Public Investment

Part of the debate – in the House of Commons at 12:00 am on 27th November 1962.

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Photo of Mr John Temple Mr John Temple , City of Chester 12:00 am, 27th November 1962

To use cricketing language, I should very much like to congratulate my right hon. Friend the Chief Secretary to the Treasury on carrying his bat last night and on opening his innings once again today in such exceptionally good form. Possibly last evening's debate was a more lively affair because we were dealing with something more comprehensible. We were dealing with money in terms of shillings and pence. Today we are discussing a White Paper dealing with money in terms of thousands of millions of pounds. As my right hon. Friend the Home Secretary said last year when he was Chief Secretary to the Treasury, the sums of money involved in this public expenditure programme are vast.

I could not agree with very much that the hon. Member for Hamilton (Mr. T. Fraser) said. Certainly I could not agree with him when he said that this White Paper would not be a big boost to the economy. I believe that the public expenditure envisaged in it will be a very big boost indeed to the economy. Today I shall examine the effect on the economy of this large boost and, more particularly, its effect on local authorities and ratepayers.

First, I deal with the effect of this vast programme of public expenditure on the national economy. Last year, the then Chief Secretary forecast that the rise in public investment between 1961–62 and 1962–63 would be 5 per cent., but in the event that rise has turned out to be 9 per cent. Today we are considering an overall programme in which there is a built-in increase in constant prices of 7 per cent., but, having regard to what happened last year and the fact that the eventual out-turn was an increase of 9 per cent., I think we can confidently forecast that the increase for 1963–64 will be about 12 per cent. at current prices, rather than 7 per cent., which is the estimated figure in the White Paper.

Last year, the then Chief Secretary said that the proportion taken by this public investment programme as a whole would be one-thirteenth of the gross national product. What concerns me very considerably is the fact that this proportion is likely to grow, because unless the gross national product grows at a very much greater rate, this public investment programme, with a dynamic built into it far greater than the growth of the gross national product, will take an increasing share of the gross national product.

Page 5 of the White Paper deals partly with expenditure at current prices and partly with expenditure at constant prices. When my right hon. Friend was speaking, I drew attention to the last column on page 5, which shows the estimated expenditure. That, of course, is at constant prices, and that is why when considering this subject we are liable to be confused by the comparatively low growth rate forecast compared with the actual growth rate which emerges in the following year's White Paper.

I said that I was greatly concerned about the effect of the growth rate of this public investment. I noticed that my right hon. Friend drew particular attention to the fact that for 1963–64 the Government had decided to inject an extra £70 million into certain sections of this investment programme. I can understand why the Government have done this. They have done it with the intention of taking up the slack in the economy in those places where the hon. Member for Hamilton wishes that slack to be taken up. I trust that this policy will be successful. But the figures with which we are dealing are immense, and I find this overall growth rate extremely disturbing when one considers the fact that sterling is a reserve currency. I think that we in this country will have to be very careful not to let public expenditure grow so rapidly that we run into another balance of payments crisis owing to the type of pressure on sterling which we had only about twelve months ago.

I turn now to that part of this White Paper entitled "Public Service Investment". I dare say that my hon. Friend the Member for Kidderminster (Mr. Nabarro), if he catches your eye later, Mr. Deputy-Speaker, will be speaking about that sector represented by investments in the nationalised industries. I propose to concentrate on the public service investment sector. Quoting from page 4, paragraphs 2 and 3 of the White Paper, one sees quite clearly where this major increase in expenditure is coming from. Paragraph 2 says: Public investment expenditure continues to grow rapidly. Paragraph 3 says: The largest increases are in expenditure on the electricity programme, on education, on housing and on the aggregate of small local authority programmes. I am going to concentrate particularly on the effect of this great growth of public expenditure on local authority budgets. I do not think that local treasurers, although they were exhorted last year by the then Chief Secretary to plan ahead with their investment programmes, can really do this against a background where changes in their expenditure are affected by national decisions. In this respect the Government are the "pace-setters" with regard to expenditure right across the economy, and no local treasurer last year reading the then White Paper could have envisaged that there would have been a decision by the Government this year to step up public expenditure. This decision on public expenditure is definitely going to affect local budgets.

