, the amount of additional employment will be something of the order of 20,000.

Unemployment is increasing per month at a greater rate than 20,000; so it is necessary to say this not because we wish to criticise the noble Lord on the nature of the measures themselves—a little is better than nothing at all. Indeed, in response to what I said earlier about the tax difficulties I am glad to learn from this morning's The Times that the Government are considering the points on which I ventured to touch with a view to simplifying if from the tax standpoint. I am not trying to belittle or to run down the steps that the Government propose to take; they are valuable; but they are very small and small in relation to the problem.

Here we have a paradox. We have, in terms of the tax reliefs given by the Chancellor of the Exchequer, a direct addition to the public sector borrowing requirement. And all the time the PBSR is increasing month by month because of the growth of unemployment in this country. It is quite clear that the really selective steps that the Government ought to be taking are those concerning the health of the economy as a whole within which small business must function. Therefore they must first of all reduce interest rates.

Here I note that the philosophy of the Government's new adviser, Professor Walters, is in sharp contrast with the remainder of Her Majesty's Government's advisers. When he was interviewed in New York—and I have a cutting with me—he said, contrary to popular belief, that increased interest rates in fact increased inflation; they did not bring it down. I shudder to think what would have happened to the noble Lord, Lord Cockfield, who unfortunately is not here this evening, had he been appraised of that at the time.

Small businesses—like all other businesses—depend fundamentally on there being a demand for what they produce. Unfortunately, if we judge by the latest report from the renowned firm of stockbrokers, Capels, consumer demand is likely to fall by 2 per cent. during the current year. This is not very encouraging to small businesses. Whatever good the small measures that the Government are taking do to individual firms, they are doing nothing to alter and reverse the climate within which these companies must work. This is particularly significant in the case of small building contractors. Small building contractors depend for 50 per cent. of their turnover—and I have the data here and I can authenticate it—on the expenditure of local authorities. The cuts in local authority expenditure have produced very considerable unemployment, as is well known among small building contractors.

Let us go to the shopkeepers, too. They have suffered not only from increased rents over the past 10 years—and their share of property in the national income has grown significantly over the past 7 years —but also because of increased rates. Before I hear too many cries of "Hear, hear" about that—doubtless with certain local Labour authorities in mind—may I remind your Lordships that in the Conservative Borough of Kensington and Chelsea the rate burden has gone up by 53 per cent. and the local greengrocer will have to pay an extra £2 a day in rates. All this really adds up to is this—

Lord Gisborough

My Lords, would the noble Lord agree that the reason for that rate rise is the excessive spending of the ILEA?

Lord Bruce of Donington

My Lords, the requirements of the ILEA vary considerably from authority to authority. Doubtless when Her Majesty's Government reply to the Question that has been put down by the noble Lord, Lord Boyd-Carpenter, for the 21st of this month (which is now on the Order Paper) they will be able to enlarge upon that point.

The fact of the matter is that the Government have got it entirely wrong. I invite the noble Earl to ask himself urgently whether it is conceivably possible that the Government might have got the whole thing wrong. I invite him just to consider that possibility—nothing more than that because that would he a breakthrough.

We have been so accustomed in this House to economic arrogance from some of the noble Lords opposite who address us on economic affairs—and I do not include the noble Earl, Lord Gowrie, in that number—that it would be a good thing if the possibility of mistake, the feasibility of error, could even be considered by the Government. The evidence is there to see for all those who want to see it. It is the fact that cuts in public expenditure on the lines that have been undertaken have had a disastrous result upon the economy as a whole. The complete confusion that exists in the Government's mind is reflected in the conflicting speeches of their Ministers in another place. The conflicting concept of the significance of the public sector borrowing requirement is another indication of uncertainty. The initial reliance on the control of the money supply which was put forward so proudly has now completely disappeared into thin air because they now know that they cannot possibly control it.

What the Government should do if they really want to help small businesses is to create the economic climate within which they can flourish. All they are really doing at the moment is to turn on a little trickle tap into the bucket for the benefit of small businesses while the whole vitals of the nation's economy are being drained through a 42[...] drain right out of the economy as a whole to the detriment of the country as a whole.

May I say once again that I support all the endeavours that the Government have made so far to help small businesses, with the reservations of course that I have made on these particular clauses of the Finance Bill which is now before another place. If they really want to help, they should examine their own policies again and come back clean to us. The House is always very willing to warm to those who admit that they have made mistakes, particularly when those mistakes are so obvious and so glaring that all but the purblind refuse to acknowledge that they exist.

