HL Deb 23 November 1983 vol 445 cc244-53

2.59 p.m.

Lord Boyd-Carpenter rose to call attention to the urgent need to liberate from the control of Government and other public bodies more of the resources required for the creation of wealth; and to diminish the disincentive effects on work and investment of high levels of taxation; and, to move for Papers.

The noble Lord said: My Lords, before I venture to offer to your Lordships a few observations in support of the proposition contained in my Motion, may I first say what a pleasure it is for me, and I have no doubt for many of your Lordships, that this debate is to bathe occasion of the maiden speech of my noble friend Lord Maude of Stratford-upon-Avon. Those of your Lordships (who I am happy to think include the noble and learned Lord the Lord Chancellor) who have listened to my noble friend through the Oxford Union and through the House of Commons to this House, know what a pleasure this will be and what a powerful addition to the speaking power of this House my noble friend will undoubtedly make.

It was said of a certain provincial mayor that on taking office he solemnly assured the citizens that he would, in the course of his duties, steer between partiality, on the one hand, and impartiality, on the other, without actually falling into either. That particular line of conduct seems to me to be very much the line which successive Governments of all parties in this country have followed in the management of our economic and financial affairs. In the modern world there are basically two methods of organising the operation of large economic communities. There is the socialist/communist method, with virtually all power vested in the Government machine and in the political party which controls it, which allocates investment, decides on earnings and wholly controls the operation of the economy; and there is also the free enterprise capitalist system. Part of the theme of what I desire to say to your Lordships is that we have followed the tottering footsteps of the provincial mayor to whom I referred.

The communist/socialist system undoubtedly works. It does not work very well in agriculture, but it does manage somehow to organise an economic community although it produces, by relative standards, very low standards of life. The free enterprise capitalist system, of which the United States is the obvious example, has produced the highest material standards of life that humanity has seen in the history of mankind, but it has to be bolstered and assisted by substantial social security provision for the less fortunate and the less capable, which it has the advantage of producing the means to sustain.

It seems to me that for the last, I was going to say 19 years, but as that pinpoints almost too exactly my own date of departure from the Treasury I had better say 20 years—and I hope that my noble friend Lord Home will forgive me for that observation—we have steered between the two methods, neither attaining the discipline on our economy which the communist system undoubtedly provides nor at the same time obtaining the stimulus to the creation of wealth on which the free enterprise system depends.

Before that 20-year period and during the prime ministership of Mr. Macmillan and of my noble friend Lord Home, we had in this country a period during which the free enterprise system, though still somewhat restricted, was allowed to deliver the goods. Year after year we had a reduction in the level of taxation, but year after year those taxes at reduced rates produced increased revenues which financed the provision of improved social benefits as well as adequate defences and the other needs of Government. We had a situation in which the Prime Minister of the day, Mr. Macmillan, was rebuked for an observation to the effect that we had never had it so good by a number of intellectual prigs who thought that his observation was too materialistic. The very fact that that observation could be made and was not challenged for its accuracy is an indication of the success which, if given a chance, the capitalist free enterprise system can have in, first, the creation of wealth, and, secondly, as a consequence of that creation of wealth, the availability of resources both to stimulate the enterprising and take care of the unfortunate and to meet the financial needs of the state. It is our departure from that which I fear is the cause of a great many of the ills which on both sides of this House and of another place, with, I think, equal sincerity, we deplore.

After the war—and I hope that your Lordships will forgive this expression—we lurched into nationalisation. The older of your Lordships may recall the bright enthusiasm with which the taking over by the state of the commanding heights of the economy was received in certain quarters. One accepts that all this was done for the highest of motives, in the genuine and sincerely held belief of those who constituted a majority in this country at that time that the national benefit and the national wealth would be improved by the transfer of large activities to public ownership. Very few people, in the light of subsequent experience, would put it quite that way today.

But let me recall the heady enthusiasm of those days in the words of the late Lord Morrison of Lambeth—Herbert Morrison—who, as your Lordships will remember, was not a particularly starry-eyed or emotional character. In his publication The Socialisation of Transport he said: The quality of service will tend to advance, and the price charged to fall". He went on to say: The industry itself will be more efficiently and economically conducted". I do not think that there would be many people today who would share the enthusiasm of Lord Morrison of Lambeth.

