Investment in Industry

HL Deb 12 February 1992 vol 535 cc817-30

9.21 p.m.

Lord Ezra rose to ask Her Majesty's Government whether in view of the continuing recession they have any plans for stimulating investment in industry.

The noble Lord said: My Lords, I have put down this Question for debate because, although industry and the state of the economy have been the subject of many debates over recent years, the prolongation of the present recession has made industrial recovery a vital issue. Indeed the Bank of England's latest quarterly bulletin indicates that in spite of many predictions no recovery has yet occurred.

The problems of British industry, its size and competitiveness, are not new. Attention has been drawn to them over several decades. More recently, in our own House the reports of the Select Committee on Overseas Trade in 1985 and of the Select Committee on Science and Technology in 1991 on innovation in manufacturing industry have represented painstaking reviews of industrial policy and have put forward many recommendations for long-term industrial growth. Industry was particularly badly hit in the recession of 1980–81 and has once again been hard hit during the present recession. The need therefore for measures to correct the present situation and to hold out some prospect of long-term growth has become particularly urgent.

The main problem with which British industry has had to contend in the post-war period has been the ups and downs of the economic cycle. More often than not these have been brought about by excessive relaxation of credit, leading to balance of payments difficulties and inflation, which in turn have necessitated restrictive action. The impact of world economic fluctuations, as on the present occasion, has exacerbated the cycles. What is needed above all for industry is a background of greater economic stability. The move towards European economic and monetary union may well hold out this prospect and this would need to be accompanied by institutional changes within Britain. In the meantime, however, a way has to be found to correct the present critical situation.

The hope that recovery will come through a resurgence of consumer demand is fraught with difficulty. In the first place there is no sign that such a resurgence in demand is taking place. There is a lack of consumer confidence, indebtedness is still widespread and consumers are likely to remain cautious for a very long time before they indulge once more in a spending spree. Further, when they do so they may be sowing the seeds of the next recession just as the spending spree in the late 1980s led to the present recession.

Throughout the post-war period the revival of consumer demand has generally been accompanied by a substantial increase in imports because of the lack of capacity to produce sufficient goods to satisfy the demand in Britain. It is regrettable that even during the course of the present recession Britain has continued to run a substantial balance of payments deficit whereas a surplus might have been expected in view of the reduced demand for imports. If consumer demand should pick up that deficit will clearly grow to even greater proportions.

What is needed is not a consumer-led recovery but an investment-led recovery. By that means capacity could be built up not only to expand exports but to meet an increase in consumer demand when it finally emerges. A diversion of resources to stimulate investment in industry is clearly called for. Such a diversion should not lead to a major increase in public expenditure. To a large extent it should be self-correcting through increases in tax revenue both from enterprises and through the generation of more jobs. That, in turn, would lessen the pressure on social expenditure and, above all, ease the excessive burden of unemployment.

Many proposals have been made on how industry in Britain might now be re-activated. I should like to put forward the following five-point package. First, the most important requirement is a further noticeable reduction in interest rates. Real rates of interest in Britain are the highest that they have been for a very long time. It should be possible to make an adjustment without jeopardising sterling's position in the exchange rate mechanism. The resurgence of confidence would correct any technical weakening in the currency.

Secondly, a specific incentive to industry to invest should be given by increasing investment allowances. The CBI has proposed that they should be raised from the present level of 25 per cent. to 40 per cent. Others have suggested even bigger allowances. Thirdly, consideration should be given to preferential interest rates for small businesses. They have been particularly badly hit in the present recession, not least by delays in payment by their major customers. A system of preferential rates of that sort has been in operation in France and in Germany for many years with beneficial effect.

Fourthly, the Government should remove specific financial burdens on industry. In particular the recent imposition of monthly VAT returns in place of the normal quarterly returns on the 1,600 largest companies, while no doubt an interesting proposition for the Treasury, would take £1.5 billion out of industry's cash flow at the very time when it is most needed. I cannot think of a worse time to introduce such a measure. There is also the impact of surplus advance corporation tax on companies with overseas earnings, which acts as another absorber of cash flow and to which the CBI has drawn attention in its report on economic priorities for 1992.