6.7 p.m.

The Minister of State, Department of Employment (The Earl of Gowrie)

My Lords, I will admit to mistakes, and one mistake that the Government should admit to is that our cuts in public spending were not fiercer and earlier. However, we can come back to that at a later stage. In response to what the noble Lord, Lord Bruce, said about economic arrogance—and I must be careful because I confess to a weakness for macroeconomic debate, a weakness that is shared by about 90 per cent. of the citizenry of this country at the moment—the trouble with life is not so much economic arrogance as the arrogance of the laws of arithmetic. Those are what drive various administrations, Ministers and indeed citizens to drink.

But I have come to learn rather than to teach. If I may say so, even allowing for the conventions of self-congratulation to which in this House we are perhaps too prone, this debate has shown the House of Lords at its best and the noble Lord, Lord Spens, should be very pleased. The entire Hansard—anyhow up until this moment—should provide a short textbook of some of the problems, challenges and possibilities in this field of small business and wealth generation. I shall see that it is widely distributed—and I shall see that it goes immediately to my honourable friend (in both the technical and literal sense of the word) Mr. John MacGregor, the Minister with special responsibility in this field. He is a very new Minister and a very good Minister, with whom I worked closely when he was the Department of the Employment's Whip. Of course we at the Department of the Employment are glad that he is so aware—as so many speakers today have been aware—of the employment possibilities of wealth generation in this field.

Also, the timing of the debate is excellent because yesterday saw the launching by my right honourable friend the Chancellor of the business opportunities programme. We have in the Government done much to encourage the small business sector and to enhance both incentives and rewards for those who show the drive and determination to run a business. The main purposes of the programme are twofold: to encourage the creation of new business and to create greater public awareness of the importance to the economy of small firms and the extent of the changes, tax and otherwise, made to help them. To use American jargon, it is really a question of "raising consciousness" about the role of small businesses in society. In a communicating, mass-media democracy like ours, if you only make people aware of certain activities in the economy very often they then plunge into them and take them on.

There will be therefore an increased programme of ministerial speeches and discussions of various kinds with groups of existing and potential small businessmen, their advisers and their representatives in all parts of the country. But of course this is a two-way programme. The Government are trying to take the lead but others have to respond if the programme is to succeed. We never cease to repeat that governments of any complexion can only set a framework and a climate within which human beings undertake their own activities. New job opportunities and new ideas, industrial diversity and spurs to competition generally are the prizes to be won in fostering a small and thriving business sector. We are altogether committed to try to win those prizes and to encourage the enterprise and growth of small businesses. There should be no mistake about that. Our commitment is founded on the bedrock of a range of powerful fiscal initiatives introduced not just during this last Budget—as many speakers, including friendly ones, seemed to imply—but all through the last two years. They culminated in a series of measures comprising the "enterprise package" announced by the Chancellor in the Budget statement.

I shall come to the measures in just a minute but before that I must say that I altogether agreed with the noble Lord, Lord Bruce of Donington, when he said that what small business really needs is a generally good economic climate in which to work. That is why we have felt we cannot flinch from the main task of squeezing inflation out of the economy—the inflation which has been rampaging through it for over 10 years under successive Governments—so that the conditions of financial stability and confidence, on which all business in the end depends may once more return. Our policy to reduce inflation is bearing fruit and interest rates have been lowered.

Of course it is easy for the noble Lord, Lord Davies of Leek, in a very temperate and interesting speech, to say that the Government have nailed themselves to the myth of PSBR. Even if you discount, as I personally do not, the direct money supply effect of PSBR, you are again left with the arrogance of arithmetic, which tells you that if you increase your borrowing you also have to go on to the money markets to get the money and, as you are a very large borrower, you squeeze out small operators and drive up rates of interest. That is the logic which no Government, however detached their philosophy from one or other form of "ism", have been able to avoid.

Lord Davies of Leek

I hate to interrupt—but may I?

Lord Sandys

My Lords, if the noble Lord wishes to intervene he should address the House from a standing position.

Lord Davies of Leek

My Lords, I was doing the Minister the courtesy of seeing whether I had got permission. I shall make the point very quickly: I do not want to develop it, although I could. I think the noble Earl is quite right in that analysis. It does push up, but the resulting economic activity in employment would pay for the extra increase even in interest in the transition period, because we would not have all the unemployment benefits and so on to pay. I will leave it as brief as that.