I must remind your Lordships, so far as it is necessary, of some of the facts. For years past now the prices of the products of the publicly-owned industries have risen considerably faster than either the index of retail prices or the level of prices in the private sector. If we take the latest figures available we find that in February this year the retail price index was rising at a rate of 5 per cent. per annum and that the price rise in the private sector was somewhere near that figure. Prices in the public sector were rising at a rate of 13 per cent. At the same time, if one quotes Economic Trends again, it is the fact that the cost per employee in the nationalised industries, the cost of labour, has risen far faster than in the private sector, with, of course, the inevitable consequence on prices to which I have already invited your Lordships' attention.

The nationalised industries as a whole have not assisted in the solution of the problem of unemployment. Indeed, several of them are now employing a good many fewer people than they were even five years ago [Interruption.] and are doing so very properly, within their limitations, because of their inability to sell their goods. I wonder whether the noble Lord, Lord Beswick, laughs at that? Worse, in several cases these industries have been kept in operation only by substantial payments of subsidy, at the cost of the taxpayers. In recent years the coal and steel industries and the railways have all absorbed subsidies of very great substance taken from the taxpayer, and, therefore, many of them, taken from the taxed profits of the private sector of industry.

It is by no means self-evident—it would not be self-evident to a visitor from another planet—that profitable industry (industry which in the difficult conditions of today can still make a profit) should be taxed, and heavily taxed, to sustain the scale of operation of industries which are plainly unprofitable and which for years to come will show no prospect of providing anything other than a deficit.

Lord Molloy

My Lords—

Lord Boyd-Carpenter

My Lords, I hope the noble Lord will forgive me, but I have a good deal to say and I do not want to detain the House any longer than I must. The noble Lord may have a chance to speak later.

I ask your Lordships to consider the point of the diversion of investment by the Government into the public sector—the use of the guaranteed borrowing power of the state to secure that a large proportion of the resources available for industrial investment goes into the public sector. I would invite those of your Lordships who have not followed this argument very closely to look at a recent leading article in The Times headed: It depends on the rate of return". This article points out that, particularly in the middle-1970s, huge investments were undertaken in the steel and coal industries to increase their capacities—in the case of steel to increase its capacity by the construction of Ravenscraig and by the expansion of Redcar, and in the case of the coal industry to extend its capacity after 1985 up to a possible total of 42 million tonnes a year. The Times, in its brutal but I fear—and many of your Lordships will think—its justified way, says: The money 'invested' in the two industries was, in fact, clear and massive social waste". Since the war, apart altogether from investment but by way of subsidy and writing off of debts, some £40,000 million have been provided from central Government for the nationalised industries. It is easy to reflect what immense return might have been earned on such an investment had it been directed into the newer areas of electronics and communications—the newer industries which are still clamouring for capital and for investment.

Therefore, one must reflect on the damage done to the British economy by the diversion of these resources, not on the basis of proved economic need (and still less on the basis of proved prospects of profitability) but simply because the industries concerned happened to be publicly-owned and in the public sector. If your Lordships want one further example—and I promise that I shall not give more at the moment—there is the case of British Shipbuilders which even in the past few months in the case of the "Canberra" replacement, in the case of the "Queen Elizabeth II" refit, in the case of the "Cunard Countess" refit and in the case of the "Atlantic Conveyor" refit, have demonstrated themselves to be completely uncompetitive with their foreign rivals.

Why has this happened? It is certainly not due to any lack of quality in the leadership of these industries. Very far from it. On the whole, they have been led by men of great distinction and ability, two of whom—the noble Lords, Lord Ezra and Lord Beswick—I understand are taking part in this debate. I hope they will allow me to say that they are people who have undoubtedly proved their capacity to run industries and organisations in very difficult circumstances with very great ability.

Therefore, it is all the more significant that, despite having had the advantage of the leadership of such men. these industries have produced so dismal a result—a dismal result in that even the electricity industry is only returning 2 per cent. On capital employed at a time when the cost of money is 9 per cent. or 10 per cent. Indeed, in the nationalised sector as a whole the overall return on capital employed at the moment is about nil.

Why has this happened? I think this is almost literally the 64 billion dollar question—or, indeed, your Lordships might name a higher figure. My submission to your Lordships is that this derives from the nature of the system. The managers are not free to manage; they are subject to continuous interference, not so much by Ministers but by civil servants. Here I speak from experience as a former chairman of the Civil Aviation Authority where the Ministers under whom I worked, both Conservative and Labour, were helpful in the extreme, but where a great many of their civil servants were the reverse and took up a great deal of my time and that of my senior staff asking silly and pointless questions which had nothing whatever to do with the conduct of the business.