I propose to draw attention to four particular points. They are mentioned specifically in paragraph 3 of the White Paper and refer to the great increase in expenditure on education, water and sewerage, hospital, local authority health and welfare services and the aggregate of small local authority programmes. Mentioning education first and turning to pages 22 and 23 of the White Paper, I find that educational expenditure in the last year, between 1961–62 and 1962–63 has risen by 14 per cent. Paragraph 71 of the White Paper says: Expenditure by local education authorities is, for the most part, financed by borrowing and the loan charges, together with capital expenditure from revenue, are taken into account in fixing the general grant". The important words here are that this expenditure is "financed by borrowing".

Unlike the expenditure on the nationalised industries, there is no direct return on educational expenditure. I fully realise that there is an indirect return, but what the local authorities have to deal with are the actual loan charges on the capital involved in their educational programmes. Admittedly, this paragraph refers to the general grant, and, naturally, the central Government will be responsible for bearing their share of the loan charges as determined through the general grant structure.

Paragraph 73 of the White Paper makes a special point of mentioning that colleges of advanced technology have been transferred, regarding their financial burden, from the local to the central Government. I will now quote from paragraph 74 of the White Paper. I apologise for the number of quotations that I shall have to make, but this is a matter of considerable complexity and detail. Paragraph 74 says: The most important element of expenditure on other educational services in England and Wales is the expansion of teacher training colleges. I say quite definitely that teacher training colleges are an aspect of local education authorities which could well be transferred as regards their financial burden direct to the central Government. The catchment area for teacher training colleges is quite obviously very much larger than the catchment area for any local education authority, and I would say, recognising the extremely rapid rate of growth of expenditure on education, that there should be a shift of a certain amount of responsibility for the financing of that programme from local to central Government.

Turning to another aspect of this public investment programme which affects the local authorities, I would mention water and sewerage, which are referred to on page 25 of the White Paper. Here, again, we find exactly the same thing. Paragraph 84 says: For the most part expenditure is financed by loans That means that on those loans there will be a considerable service charge in respect of interest and a very large increase in expenditure by the local authorities themselves in order to cope with the maintainance of these schemes when they are in operation.

Turning to the "Hospital and Local Authority health and Welfare Services" referred to on page 26 of the White Paper, I am concerned only with the local authority health and welfare services. But here we get a quite amazing rate of growth. Looking at the mental health services referred to on page 26, we see that in the four years 1960–64 expenditure will have gone up by 400 per cent., a fourfold increase. I am here talking about England and Wales. When we look at the total programme for England and Wales, we find in this sphere that the capital investment programme in four years has been nearly doubled. We are certainly talking about services which are growing extremely rapidly. I think that there is a strong case for transferring the financial responsibility for the mental health service from the local authorities to the central Government. The growth rate in this sphere is 16 per cent. in current terms as between 1961–62 and 1962–63.

Paragraph 3 of the White Paper makes special reference to the "Other Investment by Local Authorities" and is referred to on page 31. Here, again, we have some phenomenal growth rates, the overall growth rate being 17 per cent. Referring to certain items among "Other Investment by Local Authorities", I would mention car parks which over the last four years have grown five-fold in capital expenditure. Expenditure under the Town and Country Planning Acts has doubled, and expenditure on Civil Defence has gone up three times. Paragraph 114 goes on to say: For the most part this expenditure is financed from local authorities' internal resources or by borrowing. I can say from my own experience that tar and away the bulk of the expenditure is provided by borrowing.