Fifthly and finally, steps should be taken to stimulate investment in the infrastructure. The construction industry is now going through one of its worst post-war crises. A major corrective could be brought about by releasing more of the local authority housing funds to which reference has been made many times in your Lordships' House. Transport, and in particular rail transport, is another area where further investment is urgently required. Authorisation for British Rail to borrow from the private sector in addition to the public sector funds allocated to it would have a positive impact. Incentives for training and research should also be considered as part of the infrastructure package.

Therefore, what is now urgently needed is a combination of measures to stimulate investment in industry and in the infrastructure. I have indicated what those measures might be. There is a growing consensus in support of them. Without such measures it is difficult to see an early end to the recession. If it is brought to an end by a revival of consumer demand, the seeds of the next recession might well be sown. By stimulating investment in industry and the supporting infrastructure we should effectively be preparing ourselves for the more stable environment which is being held out by moves towards economic and monetary union.

9.30 p.m.

Lord Stoddart of Swindon

My Lords, the noble Lord, Lord Ezra, is to be congratulated on asking this Question. It is a matter which worries all of us and the country. I have noted, as have many others, the dismal reports that are coming in day by day of large-scale employment losses in a variety of industries. Yesterday, it was 3,000 from Gateway (a retail firm); today it is 2,200 in British Aerospace (a manufacturing industry). What will come tomorrow? That catalogue of lost jobs, day by day and week by week, is sapping the confidence not just of industry but of individuals; and yet the Government appear to be moribund in their thinking, and sitting on their hands.

The noble Lord, Lord Ezra, is right, because in 1985 he and I sat on the Select Committee discussing overseas trade under the chairmanship of the noble Lord, Lord Aldington. We predicted what would happen unless the Government then took serious action. We predicted that as the production of North Sea oil reduced we would face a severe balance of payments problem. We urged the Government to resuscitate and stimulate manufacturing industry, but what was the reply from the then Chancellor? Insults to the committee and a reliance upon what he termed market forces. Now we know where market forces have taken us: to slump and high unemployment.

I ask the Government how high they are prepared to see unemployment figures go. Is it to 2.6 million, 3 million or 3.5 million? When will they take some action to stop that inexorable and seemingly inevitable rise in unemployment which is now becoming the scourge of the nation? The Government need to take immediate action. The proposals put forward by the noble Lord, Lord Ezra, are right. We must stop listening to computers and economic experts. We need to take economic models with a pinch of salt, because so far they have not delivered the goods. We may now need a dose of good common sense.

The noble Lord, Lord Ezra, pointed the way. He said that people would be more prepared to invest if interest rates were reduced. Like him, I believe that it is possible to reduce interest rates. Indeed, it is vital that interest rates are reduced substantially and soon. That is one thing the Government can do. I also agree that investment in industry must be made more attractive by better investment allowances. The future lies in investment in industry; not in laissez-faire economics, but in helping the industrialists to expand their businesses and provide goods and services, thus helping unemployment.

I also believe that there needs to be a stimulus to spending in a way that will encourage spending where it is needed among the poorest people in our nation. The way to do that is not by taking a penny or twopence off income tax; it is to restore VAT to the 15 per cent. that it was last year, before the Government tinkered with it. In that way, the right people will buy the right goods and encourage further investment in manufacturing industry.

In conclusion, I warn the Government that the worst long-term solution would be to stimulate the housing market. There is enough money in the housing market as it is; we need the money in manufacturing industry. I sincerely hope, therefore, that the Government and the Chancellor in his Budget will take heed of what has been said here tonight and elsewhere, not only by the Opposition but by experts in the matter. I hope that the Government will get off their hands and do something about the economy.