Secondly, in the nationalised industry sector it is the fact that no one's living depends on its profitability. This creates particular difficulties when difficult decisions have to be taken over closures of plant or equipment. In the private sector if parts of your activities are unprofitable, you have to brace yourself to close them down and to say to those concerned, "This has to be done to keep the company viable and going". No leader of a nationalised industry can say that because it would not be true, and all those concerned would know that the resources of the state were behind it.

Equally, the managers of these industries have to deal not only with Whitehall but with monopoly trade unions, and they are denied the advantage which we have in the private sector of the development of employee shareholding. In a company of which I have the honour to be chairman, over 90 per cent. of those who work for us are shareholders in the company, and for that reason have a feeling of common interest with those who run the company. This is impossible in the nationalised structure.

Again, a good many, but not all, nationalised industries are subject to the enervating effect of monopoly, of absence of competition, of the fact that they have captive customers. This is bad for all of us and only too easily leads to a contempt for your customers—the very opposite of that American placard which I saw in an American factory, which on a previous occasion I quoted to your Lordships: Customers make pay day possible". I suggest to your Lordships that it is this system which is the cause and the explanation of the problem.

The words which were used by the present Financial Secretary to the Treasury I think sum up this part of my argument: At the end of the day the heart of the matter is that a nationalised industry does not have to succeed in order to survive". Evidence about the system is coming to our hands daily now as a result of my noble friends' and my right honourable friends' policy of denationalisation. I prefer to say, "denationalisation" because in common with most of your Lordships I hate the expression "privatisation". Quickly let me give your Lordships one or two examples. Since Cable and Wireless was denationalised, it has produced pre-tax profits more than double those in the last year under nationalisation. The profits of Associated British Ports for the first six months have gone up from £1.5 million under nationalisation to £6.8 million under company structure. Amersham's profits, despite the competition. have risen by a third. There is every reason to believe that the National Freight Company—itself a good example of co-operation—is going to bring in profits of something like £5 million this year after breaking even last year.

Here is solid evidence that the system is working against the efficiency of the industries, and therefore against the creation of wealth in this country. To take one final example, even the prospect of denationalisation—plus of course the dynamic leadership of my noble friend Lord King of Wartnaby—has pushed British Airways back into profit after some years of deficit. The result is that all these denationalised industries or about to be denationalised industries are now creating wealth for the nation instead of consuming it.

A criticism has been made which I ought to answer. It was made in another place by a member of the party opposite, who said that to sell these nationalised industries and use the proceeds for current expenditure was like "selling the family silver to pay the food bills". There is a slightly feudal ring about that observation. But with respect, I think it is right. It is extremely important that we should not use the proceeds of these sales simply to finance current expenditure. The resources should be made available for investment in the private sector, either indirectly by using them for necessary Government capital expenditure, so diminishing the demands of the Government on the market for funds, or perhaps even more firmly and effectively by reducing taxation, but certainly not by financing current expenditure.

On the mention of taxation I must add this: I am concerned, as I think are many of your Lordships, by the observations of the Chancellor of the Exchequer that he might be contemplating increases in taxation in the coming Budget. From the point of view of the creation of wealth, as indeed from the point of view of the whole policy of the Government as I understand it, that would be a most unfortunate step to take.

We have become so accustomed to it that not all of us realise how high is the burden of taxation in this country: a burden of taxation, local and national, which takes up in the current year 42.5 per cent. of gross national product—and I shall give noble Lords opposite the point, otherwise they will certainly take it—which is a higher figure than in the last year of the Labour Government. In those circumstances, to increase taxation further would, I suggest to your Lordships, be a particularly unfortunate step to take.

Taxation is very high. You do not need to say that because your Lordships pay it. But when you consider that a man of substantial earnings—I am going to the top of the scale deliberately now—who has certain savings is paying tax at the rate of 75 per cent. on some part of his income, one cannot forbear the comment that taxation at that rate is confiscation. I am rather surprised that those bodies who interest themselves in human rights have not made that point. Gross domestic product is being taxed to the extent of 42.5 per cent. There are taxes on capital; there is 15per cent. VAT; and there is the national insurance employers' surcharge. All these constitute a heavy burden on the taxpayer.

They do two things: first of all, they directly divert wealth from the private hands to the public sector; secondly, they diminish incentive either to save or to undertake additional work. The 15 per cent. surcharge on investment income hits particularly viciously a person such as perhaps the small shopkeeper who has not had an opportunity to contribute to a pension, which is treated as earned income, but has built up a little business and sold it to pay for his retirement, and finds himself taxed with this 15 per cent. surcharge on whatever else is his rate of tax.