The Earl of Gowrie

My Lords, one of the difficulties we have in my department is that it is very hard to predict which sectors of activity generate employment at a given moment. For instance, we might all applaud some splendid public scheme, especially if we could finance it from outside the PSBR, such as the Channel Tunnel, but there is no evidence that existing unemployment would be helped or that unemployed people would be taken on for that scheme. It would be very difficult, costly and bureaucratic, if you like, to guarantee that only unemployed people would take up such activity. So I think we are in agreement that the important thing is to improve the general climate.

On interest rates generally, I would also say to the noble Lord, Lord Bruce of Donington, that in the real world—I do not think this is economically arrogant, but it is again the arrogance of arithmetic—you have to discount the level of inflation at any given point when you calculate the levels of interest rates. In fact there is a credible historical argument which says that interest rates all through history have varied at around 3 per cent. to 5 per cent. in real terms. What they turn out to be in gross terms depends on what level of inflation is being run in the economy. So all this is really to say that we consider reducing inflation to be the prime issue for creating a more stable financial climate in which business and industry can invest. As the noble Lord, Lord Lever, who was the small business Minister in the previous Government, reminded your Lordships in his interesting maiden speech here, there is no shortage of money for investment in this economy. We live on the edge of one of the greatest capital markets in the world. That capital is now social and corporate and represents the savings and pensions of millions of ordinary people. But there is no shortage of investment capital. What there is is the lack of a stable financial climate in which it can be invested in things other than trying to heat inflation—property and the rest—a shortage of profitable activities which it may go into. And, I would say to the noble Lord, Lord Bruce, that we do calculate the net effects. When we think about our borrowing, we do think of the net effects, for instance, in the special programmes that my department runs for the unemployed. We think of the net effects in terms of our borrowing, the amount of people taken off the register, and all the rest.

Leaving aside all these macro-economic considerations, although conditions are still difficult, we are encouraged by the rate and speed at which inflation has come down. We are now determined to encourage in that improved climate, although there is still a long way to go, new and small firms so that they are ready and equipped to take advantage of any recovery, and so that we do not lose out to our international competitors.

I want to say how much I agree with the remarks of the noble Baroness, Lady Seear, on training, and also indeed with the remarks of the noble Lord, Lord Seebohm, and my noble friend Lord Vaizey on education matters. A lot of my work in the department, and with the MSC is concerned with the new training initiative document which is at present being considered by the Government. I am sure we shall be debating it in this House in due course.

This brings me back to the measures in the Budget which were announced despite the general constraints on the Chancellor imposed by his need to reduce the level of public borrowing in order to help bring down inflation, release resources for industry and indeed for small business, and help to lower interest rates. Two of the measures, as many of your Lordships have said, are entirely new. They are both designed to increase the rate of business start-ups and expansions by attracting firms back to small enterprises and, frankly, acting as propaganda as to what can be achieved by small firms, and to concentrate the attention of people on the possibilities opened up by small firms.

Various noble Lords have dealt with the measures. The first new measure is the loan guarantee scheme. This is designed to help where bank managers are reluctant to lend although the business proposal appears viable, because the potential businessmen in question have no track records, or where maybe there is insufficient security. Thus the scheme will support additional lending to small firms, and that is a very important point. Finance in the circumstances that I have described has often been referred to in this House and elsewhere as a significant problem for small business, standing, so to speak, as a road block in the way of new ideas and the entrepreneurial spirit. Now the Government will offer guarantees on the major part of certain loans made to small businesses. That will be achieved with as little bureaucracy as possible. I would say to the noble Lord, Lord Davies, that it is a little early for me to be able to report on it but I will bear him in mind and we can keep in touch with him as the scheme progresses. Since the Budget we have, in fact, been finalising the details of the scheme with the participating financial institutions. I should like to take this chance to pay a most grateful tribute to the banks for their co-operation—and it is at a time when we have just hit them on the nose with additional taxation—in jointing with us in the new scheme.

My right honourable friend the Chancellor announced yesterday that the loan guarantee scheme will be launched on 1st June. I should say that this is, of course, a trial scheme introduced so that we may assess just what the demand is. In these circumstances, we have felt it right to limit participation to institutions with a proven track record of lending to small firms. Cheap money is not being made available under the scheme and borrowers will have to pay the full commercial rate, together with a premium for the guarantee. That I hope answers the point of my noble friend Lord Gisborough that it is important that we should not be unfair to existing small businesses which would not benefit under the scheme.