9.36 p.m.

Lord Cobbold

My Lords, I wish to support my noble friend Lord Ezra in the five points he put forward in the debate. I wish to stress the most important role for Government, setting the circumstances in which industry can operate. I deplore the Government's record during their period of office, perpetuating the stop-go cycle of boom and bust which we have had in this country since the war. It is most important for the future to get out of this cycle and I therefore welcome moves towards participation in the European monetary system, the exchange rate mechanism. I equally regret that we have not been able to participate with full commitment. That would be in the interests of this country and of reducing interest rates for the benefit of business.

I further wish to stress the huge neglect by the Government of the country's infrastructure. I deplore the way in which they have used the proceeds of privatisation, selling the capital assets of the nation and using the proceeds for current expenditure rather than ploughing them back as investment in improving the infrastructure for the benefit of private enterprise.

I fully support the five points made by my noble friend Lord Ezra and hope that we shall see considerable improvement on them by the Government.

9.39 p.m.

Lord Grimond

My Lords, my noble friend Lord Ezra spoke of two aspects of this extremely important Question: first, the importance of increased investment; and, secondly, the need to ensure that when the recovery comes it is led by investment and not by consumption. I take it that the Government agree with both those points. My noble friend then went on to make five suggestions as to what should be done. I should be interested to hear whether the Government accept them also or, if not, what counter proposals they have.

I have one or two comments of my own to make. The demand for investment is high and rising worldwide. There is a need for immense investment, for example, in Eastern Europe. That makes it more important than ever that we make proper use of the savings and investment available. It is not only that we need more trained workers, but we wish to ensure that the investment which we can provide assists workers by increasing the number of tools and the amount of horsepower at their disposal and ensures that these are not wasted. Unfortunately it seems to me that we have become sadly incompetent. The stories of the British Library, the Channel Tunnel and the London Underground escalators all point to our failure to use our investment efficiently. To my mind the waste of resources is one of the most serious problems facing Britain today.

I can give two examples of that from Orkney. I know that area well. First, Orkney local council has now poured between £6 and £12 million into trying to create a short sea crossing: no result has been achieved. Secondly, the pipes which are laid to transport oil in the North Sea are nearly all made either on the Continent or in Japan. That does not indicate efficient management of our affairs at home. I press the Government to continue to ensure—I must confess that they have been doing this—that public and local authorities make the best use of the investment available to them.

It is absolutely essential that we establish stability in the economy. It is also essential not only that inflation is temporarily reduced but also that it is kept down to negligible levels. One reads about enormous salaries being paid to the leaders in our society. I have read that public servants will be awarded a pay increase far in excess of the rate of inflation. When one reads of the amount of money that is apparently available for secondary purposes, one wonders whether the Government have any faith in their ability to reduce inflation more or less to vanishing point.

I believe British industry bears an extraordinary burden in the form of our complex tax and accounting systems. For a brief period I belonged to an international organisation. It appears that foreign industry does not suffer from that handicap to the same extent. Again I urge the Government to simplify and reduce as far as possible the various taxes and other regulations which industry has to deal with.

The noble Lord, Lord Ezra, rightly stressed the importance of the infrastructure. With the advent of the Channel Tunnel it is essential that communications from the North and West and from Scotland should be improved so they are much more adequate than is the case at present. That is particularly essential for the railways. However, it is also necessary to improve the roads, ports and air services.

At the moment personal savings are high. I believe they have been increasing. At the same time there is a large unused pool of resources in the form of unemployed people and other resources. It would seem an ideal moment to bring those resources together. Future generations will be amazed that our interest rates appear to be at the mercy of movements of foreign money in and out of this country and have little to do with the needs of our industry and services. I cannot believe it is beyond the wit of the banks to change that situation. They could either establish a separate interest rate for production and investment or they could devise some other means of conducting our affairs.

