§ 5.39 p.m.
§ The Earl of Strathmore and Kinghorne rose to move, That an humble Address be presented to Her Majesty praying that the order be made in the form of the draft laid before the House on 7th November [1st Report from the Joint Committee].—(The Earl of Strathmore and Kinghorne.)
§ The noble Earl said: My Lords, the purpose of this draft order is to allow the Central Statistical Office to collect quarterly data on companies' profits under statute. This is one component of a package of measures being taken by the Government that will help to improve the quality of economic statistics.
§ First, I should like briefly to explain the technical aspects of the order. The Statistics of Trade Act is the main authority by which the Government collect statistics from companies. It allows competent authorities—that is, certain government departments including the Central Statistical Office—to require companies to supply information on specific aspects of their business. The Act contains a schedule listing the topics on which the Government can request information. Section 5 of the Act allows additions to be made to this schedule by Order in Council. Such an Order in Council is before your Lordships this evening. The order would add a paragraph to the schedule to the Statistics of Trade Act. This paragraph appears in the schedule to the draft order. The paragraph contains the words "profits" and "losses", which are not covered by the existing schedule. It also contains other phrases. I shall explain shortly why this is necessary.
§ Before doing so, however, perhaps I may put into context our proposal to make this change. I am sure that your Lordships will agree that the Government 949 need good economic statistics both for monitoring and forecasting the UK economy and as the basis for fiscal and economic policy. That almost goes without saying. Your Lordships will be aware, however, that there have been severe problems with the quality of our economic statistics. These have given rise to real difficulties for economic policy makers and indeed for all users of the statistics both inside and outside government. That is why we are here this evening.
§ I now turn to the specific topic of statistics on company profits. The Government need quarterly data on profits for four reasons. First, they make an important contribution to the income measure of gross domestic product; secondly, they provide the base from which corporation tax receipts are forecast; thirdly, they help provide the Government with an assessment of the financial position of companies; and fourthly, they are used by Treasury in analysing, modelling and forecasting the economy. Therefore, I hope that your Lordships will agree that it is important to have these figures as securely based as possible. As I have mentioned, the schedule to the Statistics of Trade Act does not currently cover profits and so the Government cannot collect data on company profits under the Act. Of course the Government nevertheless compile statistics on company profits. However, there are significant weaknesses.
§ The basic source of statistics on the profits of industrial and commercial companies is Inland Revenue data on assessments for corporation tax. These statistics are thought to be soundly based. Inevitably, however, these data are not available until some time after the profits are earned and they also relate to whole years, not to quarters. Quarterly data are needed for monitoring, forecasting and policy purposes. The tax assessments data are, therefore, supplemented by a quarterly inquiry asking a sample of companies for information on their profits. Results from this inquiry are used to provide figures for the national accounts for the past two or three years. The inquiry is voluntary and many large companies exercise their right not to provide data. Despite several efforts that have been made to recruit more companies to the inquiry, it remains unrepresentative and lacks a number of large company groups. The estimates derived from the current quarterly inquiry are, therefore, weak. It is no real surprise that there tend to be large revisions to the statistics when the tax assessments data become available two or three years later.
§ Adding the phrases "profits" and "losses" to the schedule, as proposed, will permit CSO to collect up-to-date quarterly information from industrial and commercial companies about their profits on a statutory basis. It will be able to collect these statistics from all large company groups in the country not just those who agree to report voluntarily. The resulting figures would be more accurate because the inquiry would be larger and more representative. Statutory inquiries are also more equitable than voluntary ones. Companies which respond to voluntary inquiries do 950 so from a sense of public responsibility. The costs that they incur may be small but they are still costs that will not be incurred by their non-responding competitors.