I would think that among these items there is yet another which could be transferred from the local authorities to the central Government. I refer here to Civil Defence. Paragraph 123 of the White Paper says: Expenditure on Civil Defence is almost wholly incurred on the provision of training premises and operational controls. I believe that the provision of training premises and operational controls is quite definitely a national expenditure, and I hope that my hon. Friend when he replies will comment on these suggestions because I believe that here we have decisions which will have to be taken by the Treasury. Therefore, looking right across this field of local authority capital expenditure referred to in the White Paper, we find that the growth rate has varied between 13 per cent. in respect of water and sewerage and 17 per cent. in respect of other local authority investments. I have worked out a weighted average of increase of expenditure on the services which I have just mentioned which comes out at 15 per cent. That was in respect of the increase as between 1961–62 and 1962–63, and it was on a forecast overall increase of 5 per cent. What will happen in 1963–64, when we have a forecast increase of expenditure of 7 per cent. as opposed to 5 per cent.? In these sectors, we may well end up with an increase of something like 20 per cent.

If we are dealing with cumulative increases of about 20 per cent., we are facing a rapidly increasing rate of growth of capital expenditure in the local authority sector which in time must give rise to an increase in the current expenditure of local authorities.

I have made a point of picking out those aspects of local authority expenditure on which there is very little direct return. I have not mentioned housing. I did not regard this as being specifically a housing debate, although I should be pleased to debate housing specifically at any time with the hon. Member for Hamilton. In the context of local authority expenditure, however, I have always regarded housing as being very largely a self-balancing item and felt that only a small proportion of this expenditure should fall upon the local authorities themselves.

I have mentioned that these programmes which will have to be undertaken by the local authorities must be financed largely by loan charges. Only comparatively recently, while I was in the United States of America, I had the opportunity of talking to several of the financial officers of some of the largest local authorities in that country. The problem of local authority finance is not confined to Britain alone. It is a problem which faces developed countries all over the world.

I found, however that the United States had a lower long-term interest rate than we had. I hope very much that when my hon. Friend the Financial Secretary to the Treasury replies to the debate, he will indicate whether the Government see any chance of harmonising our long-term rates of interest with those which obtain in the countries of the European Economic Community and in the United States of America. I have always campaigned for a lower long-term interest rate. I have never asked for a special lower long-term interest rate for any sector of the community, but I believe that a lower long-term interest rate is essential for the financing of these vast local authority programmes. I make no special point, however, of seeking a lower long-term rate of interest specifically for local authorities.

A substantial part of the expenditure on these services as applied to local authorities will, of course, be met by the central Government through the general grant. That is a matter entirely for my right hon. Friend the Chief Secretary to the Treasury and his right hon. Friend the Chancellor of the Exchequer. I can only presume that they are quite happy about meeting their share of this burden, because one knows that central Government revenues are comparatively buoyant. But what about the local authorities? Here we have a very different story. The only source of revenue for local authorities—and I agree with this particular source of revnue as being the only source—is the general rate. This is based on the aggregate value of hereditaments with rateable values throughout the country.

Quoting from local government financial statistics, the rate of growth of rateable values has been of the order of 2 per cent. per annum cumulatively in real terms. In terms of current values, it might have been 2½ or 3 per cent. The rate of increase of rateable values throughout the country in real terms has been nothing like 15 or 20 per cent, per annum! Therefore, if I follow this argument consistently, I adduce that rate poundages are bound to increase if local authorities have a rate of expenditure of anything like 10 per cent. cumulative per annum in current terms, which is three or four times as much as the increase of rateable values.

I do not think that the picture is quite as black as I have painted, for the reason that the increase in current expenditure of local authorities in real terms is of the order of 6 per cent. per annum. Taking this 6 per cent. and adding to that the service charges which will have to be paid on these vast increases in public investment, I believe that the increase in local authority expenditure in current terms may well end up to be of the order of 10 per cent. per annum.

I have concentrated more or less entirely on the effect of this vast programme of capital expenditure on the local authorities. I make no apology for that, but I accept that this year there is a powerful case for a certain stimulation of public investment. I hope very much, however, that my right hon. Friend the Chief Secretary will not hesitate to cut back this rate of expenditure if the existing slack in the economy is seen to have been taken up. I do not believe that we should go on with a rate of public expenditure which is far in excess of the resources which the economy can generate having regard to the growth of the gross national product.