That may be a long-term solution and in the long term other changes may be needed in banking, such as a greater shift from loans to equity. However, in the meantime, we face this serious problem of a lack of investment to which my noble friend has drawn attention. Members on all sides of the House have admitted that a problem exists. My noble friend has proposed five remedies which could be put into operation more or less at once. We shall be extremely interested to hear the Minister's remarks.

9.44 p.m.

Lord Desai

My Lords, I thank the noble Lord, Lord Ezra, for initiating this debate on this matter. The need to stimulate investment is the most vital aspect of our economic policy. I regret that so few noble Lords have shown an interest in this debate. However, as I am an academic I am used to small audiences. Therefore I shall ignore my small audience tonight and act as if what matters is the issue we are discussing and not the number of noble Lords who are interested in it.

We face one of the deepest recessions that has been recorded for a long time. The Question of the noble Lord, Lord Ezra, is especially urgent because of that fact. It will not do to argue that the current recession is somehow caused by foreign influences. All parties have to stop the practice of claiming credit for all the good things and blaming foreigners for all the bad things. That will not be sustained by any examination of data.

It may be that Japan, Germany and other countries in the EC suffer what we call a growth recession—their growth rate has slowed down. We have a negative growth rate, which is different from a growth recession. We are also suffering one of the longest recessions of recent history. Although about five months ago the Government claimed that the recession had ended because output had increased by a fraction of 1 per cent., if we discount North Sea oil it is clear that that was a hollow claim.

I do not want to make a party political point. The important matter is that this is an unusual situation in British economic history. Therefore it is urgent that all good people get their heads together and ask how we are to get out of this situation. I recognise that there are constraints. Our membership of the exchange rate mechanism constrains us. I recognise also that we do not want to do anything which will disturb the fragile confidence of the international financial markets. However, at the same time I want to argue that doing nothing is not the right strategy. We are grateful to the noble Lord, Lord Ezra, for having put forward a set of concrete proposals.

There are two problems. There is the problem of investment in industry during the recession. However, in the background there is a longer term problem. The UK economy invests less in all activities in comparison with our competitors such as Germany and Japan. For example, we invest about 18 per cent. of our GDP whereas Germany invests 21 per cent. and Japan about 30 per cent. There are accounting problems and, as an economist, I know that such numbers never mean exactly what they are supposed to mean. However, by and large it is clear that other countries invest a larger proportion of their GDP.

At the same time the long term trend of investment in manufacturing industry in this country has been downward in terms of the proportion of GDP invested. I have obtained figures from Economic Trends which show that in the 1970s we invested about 3 per cent. of GDP in manufacturing. In the early 1980s that fell to 2 per cent. and it fell to below 2 per cent. in 1983. Now it is barely crawling up to 2.8 per cent.

Whatever is said—and it was said by the previous Chancellor of the Exchequer but two that manufacturing does not matter and that it was money which was important—it is very important that manufacturing investment is maintained. We are a trading nation and tradeable goods matter, and manufacturing industry makes tradeable goods. If we do not have manufacturing we will not have tradeable goods and exports and we will be in trouble.

Of course, we may finance any level of deficit, as Nigel Lawson used to say when he was Chancellor, but we cannot do that at any rate of interest we choose. If we run deficits we pay high interest costs. Even within the ERM, hard discipline though it is, I would submit that our currently high interest rates are due to the fact that we are financing a large deficit on manufacturing account and need to offer high interest rates to the world at large. Even within the ERM we could have had lower interest rates if we had run our affairs better. Indeed, Nigel Lawson when Chancellor confessed that deregulation of the financial sector was a mistake whose consequences were unanticipated. We got into a bad financial boom and we are now paying the cost of it.

It is clear that the current levels of investment as a proportion of GDP are inadequate. Even if one were to argue that some manufacturing had to be reclassified as services and so on the overall level of investment, growth rate and investment in manufacturing would be inadequate.