§ I am sure that your Lordships are concerned about the possible increase in reporting burdens. As part of its preparation for this measure the Government consulted the CBI and the Stock Exchange about the possibility of introducing a quarterly statutory inquiry into profits. While neither body could be expected to welcome additional reporting burdens both accept the need for accurate statistics. The CBI is of the opinion that the reporting burden will not be too great as most of the required information can easily be provided from existing sources within most companies. The Government also discussed the availability of quarterly profits figures with some large companies last winter. The impression gained from these discussions is in line with the CBI opinion. In this instance, therefore, the Government believe that the prospective improvement to the statistics is worth the slight increase in the reporting burdens involved.
§ This covers the words "profits" and "losses" in the proposed additional paragraph. As I mentioned earlier, the paragraph also covers income received, dividends and interest paid and taxes paid. This is because of a particular problem in compiling statistics of the profits of financial companies. Such companies would naturally see their profits as including turns on interest rates or on the prices of traded instruments. For the national accounts, however, such earnings are not included as profits. There would, therefore, be no point in attempting to collect statistics from financial companies on such a basis. The only wary to obtain the appropriate statistics is to collect data from financial companies on particular items of their income and expenditure, and for CSO to compile the required profits figures itself. This is the approach adopted in existing inquiries of financial companies. However, most of the inquiries collect only annual figures. Figures for the latest quarters are projections and substantial revisions can occur when the figures for the latest year become available. The further additions to the schedule will enable CSO to collect income and expenditure data from financial companies on a quarterly basis. As with industrial and commercial companies the Government are satisfied that the required information is readily available for most companies. Finally, the phrase in the proposed paragraph dealing with services is included to remove any possible doubt that such information falls within the scope of the Act.
§ The proposed amendment to the schedule will enable CSO to compile better statistics on company profits without an undue increase in reporting burdens. As part of the package of improvements announced by my right honourable friend the Chancellor of the Exchequer, this will help in eliminating the three major problems with economic statistics. It will help to reduce the gaps between the measure of GDP; it will reduce the scope for revisions; and it will lead to more coherent statistics and reduce the balancing items. This will be an important 951 contribution to improving the statistical base used for economic monitoring, forecasting and policy making. I commend the Motion to the House.
§ Moved, That an humble Address be presented to Her Majesty praying that the order be made in the form of the draft laid before the House on 7th November. [1st Report from the Joint Committee].—(The Earl of Strathmore and Kinghorne.)
§ 5.48 p.m.
§ Lord Williams of Elvel
My Lords, the House will be grateful to the noble Earl for introducing the order. Generally speaking, it has our support. We believe it is right that the collection of such statistics should be on a statutory basis and not on a voluntary basis. To that extent we support the Government's action.
We also note and support the comments made by the noble Earl about the criticisms that have been made of the quality of government statistics. Indeed, we have joined in some of the criticisms. We have also criticised the Government for the way in which they use the statistics, but that is a different and more political question. The Pickford Committee recently reported on statistics, and on national income statistics in particular, and the order before the House follows its recommendation.
I have one or two questions that I should like to ask the noble Earl, given our general support. Forecasting has recently come under much criticism. After all, the Treasury does not have a very good record on forecasting either the balance of payments or inflation. Anything which will improve that ability to forecast will be welcome both to your Lordships, and, indeed, to the country as a whole.
In those circumstances, why have the Government drastically cut the grant in connection with the consortium consisting of the Economic and Social Research Council, the Bank of England and the Treasury for funding of econometric models outside the Treasury from £1.5 million to £0.5 million next year? I should be grateful if the noble Earl can explain how that is consonant with the view that he has just expressed that economic forecasting should be improved.
Secondly, were the Financial Reporting Council and the accounting standards board consulted about the contents of the order, particularly as regards the definition of "profits"? Profits are extremely difficult to define and the accounting standards board now has the legal obligation to lay out the accounting standards and principles which companies should adopt. Was that body consulted by the Government on the expression "income receivable by the undertaking"? Was that expression satisfactory to the accounting standards board? Are we to assume that all accounts which are reported under this order must be made up according to the principles of the ASB or are small companies in some way exempt?
Thirdly, how often do the Government propose to publish profit and income statistics which are to be collected under this order? Are they to be published 952 quarterly, annually or are they to be published only when the national income statistics are published, and then subsequently revised?