I say to my noble friend the Lord President of the Council, who is to speak in a moment, I beg of him to convey to his right honourable friends the need for reductions rather than increases in taxation. I believe that I am going to the right court. According to the public prints my noble friend is President of the Court of Star Chamber on Public Expenditure. In that role, as one who was once involved in control of public expenditure, I wish him extremely well, because it is of course only through the success of his efforts in restraining the growth of public expenditure that the reductions of taxation, which are a necessary part of a policy aimed at the creation of wealth, can be effective.

Having said that, I hope that none of your Lordships will suggest that those of us who take this view are wanting in compassion for those who need the support of our social services. I assure them that they have no monopoly of compassion. Where I think we differ from this is as to the means, not the ends. We all want to see a prosperous, wealthy country. We all want to see a country where resources and incomes rise year by year, where inflation is checked, and where, so far as human happiness depends on material things, that human happiness is increased. We all want to see that. The object of those of us who have put down this Motion is to suggest that that purpose is best served by the creation of wealth, and by concentrating on measures which stimulate the creation of wealth.

It is one of the advantages of this House that, as we are not subject to direct electoral pressure, we can express our views with complete freedom without fear of saying things that are unpopular. But that does, I suggest to your Lordships, impose on us a particular duty—as freedoms always do impose duties—and that is to seek to the best of our ability, whether measures are popular or unpopular, to secure that those measures are the right ones for our country, because it is only if the economic and financial policies which we follow are right—and I suggest that these should be policies concentrating on the creation of wealth—that we shall be able, in the words of the poet, to "scatter plenty o'er a smiling land". My Lords, I beg to move for Papers.

3.28 p.m.

The Lord President of the Council (Viscount Whitelaw)

My Lords, I should like to begin by congratulating my noble friend on his choice of Motion today. May I humbly say to one whom I have both long admired and wished that I could emulate in his oratory, how much I admired the speech that he made this afternoon. His theme is central to the Government's policies for economic recovery. It is fortunate that we should be considering these questions only a week after my right honourable friend the Chancellor of the Exchequer published his Autumn Statement; and it is apt that the Motion should stand in the name of my noble friend.

In an earlier incarnation he was a distinguished member of a Treasury team. He was, indeed, the second of a long line of Chief Secretaries—now powerfully reinforced in this House—whose thankless task is always to remind us that the public purse is never quite so full as we should like it to be. It is a task which requires all the persuasive skills which my noble friend has long shown, and which he has certainly shown again today.

The economic background to this debate is one of modest optimism. The economic recovery has now been under way since early 1981. Growth this year is likely to be up by 3 per cent. We are now growing faster than any other country in the European Community. As the economy recovers, the job market is also beginning to recover. The total number in employment (including the self-employed) is estimated to have risen in the second quarter of this year. Vacancies are continuing to rise. Unemployment is worryingly high, but it is now levelling out.

The recovery has begun with a rise in consumer spending and an acceleration of housebuilding. These resulted from increased confidence, lower interest rates, and, above all, low inflation. The emphasis of the recovery can now be expected to switch from the personal sector to the company sector, as investment increases and exports benefit from the world recovery.

The Government's economic objective is clear. It is to achieve sustainable non-inflationary growth. The first essential is to continue our sound money policies and make further progress against inflation. This means keeping to our medium-term financial strategy and maintaining downward pressure on Government borrowing. But equally important is to encourage enterprise where it really matters—in the market place. This means increasing incentives, exposing more of the economy to the forces of competition, and removing obstacles to the operation of free markets. Those are the main themes of the Motion put before us by my noble friend.

It is right that this Motion should link the questions of wealth-creation and investment with that of the level of taxation and its disincentive effects. No member of the Government could claim to be satisfied with the progress that we have made so far. I shall certainly convey to my right honourable friend the Chancellor of the Exchequer what my noble friend said about the future; with considerable acceptance on this side of the House, I noted. But we judged that high inflation and high interest rates are even more damaging to investment and wealth-creation. That is why our aim of reducing taxation has had to take second place. Yet we have made substantial and beneficial improvements in taxation.

The basic rate of income tax has been reduced by three percentage points. The penal higher rates of income tax have been reduced to levels equivalent to those of our European competitors. The income tax thresholds, including the threshold for the investment income surcharge. have been increased in real terms. The capital tax regime has been recast to reduce disincentives to productive investment. In the field of company taxation, the national insurance surcharge (the tax on jobs) has been cut from 3½ per cent. to 1 per cent.—a reduction worth some £2,000 million a year to the private sector.