The recession at hand is a serious matter. The Engineering Employers' Federation has argued very cogently that it is worried about the level of investment in the economy. If one looks at the total of net new fixed investment as a percentage of domestic product one finds that even at the peak of the 'eighties (1989) as a proportion of net domestic product investment did not exceed the level of 1974. While there has been a recovery since 1981 it has not been adequate and we have to start thinking seriously about the problems. The problems relate to the crucial activities of engineering and construction. We have to encourage investment in those two activities.

I will come to the suggestions of the noble Lord, Lord Ezra, and other noble Lords. If we are to have higher investment it is obvious that within the exchange rate mechanism our scope for raising interest rates is limited. Although there may be a difference of opinion on the matter, I argue that the Government could have been bolder even within the ERM and got interest rates down faster than they have. Opportunities have been missed. I do not want to raise hopes but it could have been 9½ per cent. rather than 10½ per cent. Over the next two or three weeks we face the prospect of having to raise interest rates if the Bundesbank decides to do so. That would be catastrophic for the economy.

We come to the question of what we can do in regard to fiscal policy because our room for manoeuvre in monetary policy is limited. There is tripartisan agreement that we are in the ERM and want a stable macro-economic framework. I know that my noble friend Lord Stoddart will disagree with me, but I beg his forgiveness. He has limited tolerance for economists and economic models but I beg leave to differ with him.

Fiscal policy has been a dormant instrument for a long time —not fiscal policy as regards public spending. One of the paradoxes of the Autumn Statement was that the Government gave up their dogma on public spending as such. They tolerated a public spending borrowing requirement of £10.5 billion which we expect to be overshot by £1 billion or £2 billion. I do not complain about that. I am not a monetarist hyena; I am, or used to be, a Keynesian. I complain about the fact that it is a passive fiscal overrun from which we suffer rather than an active fiscal policy. It is not just that we need to absorb the additional unemployment benefits that we have to give; nor the fact that we have to have an overrun of PSBR. I should like to see an active fiscal policy within the ERM framework which we can implement. The pity is that the Government have seemed to be very passive in that respect.

The noble Lord, Lord Ezra, made a number of suggestions. I am happy to say that, although not entirely, there is a great deal of convergence in the ideas put forward by the Labour Party and those which he put forward. It is quite clear that we need a major set of incentives for investment. In order to get out of recession they may be temporary incentives: investment allowance and quick write-offs brought forward. We need to take steps that will encourage firms to write off old plant more rapidly; we should give them incentives or tax holidays for investments being made currently. A whole host of measures could be formulated. I should be quite happy to spell them out in detail if the Government wish me to do so. It would mean an accelerated depreciation allowance or a tax postponement. The noble Lord, Lord Ezra, proposed increasing investment allowances from 25 per cent. to 40 per cent. We need things of that order which are a temporary measure. They will be returned to normal later on. They will bring forward investment so that we can get out of the recession faster. That is most important.

The noble Lord also put forward the idea that we should have preferential interest rates for small businesses. That is an interesting proposition. That may perhaps be done by giving preferential tax treatment to small businesses compared with large businesses. There will be problems within the EC about making preferential interest rate payments for small businesses as against large businesses. But the idea is to do it either by way of corporation tax or other taxes that the small firms pay. We ought to be able to discriminate so that small firms will either pay less for the cost of finance, pay less in turnover tax of some sort or are able to postpone their payment until times are better.

Although the noble Lord did not mention the uniform business rate, it is causing a lot of heartache to many firms. I throw out for the moment the notion that it would not be a bad idea for the Government to say that this is a recession year; we recognise that the uniform business rate was based on evaluations made at a prosperous time but the prosperous time has gone and we are giving firms a small concession for another day. That would put up the PSBR. We recognise that. However, the Government have also said that budgets are to be balanced over the cycle, not year by year. I think that that would be a financially prudent action rather than suffering from the deep recession that we have on our hands.