The second new measure is the business start-up scheme. Taking advantage of this, outside investors in certain new trading ventures will be able to get full income tax relief on the capital which they put in at the start of the business. I am glad that tributes have been paid to that on the other side, as well as on my own side of the House. The business start-up scheme gives new opportunities for tax relief at the investors' full marginal rate and is geared to attracting funds directly into productive investment at the start-up stage, where there may be particular difficulties in raising finance and when the creation of a proper capital loan is most desirable.

I never thought the noble Lord, Lord Bruce of Donington, particularly innocent before, much as I admire him. I thought he was, perhaps, a little innocent here, in that it seems to me that there would be a number of gift horses—not in terms of tax evasion, in any way, but, say, in tax reduction—for wealthy people in this scheme if we made it too open to relatives, particularly as relatives already have existing deductions for handing over capital sums to their dependants. If you limited the scheme to outfits which generated employment and had to monitor the employment all the time, that indeed would be bureaucratic and expensive. Nevertheless, the noble Lord was most constructive in that part of his speech and I shall see that his criticisms are looked at.

I am pleased to say that this is an imaginative new measure—new to this country, but also unique among our main trading competitors. I know that many of your Lordships are impatient for us to go further and faster, but in any tax area we should proceed with some caution and see how things work out. It would be a great pity if a scheme were made so open to leakage and abuse that it proved unworkable and this potential source of help to the small business sector would then have to be lost. But, again, I shall attend to the criticisms made by the noble Lord, Lord Seebohm, and by my noble friend Lord Vaizey.

These two new schemes have attracted most attention, but we should not forget the other measures in the Budget which will be important to small business. The limit up to which the lower rate of corporation tax—40 per cent. as opposed to 52 per cent.—is payable was increased to £80,000. The VAT registration limit was increased to £15,000, and noble Lords will know that we are under some constraints from the European Community's rules in this matter. The Venture Capital Scheme, which was introduced in the previous Budget, was extended to include investment companies as well as individuals, and we have also announced our intention to make it possible for companies to buy back their own shares.

We should not forget, again, that the previous Budget also contained enterprise measures to help small firms. The lower rate of corporation tax was reduced from 42 per cent. to 40 per cent.; the Venture Capital Scheme was introduced; there were special 100 per cent. capital allowances in the first year to encourage the construction of small workshops and the apportionment rules on the trading income of close companies were ended.

A number of noble Lords, including the noble Lord, Lord Spens, have suggested that, with the increasing number of people receiving substantial sums of redundancy moneys, some way should be found to encourage the positive use of such payments. This is a very delicate matter and one must be careful about encouraging those who are still feeling the effects of being made redundant from risking their capital prematurely in a business venture. Consideration and guidance is called for and the Department of Industry's Small Firms Service is always available to give such help. The noble Lord, Lord Bruce, was anxious lest some of the tax regulations were too hard to understand, but, in point of fact, an individual need not struggle; he can refer to the Department of Industry's Small Firms Service for help. We are expanding that service.

We have made an important change in respect of redundancy. Redundancy payments and other payments made on the termination of employment were taxable if they exceeded £10,000. The Chancellor raised this threshold to £25,000 from 6th April, and the rules for the operation of this element of tax are being simplified. The Chancellor has also announced that the rules governing social security payments are being examined, because fears have been expressed—and I have to say that I rather share them—that they can act as a disincentive to entrepreneurial spirit.

The noble Lord, Lord Spens, said in a debate in 1979 that the employment protection legislation was too restrictive. I seem to remember agreeing with him at the time, as indeed I still do. So the Government introduced a number of important relaxations to ease the administrative burden on small firms and to encourage them to grow and take on more labour. I share the caveats which were expressed by the noble Baroness, Lady Seear, to the noble Lord. I feel that the Employment Act has probably got it about right. We amended the existing Act to increase the qualifying period of unfair dismissal complaints from 26 weeks to 52 weeks and to reduce the period of notification for small redundancies from 60 to 30 days. There were also a number of other special provisions for the small business; for instance, industrial tribunals are now required to take account of the size and administrative resources of a business in deciding on the fairness or otherwise of a dismissal. It is a myth that if you employ somebody you cannot sack him or her. Indeed, the present levels of unemployment are unfortunately a fair indication that sackings can take place.