But, as my noble friend made clear basic success in reducing the burden of taxation can be achieved only through firm control of public spending. So often in the past we have seen the relentless tendency of public expenditure to creep upwards. White Paper has succeeded White Paper, and each year's plans have been higher than the plans they replaced. Last year we halted that process. For the first time in years the Government's spending plans were within the level already set. When last week my right honourable friend announced his plans for spending in 1984–85, he was able to show that once again we have kept to the level of spending we had planned. When next year's White Paper gives the figures for the two following years, it will be clear that we are keeping to our plans in those years. too. It is this discipline which strengthens the Government's determination to get good value for the taxpayers' money.

As noble Lords know, and as my noble friend mentioned, I have recently had some small part in the difficult decisions required to achieve these results. This experience has demonstrated to me the relentless pressure for more public spending. The truth is that many of those who press for reduction in public spending in general still have their own particular favourite projects which they wish to protect or, indeed, enhance. Nor can this dilemma be solved by vague talk of priorities, nor by illusory hopes of basing substantial economies solely on administrative saving. Of course, every Government must constantly seek to improve their efficiency and to cut staffing costs. as this Government certainly have done and shall continue to do. But the undeniable fact is that beyond a certain point any further major reduction in public spending can come only from fundamental changes in policy. That is why I agree so strongly with my right honourable friend the Chancellor of the Exchequer that, at a time when trends in our society are pointing to increasing Government expenditure. we should have a frank and informed public debate about the alternatives before any decisions are taken. I would suggest that there is no better place in which such a debate can take place in those terms than your Lordships' House.

But it is not simply a matter of adjusting the programmes from year to year to meet short-term pressures. We need to take a broader view of the shape of the public sector—how we can best strike the balance between public and private activity, how we can best deploy the nation' s resources overall. To that aspect my noble friend addressed a considerable part of his speech.

As he has suggested, denationalisation is, and must be, a key part of our drive to roll back the frontiers of the public sector. It is one of the most important means of liberating wealth-creating resources. This is so, first, because of the size of the problem. Nationalised industries account for about a tenth of the gross domestic product. Secondly, I have to say—as my noble friend made so dramatically clear—that in many cases the performance of these industries has been poor. Their rates of return have been consistently lower than in the private sector, and since 1970 have been around zero. That, too, is a reason for a new approach.

Thirdly, liberation is important because of the numbers of people directly affected. In the end recovery depends on the initiative and enterprise of the British people, one-and-a-half million of whom work in the nationalised industries. Their talents need to be deployed to the best possible effect. Denationalisation will make it possible to link pay to success; and it decisively breaks the political link, which can so easily intrude on commercial decisions—evenunder the best-intentioned of Governments. Denationalisation will enable those who work in the nationalised industries to take a greater pride in them, and their job satisfaction will be increased. As my noble friend made clear, it offers employees the chance of owning a stake in the business in which they spend their working lives.

In this field, we already have a record of major achievement. British Aerospace, Cable and Wireless, the National Freight Corporation, Amersham International, Britoil, Associated British Ports, International Aeradio, and others have already been transferred to the private sector. Our manifesto set out our intentions for further denationalisation. They include British Telecom, British Airways, Enterprise Oil, and as many as possible of Britain's airports. We shall also continue to identify and bring forward other candidates.

But it is not enough just to transfer control. We must also tackle the problems of monopoly and lack of competition. Competition is an extraordinarily efficient mechanism. It ensures that goods and services preferred by the consumer are delivered at the lowest economic cost. It responds constantly to changes in consumer preferences. It does not require politicians or civil servants to make it work.

The denationalisation programme furthers our objective of reducing the size of the public sector and holds substantial advantages for the management of the industries, their employees, and the taxpayer. But our main objective is to promote competition and increase efficiency, and the prime beneficiaries will be the economy and the consumer.

It has been strongly represented to me that these Wednesday debates belong to Back-Benchers and that Government speakers must not monopolise debating time. I intend this afternoon to set a good example and so I will leave other questions such as reductions in Civil Service numbers to my noble friend the Minister of State. I will conclude, therefore, simply by reminding the House that we start with a much brighter economic picture than for some time. Already we have done much to reshape the tax system, to encourage incentives and the creation of wealth. We hope to, and must, do more. We are operating a firm control over public expenditure and we have a major programme for transferring industrial activity from the public to the private sector. It is a programme for a Parliament and the people have given it their support. My Lords, we shall carry it through.

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