The noble Lord made other proposals about investment in infrastructure and changing the VAT return. The idea is that there should be a clear set of temporary relief measures which have small financial cost, or rather postponed financial cost, and which ought to be implemented now. They are urgent because we want the economy out of recession.

One peculiar characteristic of this recession as distinct from previous recessions—and there were two major recessions in 1974–75 and 1980–81—is that when the economy got out of recession then the growth rate was much higher than is predicted for the current recession. So not only is the recession deep but the Treasury and everybody else expect the recovery to be rather luke-warm. That is the case because we have a lack of activism in fiscal policy.

I suggest that what was good enough in 1981 and 1975 should be good enough in 1992. We can do things which will get us out of the recession with a much more accelerated recovery than we have now. A growth rate of 1½ per cent. following one of the deepest recessions in the post-war period is just not good enough. Fiscal prudence, economic prudence and the national interest require that we should do whatever is in our power—and there is a lot in our power—to get us out of the recession as quickly as possible and as steeply as possible. I once again thank the noble Lord, Lord Ezra, for having put this before us.

10.2 p.m.

Lord Reay

My Lords, I agree with the noble Lord, Lord Ezra, and, I think, all noble Lords who have spoken when they argue that investment is vital to the continued success of this country's industry. Investment provides the capacity for growth and the means both for introducing new techniques and products, and for improving productivity. But we must always remember that investment is the means to an end, not an end in itself. We must not fall into the trap of thinking that all investment is necessarily good. As the economies of Eastern Europe have discovered, high levels of investment are of themselves no guarantee of economic prosperity.

We must also avoid the temptation to view investment too narrowly. Investment in fixed assets such as plant and machinery is important but so is investment in people and ideas—in imparting new skills through training and in research and development leading to new innovations. Investment in such intangibles enables firms to exploit the full benefits of their investment in fixed assets, and it enables employees to adapt more easily to new technology.

Moreover, we need investment in all sectors of the economy: in service industries as well as in manufacturing. For too long now there has been a sterile debate about the relative importance of these sectors. In truth, as the CBI recognises in its admirable report Competing with the World's Best, all sectors of the economy are inextricably linked and interdependent. Service industries provide a substantial market for manufacturers' products while manufacturing depends on many services, for example, transport and distribution, for its success. In saying that, I do not in any way denigrate the importance of manufacturing to the nation's wealth. My right honourable friend the Secretary of State and I have said many times before—but it bears repeating—that we cannot imagine a healthy economy without a vigorous manufacturing sector.

Proposals are often put forward for increasing investment by means of tax allowances, grants and other forms of subsidy. I cannot be expected to comment on anything which my right honourable friend the Chancellor may or may not include in his Budget, but I will say that the 1984 reforms of business taxation sought to widen the tax base by removing special incentive allowances, thereby enabling substantial reductions to be made in the rate of corporation tax. This set the pattern for similar reforms in many other countries. Following our tax reforms, companies are left with more of their profits to invest where and when they, and not the Government, think best.

We have reduced the main rate of corporation tax from 52 per cent. when we took office to 33 per cent. now. We have also cut the rate for smaller companies from 42 per cent. to 25 per cent., and raised the level of profits at which that rate applies to £0.25 million —a fourfold increase over the lifetime of this Government. As a result, we now have the lowest main rate of corporation tax and the most favourable tax regime for smaller companies of all the main industrial nations, to the great benefit of our industry.

The noble Lord, Lord Ezra, and other noble Lords called for a package of government measures to stimulate an investment-led recovery. However, greater investment is of no use to either the investor or the country unless it is aimed at the satisfaction of anticipated demand. I suggest that that is why calls for such measures put the cart before the horse. Investment is determined by the expectation of future demand and profits, not by intervention or subsidy. The CBI understands that well. It recognises, as do the noble Lords, Lord Ezra and Lord Cobbold, that the best stimulus to investment is provided by a stable economic environment.