The costs and the administrative burden for new and small companies in maintaining and disclosing company information was another problem area which was cited by the noble Lord, Lord Spens. Under the Companies (Accounts) Regulations 1979, the particulars of turnover are no longer required to be included where annual turnover is less than £1 million. The Companies Bill, which we have recently considered, will, when enacted, implement the EEC Fourth Directive on Company Accounts and further reduce the amount of detailed financial information which small and medium-sized firms must file with the Registrar of Companies.

On the subject of files, we have as an Administration reduced the number of files by over 1 million, but there is still a long way to go. The case given in evidence by my noble friend Lord Mottistone sounds like an outrage and I am certainly prepared to investigate it if given details. As a previously self-employed business man, I am personally very much aware that the self-employed are unhappy with the national insurance contributions which they are required to pay and with the benefits which they receive. It was, of course, a commitment in our manifesto that we would review the NIS position of the self-employed, and the Secretary of State for Social Services issued a discussion document. The closing date for submissions to him was 31st March 1981 and consideration of the comments received is proceeding.

The noble Lord, Lord Spens, also mentioned the burden of rates. On this evening, of all evenings, I hope that the economy as a whole will take this to heart. It is important that business men, large and small, make absolutely clear the contribution that high rates in their communities can make to levels of unemployment.

The noble Lord, Lord Spens, and the noble Lord, Lord Seebohm, mentioned local enterprise agencies. As part of our general initiative, the Department of the Environment and the Department of Industry are encouraging firms, located in a particular area, who may decide to pool their resources to help stimulate the economic development of the area. This is done in a variety of ways, including the provision of advice to small firms and matching potential investors with firms in need of capital. So far, local enterprise agencies have been set up in London, Leeds, Birmingham, Bristol and St. Helens.

The noble Baroness, Lady Seear, asked me about the community enterprise programme. I should make it clear that this is primarily a special programme for the long-term unemployed, and also for ensuring that work done by the unemployed can visibly be seen to be of benefit to the community. There are possibilities for some partnerships with local businesses, including small businesses, but it would be an illusion to think that it was primarily directed at small business, rather than as a special measure for the unemployed generally. I have had meetings myself with Mr. Colin Ball. I understand that the Community Business Ventures Unit under his direction has been examining the feasibility of setting up new community businesses. His work has been funded by the Government through the Manpower Services Commission and the Gulbenkian Foundation of the private sector. That period of initial funding has now ended and the final report is awaited.

I should like to congratulate the noble Lord, Lord Oram, upon an immensely constructive speech. My old friend, in a non-political sense, Mr. J. Grimond is of course very keen on this area of activity, on co-operatives. I have been down to see the work of Mr. Robert Lakshott in Bristol. Provided that they are not subsidised, the Government are enormously in favour of co-operatives as a valid expression of private enterprise, and are keen to see the producer sector flourish. I thought that the noble Lord, Lord Oram, made a very positive and constructive speech. He was so full of "silver linings" that for a moment I thought he might almost be a Tory. We are grateful to him. We are also grateful for the praise that he extended to my right honourable friend the Secretary of State for Employment, Mr. Prior, and also to my colleague the Parliamentary Under-Secretary, Mr. David Waddington. In fact, I felt a bit jealous, as I seemed to be the only person in the Department of Employment who at that point was not receiving a bouquet from the noble Lord. We recognise the problems of inner cities and the solutions which could be found in greater entrepreneurial activities there. In my work concerned with special programmes, I find that even with a difficult clientèle—with ethnic minorities in deprived inner city areas, for instance—we get a very positive response from suggestions regarding training for self-employment. This show's that the entrepreneurial spirit is pervasive throughout our economy.

The noble Lord, Lord Seebohm, gave us a textbook lesson on how a larger enterprise can lend a hand to a newer enterprise. The noble Lord, Lord Schon, then made it clear that he had benefited from this. This could not be a better reference. My noble friend Lord Vaizey pointed out that competition would probably get fiercer in the next 20 years and that we needed new and smaller banks. He drew our attention to the fact that a considerable structural change was going on in this economy. It might not be too fanciful to say that an element of the march from the North-East to London about unemployment is that it is in a way a march of the old or traditional manufacturing sector of the economy, outraged at the relative ease of the new service side.

