Corporate and Public Sector Borrowing (Hansard, 25 June 1982)

§ Sir Geoffrey Howe

Yes. I have decided that some further steps should be taken which I believe may help industry to raise long-term finance, to reduce the dependence of the local authorities on bank borrowing and to remove possible obstacles to funding the borrowing requirement.

Funding has been an important instrument of monetary policy under successive Governments. Sales of central Government debt, such as gilts and National Savings, to the non-bank public have been used to contain the growth of £M3 and to reduce liquidity in the economy.

The level of funding needed to achieve satisfactory monetary conditions would be lower if companies derived more of their finance from the capital market and less from banks than they have done for many years. There was a revival in equity issues last year. But there has so far been little improvement in company stock issues. This should come with further reduction in inflation and interest rates. But there is one obstacle which I can remove immediately. This is the effective embargo on the issue of zero and low coupon stock by companies. The Inland Revenue will be issuing a statement later today, of which copies will be available in the Library, to clarify the tax treatment of such stock and also of different forms of indexed borrowing by companies, together with the safeguards necessary to prevent tax avoidance.

Companies, including small companies, will now be free to issue such stock, as they have in the past been free to issue indexed stock, subject to the normal arrangements for obtaining timing consent from the Bank of England for issues of £3 million or above.

The Government are separately examining the possibility of providing for the taxation on an "accruals" basis of the discount on zero and low coupon stocks. Under such a regime the discount would be treated for tax purposes, both for the lender and for the borrower, as the interest arising over the life of the stock, rather than as rolled-up interest paid at redemption. Such arrangements, if they were considered appropriate, would require legislation in next year's Finance Bill and would not apply to stock already in issue at that time.

The appropriate level of funding has, of course, to be decided in the light of all the monetary indicators. That level may sometimes be higher and sometimes lower than the public sector borrowing requirement. But as a result of the cumulative effect of funding policy in recent years, it may not be possible to fund the borrowing requirement without a risk of producing balances in the national loans fund—NLF—larger than the working levels permitted under the 1968 National Loans Act.

I have therefore decided that it would be right to amend section 12 of the Act to allow the Treasury to borrow for monetary policy purposes when this is not needed to meet the NLF's outgoings. If use of this power leads to NLF balances with the banking department at the Bank of England, these sums would be available to relieve shortages in the money market, which are a corollary of debt sales.

I shall also be proposing amendments to section 5 of the Act. This will provide an explicit power for the NLF to 192W make variable rate loans. This will enable us to meet the request for such a facility from the local authorities, which in recent years have increasingly borrowed in this form from the banks. Higher lending to the local authorities from the NLF will raise the CGBR but not the PSBR. For a given level of debt sales it will reduce any balance in the NLF and the scale of money market shortages. A similar effect will be achieved if more of the temporary finance needed by nationalised industries is provided from the NLF. The possibility is now being discussed with them.

The necessary new clauses and Ways and Means resolution are being tabled today.