That is the answer also to the noble Lord, Lord Stoddart. The only way to increase job opportunities is to get the economy right. That is why the Government have made the defeat of inflation their number one priority—a commitment reinforced by their membership of the ERM and re-emphasised in the latest Bank of England quarterly bulletin, which was referred to by the noble Lord, Lord Ezra.

Experience shows that the best performing economies are built upon a foundation of low inflation. Inflation makes industry uncompetitive, erodes profitability and creates uncertainty thereby destroying both the means and the incentive to invest. It encourages an emphasis on the short term because, as I said when we debated this subject last month, it destroys confidence in the future. When the ability to plan for the long term is undermined in that way, is it any surprise if investment suffers?

The noble Lords, Lord Ezra and Lord Stoddart, called for a reduction in interest rates. Interest rates have already fallen by 4.5 percentage points since we joined the European exchange rate mechanism. That is a substantial fall; it saves industry almost £6 billion each year on its interest bill. My right honourable friend the Chancellor has made clear that interest rates will be set at an appropriate level to keep sterling within its ERM bands and to bear down on inflation.

Lord Stoddart of Swindon

My Lords, is it not true that although interests rates have fallen by 4.5 per cent., the real rate of interest has nearly doubled over the past year?

Lord Reay

My Lords, be that as it may, we consider that it would be a grave mistake to cut interest rates prematurely in order to give a short-term stimulus to the economy. That would take risks with inflation. I assure noble Lords that the best guarantee of low interest rates is low inflation.

Of course, establishing a favourable tax regime and defeating inflation are not the only ways in which government can seek to improve the climate for investment. By scrapping pay controls, price controls, exchange controls and a host of other unnecessary restrictions we have freed industry to concentrate on its main task: creating wealth and jobs. Privatisation has boosted incentives and promoted business efficiency, resulting in almost every case in increased output and increased investment. And by reforming trade union laws we have restored managers' ability to manage. As a result, the number of days being lost through stoppages has fallen to little more than 5 per cent. of the average of the 1970s, contributing substantially to businessmen's confidence in the future.

Nevertheless, there are areas in which the Government do have a more direct role to play in supporting investment. Research and development is one such area. Innovation is the principal source of economic growth but the market on its own will not generate an adequate level of investment in pure or pre-competitive R&D. That is why we spend £3 billion a year on civil R&D, a similar share of national income to that spent by the Japanese Government.

The noble Lords, Lord Ezra, Lord Grimond and Lord Cobbold, pointed to the role the Government have to play in establishing and maintaining the infrastructure which underpins industry's ability to grow and to generate wealth. Consequently, we are committed to a major programme of investment in transport which will see the Department of Transport's capital expenditure on roads more than double by 1994–1995; and investment in the railways is at its highest level for 30 years. Next year alone, British Rail and London Transport plan to invest over £2½ billion. But, as the noble Lord, Lord Ezra, also said, the concept of the infrastructure goes much wider than just transport. For example, it includes a skilled workforce. This year alone some £2.8 billion will be spent on training, enterprise and vocational education—two-and-a-half times as much in real terms as was spent in 1978–79.

The success of the Government's policies can be judged from our remarkable record in attracting inward investment to this country. In the three years to 1990, the latest period for which figures are available, almost half of all inward investment into the European Community from Japan and the USA came to the UK. That is a measure of overseas investors' confidence in the Government's policies and the long-term prospects for the economy.

It is true that there has been a fall recently in investment. But there are bound to be fluctuations in the volume of investment over the economic cycle. It is important to place such figures in context. Business investment rose by 45 per cent. between 1986 and 1989 and in the 1980s as a whole grew faster in the UK than in any other major industrialised country except Japan. Last year business investment took a higher share of the nation's resources than at any time during the 1970s or indeed the first half of the 1980s. Despite the recent fall, business investment is still more than half as high again now as it was in 1981.