We have to educate people, or point out to people the changes that are coming and prepare them for them. I think that the noble Lord, Lord Granville of Eye, dealt with that point. He asked me about the effect of the chip on the labour market. My department has produced a document which shows considerable evidence of new business and small business generation through new technology. I should be happy to send that document to him if he would like me to do so. The noble Viscount, Lord Hanworth, kindly gave me notice that he would raise the Hadfields point. I think it is a little wide of the debate, because even in its reduced state Hadfields is a very large business indeed. I will write to the noble Viscount about the points which he raised.

Viscount Hanworth

My Lords, I thank the noble Earl.

The Earl of Gowrie

The noble Lord, Lord Davies of Leek, mentioned the problems we are having with our roof. I do not think we could quite envisage the roof of your Lordships' House acting as a kind of gigantic job creation programme. However, I will pass on the noble Lord's suggestion to the authorities concerned.

My last point is this: It seems to me that the best thing about the debate and, indeed, about the measures we are trying to promote is that our aim is to change the whole psychological climate for business in general. The best thing for entrepreneurs is surely a stable financial climate which is not at the same time hostile to wealth creation; where success is not only rewarded but applauded; where the tendency is perhaps towards greater rather than lesser differentials in wealth in individual cases. In an open society men will always seek wealth. The interests of society as a whole demand that they seek it in a way which is productive and beneficial to others as well as to themselves.

For what my views are worth, I feel that for too long in this country the sources of new wealth have derived either from dealings in real property or in varieties of asset stripping. Inflation has had a lot to do with this tendency, but so has the philosophy of egalitarianism, because making money in these fields of endeavour is a lot less conspicuous than building up the kinds of activity which spin off into greater wealth for other people and create greater employment.

In this respect we are a curious people. We are not socially envious of those who acquire wealth by gambling or as a result of athletic or even, occasionally, of artistic ability. We are not even particularly hostile to those who inherit wealth, as some, though not all, of your Lordships well know. But we can be fiercely resentful of those who through their skill, effort and good fortune go out and make the stuff. The greatest single contribution which the Government have so far made, in my view, to small business is the reduction of the top rate of income tax on earned income to 60 per cent. When we improve the capital taxation position comparably, we really shall be getting somewhere. We have made a beginning in this respect as well as through the other measures which I have mentioned and through our attempts, by reducing inflation, to create a stable financial climate. And we mean to go on and do better.

6.38 p.m.

Lord Spens

My Lords, I do not propose to keep your Lordships for very long because I am sure that the noble Baroness is feeling a little frustrated that her Unstarred Question is taking so long to start. I can say to the noble Earl, Lord Gowrie, that indeed I am gratified. It has been an excellent debate which has spread over a very wide field. I do not propose to refer to what every speaker has said, but one or two points have come out of the debate. First, most of us feel that the Government could do a little more. We have suggested various ways. We have asked the Government to look again carefully at the clauses in the Finance Bill which deal with the new business start-up scheme. I agree so very much with what was said on that matter by the Opposition spokesman. I do not understand it, and I am an accountant. I wonder whether the noble Earl does. I omitted one point from my opening speech and I should like to refer to it now. The people who are going to contribute, whether to the start-up scheme or to my friends of small businesses scheme, or whatever, have got to turn it into cash in order to make a contribution. At the moment capital gains tax may be charged. May I ask whether there is any possibility that raising money for this purpose could be freed from the charge to capital gains tax? I should like the Minister to think about this point.

I now want to make one of the speakers blush. We have among us (and I think we realise it) somebody whom I would call an entrepreneur extraordinary. About 40 years ago the noble Lord, Lord Schon, came to this country as a refugee with no money. He started up in a new technology, very small business. He has told us how that business was supported at times by the ICFC. Finally, he spent 10 years as chairman of the National Research Development Corporation. He has made his million and he is now sitting in this House to give us the benefit of his advice. It is a marvellous achievement and we should remember it.

Finally, we must remember what was said by the noble Baroness, Lady Seear: that unemployment is not only about small businesses. The small businesses only play quite a minor part in the problem of total unemployment. The large businesses have to be brought back somehow, even if they are not the ones that we know at present. New ones have to be created. It will take time and that is why we have concentrated today on possibly getting something moving for small businesses. I thank all the speakers for having spoken so interestingly today and I beg leave to withdraw the Motion for Papers.

Motion for Papers, by leave, withdrawn.