Fourthly, is it not much more important for the purpose of national accounts and, indeed, for the purposes of this order to specify the form and content of company accounts? After all, the Government have that power under Section 228 of the Companies Act 1985. It seems to me to be sensible, if statistics of this nature are to be collected, that they should be uniform and that uniformity should be imposed by the Government under powers which they already have.
I have not given notice to the noble Earl of my last question, but it is of fundamental importance. How do the definitions contained in this order square with international definitions? It seems to me immensely important that when compiling our national income statistics we should align ourselves at least alongside our fellow members of the EC and also alongside members of OECD. I should be grateful for an assurance from the noble Earl that we are following practices generally adopted in OECD.
We have a long way to go in improving our economic statistics. I am very glad to see that my noble friend Lord Wilson is here. As a Fellow of the Royal Statistical Society, he has a particular interest in this matter. I hope that he and other noble friends will ask the Government to apply their mind seriously to the question of the quality of statistics which come from the Government. Over the years we have seen a fall off in quality and standards. We welcome this order as far as it goes but there is still quite a long way to go. We hope that the Government will take the matter very seriously indeed.
§ 5.56 p.m.
§ The Earl of Strathmore and Kinghorne
My Lords, following this debate I hope that the House will agree with the Government's view that the statistics of company profits need improving and that the way to achieve that is through a quarterly statutory inquiry. The Government believe that the best way to enable that is to approve this draft order before the House. It will amend the Statistics of Trade Act so that it covers profits.
The noble Lord, Lord Williams of Elvel, asked a number of questions which I shall attempt to answer. He asked why the Government have drastically cut the consortium funding for econometric models. The answer to that is threefold. Treasury contributions for the next round of consortium funding will continue at 20 per cent. of the total as for the current round. Secondly, it is true that there will be a substantial cut back in the total funding for the next round compared to the current round, but pressure for that did not come from the Treasury. Throughout negotiations with the ESRC, the Treasury has said that it will contribute 20 per cent. of the total and was prepared to support a much higher level of total funding. Thirdly, the increase in Treasury contributions in percentage terms cannot be justified.
The second point raised by the noble Lord, Lord Williams, was whether the ASB and the FRC were 953 consulted on the order. The answer is that they were not. Officials felt that it was sufficient to consult the CBI, the organisation representing those completing the returns. The Stock Exchange was also consulted. The CSO needs to compile figures according to international accounts conventions which are internationally agreed. The definitions used within commercial accounting in general provide the building blocks which the CSO need. That means that most companies will be able to provide the information from existing sources. Accountants and accounting standards boards have not been able to agree on many aspects of accounting.
The third question which the noble Lord asked was how frequently profit and income statistics collected under the order would be published. That will be done quarterly.
The noble Lord, Lord Williams, asked about the form and context of company accounts. It would be nice to have a single set of company accounts rather than separate accounts for corporate reporting, tax returns and statistics. That is simply not practical; for example, company accounts include the overseas activities of United Kingdom groups whereas those activities must be excluded from the national accounts figures for profits. I fear that the requirements of shareholders and national accountants will never be identical.
The noble Lord also raised the question about the burden on small businesses. I also raised that question when I was being briefed on this order. We plan that the new inquiry will be directed only at the largest company groups.
Finally, the noble Lord asked about Eurostat and whether that would have access to the data for individual companies. It will not. The recent regulation on the transmission of confidential data to Eurostat is a preliminary enabling measure only. A further regulation will be necessary to specify any information which may be transmitted. In any event, company names and addresses will not be supplied and Eurostat must maintain the same degree of data security as in the United Kingdom.
I repeat my assurances that as far as we can tell, this order will not impose a substantial reporting burden on companies. We shall be as accommodating as possible to companies which have difficulty in supplying the data as long as the accuracy of the aggregate figures is not reduced. I hope that the House agrees that the draft order before the House is not a controversial matter.
On Question, Motion agreed to, and it was ordered that the Address be presented by the Lords with White Staves.