Not only has the quantity of investment risen but so too has its quality. The rate of return in industry rose sharply during the 1980s; and according to the OECD, the UK was the only major nation to experience a rise in capital productivity—that is to say, the output produced by a unit of capital—in the business sector over the past decade.

Anxiety is sometimes expressed at the performance of manufacturing investment. The distinction between manufacturing and other sectors has become increasingly blurred. During the 1980s many manufacturers contracted out substantial blocks of work which they previously undertook in-house. As a consequence, investment in such items as office machines might now be classified as service sector investment where in earlier years it would have been treated as manufacturing investment. Nevertheless, despite falling during the recession, manufacturing investment remains over a third higher than it was in 1981; and, given that it normally lags the business cycle, it is heartening that manufacturing investment rose in the third quarter of last year and that the Central Statistical Office survey of investment intentions indicates a further rise in 1992.

As I have said, it is a mistake to view investment narrowly. British industry has come increasingly to recognise the importance of investment in intangibles. As the CBI report to which I referred says, a major factor in the improved performance of UK manufacturing has been an increased emphasis on quality, training and innovation". Employers now spend over £20 billion a year on training; and research and development performed and funded by industry grew by almost half in the six years to 1989, the latest period for which figures are available. Most encouragingly, surveys of CBI members' intentions show that investment in such intangibles is even now holding up well.

Therefore, we must not allow ourselves to become discouraged by short-term falls in fixed investment. The benefits of the surge in both the quality and quantity of investment in the 1980s have not been lost: those benefits will come through during the 1990s. As we move out of recession, they will become apparent in increased productivity, increased competitiveness, increased profitability, increased employment prospects and increased national wealth.

I believe that it was the noble Lord, Lord Ezra, who said that it was difficult to see an early end to the recession. We have made no secret of the fact that the recession has been both longer and deeper than expected, reflecting the slowdown in the world economy. It is not only in the United Kingdom that output has fallen, although I believe it was the noble Lord, Lord Desai, who suggested that. The United States, Canada, Switzerland and New Zealand have all been in recession. Australia, Sweden and Finland are in recession and there has been a fall in industrial output in Japan.

The conditions for recovery—lower inflation and interest rates—are in place. Although business and consumer confidence has faltered recently, it remains higher than a year ago. Leading indicators point firmly to an upturn in output in the course of the year, as the latest Bank of England quarterly bulletin makes quite clear.

The 1990s will be a decade of immense opportunity for British industry. In the European Community, the completion of the single market will bring access to a home market of 340 million consumers and vast new markets will open up as Eastern Europe shakes off the legacy of state control and joins the capitalist world.

The Government are determined that industry shall be fully equipped to take maximum advantage of these opportunities. We have a policy to achieve that. It is not the tired old policy of quick fixes, subsidy and intervention which has so miserably failed this country in the past. It is the creation of a framework within which industry can make profitable investment according to its own priorities, free from meddling by government, and be rewarded appropriately.

Our policies are bearing fruit. Inflation has been more than halved since it peaked at nearly 11 per cent. As I have said, interest rates have fallen by 4.5 percentage points since we joined the exchange rate mechanism. The noble Lord is interrupting the final moments of my peroration. Does he insist?

Lord Desai

My Lords, I thank the noble Lord for giving way. Will he concede that, during the days of bad intervention and so forth, the proportion of GDP invested in manufacturing was higher than it has been throughout the 1980s? Does he agree that even now it has not recovered to that earlier level? If the noble Lord is interested, I can inform him that it was about 3 per cent. in 1979. Since then it has not attained that level.

Lord Reay

My Lords, for one moment I thought of saying that, as regards the tired old policies, it was the intention of noble Lords opposite to return to them. I forebore to do so. I can only interpret the noble Lord as suggesting that those are the policies which he would like to see his government take up again were they back in power. As I said, our policies are bearing fruit. Inflation is down; interest rates are down; the conditions for economic recovery are in place. Against that background, I have every confidence that industry will in full measure invest for the future.