National Loans

Orders of the Day — Ways and Means – in the House of Commons at 12:00 am on 29th November 1967.

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Motion made, and Question proposed,

That it is expedient—

  1. (a) to establish a National Loans Fund and to prescribe its relationship with the Consolidated Fund,
  2. (b) to substitute, or to take power to substitute, the National Loans Fund for the Consolidated Fund in certain enactments, including enactments relating to Government lending and advances and to the Exchange Equalisation Account,
  3. (c) to make further provision as to the rate of interest on Government lending and advances,
  4. (d) to confer new powers of raising money, of creating securities and unsecured liabilities and of entering into arrangements or agreements for varying the terms on which money has been borrowed or securities have been issued,
  5. (e) to pay into the National Loans Fund any money raised or otherwise obtained in exercise of the new powers,
  6. (f) to charge on the National Loans Fund with recourse to the Consolidated Fund—
    1. (i) the principal and interest on any money borrowed under the new powers, or due under securities issued, or liabilities created, under the new powers, any sums required for the purpose of a sinking fund and any other sums to be paid in accordance with the terms on which money is borrowed,
    2. (ii) all existing national debt,
    3. (iii) any expenses incurred, in the past or future, in connection with the raising of money, the issue, repayment, redemption, surrender or exchange of securities, or the management of securities,
  7. (g) to amend in other respects the law about Government borrowing,
  8. (h) to direct that profits in the Issue Department of the Bank of England shall be paid into the National Loans Fund or applied in meeting any liability of the Treasury to that Department created under the new powers,
  9. (i) to make payable out of money provided by Parliament certain payments now charged on the Consolidated Fund, and
  10. (j) generally to make provision for the management of the Government's financial business.—[Mr. Harold Lever.]

8.45 p.m.

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

This is an extremely complicated Resolution. I think that it would be convenient to take the Money Resolution with this Resolution.

Photo of Sir Eric Fletcher Sir Eric Fletcher , Islington East

I do not think that the House can take both Resolutions together. I think that we must first discuss the Ways and Means Resolution and then take the Money Resolution separately. It may well be that the debate on the first Resolution will make a second debate unnecessary.

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

By all means. Mr. Deputy Speaker, if that is for the convenience of the House.

I was saying that this Resolution is extremely complicated and very technical. I gather that the reason why we have to debate it is that it effectively asks for new powers to raise money. As I understand the business which we are now discussing, this will be its effect in the matter of extending the borrowing powers of the Public Works Loan Board. This Resolution and the Money Resolution also make some radical changes in the whole system of our national accounts.

This is a story which has been unfolding gradually. We were first given some indication of it when the Chancellor of the Exchequer said this in his Budget Statement: The present arrangements have grown up as a series of ad hoc responses to particular situations over a long period of years. I think that the time has come to take stock of the suitability of the present arrangements in the contemporary world".—[OFFICIAL REPORT, 11th April. 1967 Vol. 744. c. 999.] In the debate on the Loyal Address the Chancellor made some remarks about the form of the national accounts which I hall turn to in a few moments.

In essence, the Resolution covers the establishment of a new National Loans Fund. There are a series of questions which I ought to ask the Financial Secretary so that we can have a clearer idea of what the Government's intentions are before we debate the Second Reading of the Bill on a later date. The first question is a simple one, but perhaps it ought to be asked, in view of the changes which are proposed. It is a fine tradition of the House that in the debate on the Consolidated Fund Bill we are able to raise matters of particular concern to our constituents. I assume that the changes which the Government now propose to make under the Resolution and subsequent legislation will in no way affect the procedures of the House. I assume also that when the National Loans Fund question comes before the House it will not, alas, give back benchers the right to raise their constituents' problems.

I come now to the Resolution and to the relationship, referred to in its earlier paragraphs, between the Consolidated Fund and the proposed National Loans Fund. As I understand it, the Government's intention is to distinguish clearly the Loans Fund from the Consolidated Fund, which, if the proposed legislation is enacted, will be merely concerned with the Government's revenue coming in from taxation and, in turn, with the expenditure which the Government make out of that taxation on both current account and capital account.

The Loans Fund will be concerned with the funds which the Government obtain from borrowing and, again, the expenditure which the Government undertake out of that borrowing, some of it presumably going to finance current expenditure and some to finance capital expenditure. The new proposals will help to simplify our accounts in the sense that one fund, the Consolidated Fund, will be concerned with taxation and the other, the Loans Fund, will be concerned with borrowing, but we shall still have both funds used to finance current expenditure and capital expenditure, so that particular confusion will not be eliminated.

There are one or two specific questions about the actual projects likely to be financed out of the Loans Fund. What will be the position of the nationalised industries? If I understand it correctly, the proposal is that all the borrowing by the nationalised industries is to be financed out of the Loans Fund. Perhaps the Financial Secretary can clarify that the nationalised industries would not be borrowing from any source other than the Loans Fund.

I should be grateful if' he would tell us, in view of paragraph 1(c) of the Resolution which says: to make further provision as to the rate of interest on Government lending and advances whether it is the Government's intention that all the money lent to the nationalised industries out of this Fund will be, if in loans of a comparable kind, at the same rates of interest and on the same terms. This has a considerable bearing on the recent White Paper on the review of the economic and financial objectives of the nationalised industries, Cmnd. 3437. We should like to be clear whether it is proposed that all the nationalised industries should make interest payments on the same basis.

Is it proposed to revise the rates of interest from the Fund as the costs of money going into the Fund rise or fall? I understand the proposal to be that the Fund will not be a profit or loss-making institution, that it will seek to lend to the various bodies which it finances at a rate which covers the cost which it incurs borrowing from the various sources available to it. In terms of our national accounts this is something which we want to establish.

The position of the local authorities arose in the debate on the Gracious Speech when on 7th November my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) intervened in the speech of the Chancellor to ask what was the position about borrowing by local authorities and when the Chancellor replied that the intention was that local authorities would be able to borrow at a rather cheaper rate of interest than otherwise.

Perhaps the hon. Gentleman will make it clear whether the position of local authorities, who can now choose between borrowing on the open market and obtaining a loan from the Government, will alter and whether the lower rate of interest of which the Chancellor spoke with such enthusiasm on 7th November will reflect merely the difference in the credit rating of the Government and local authorities, or whether there will be some element of subsidy in the lower rates of interest which an individual local authority is charged when borrowing from the Loans Fund.

Thirdly, I want to turn to a rather technical point. As I understand it, the intention is that the Loan Board will cover virtually all the various organisations upon whose behalf the Government are borrowing, and this will include, not only nationalised industries, local authorities and so on, but also a number of international institutions. I understand, for example, that our subscriptions to say, the International Monetary Fund, will be paid out of this National Loans Fund. I am not entirely clear what the position is about the drawing rights under the International Monetary Fund. If we exercise our drawing rights on the International Monetary Fund are we to find that the money raised under these rights passes into this Loans Fund and thence into various Government agencies, or are we to understand that it goes instead straight into the Exchequer Equalisation Account?

From the point of view of being able to follow this transaction, it may be that this is not merely a matter of procedure, but that it also may have some effect on the way in which we can understand precisely what is happening to the state of the economy. In his speech on 7th November the Chancellor said: By themselves, these changes— which the Chancellor was proposing to make and which are covered by this Motion— will not affect the present arrangements under which local authorities are able to borrow from the Public Works Loan Board and the market. Nor will they affect borrowings by nationalised industries. But it will make it easier to make these changes in future if they are thought to be desirable."—[OFFICIAL REPORT. 7th November, 1967; Vol. 753. c. 866.] I should like some clarification on this point. The Chancellor appears to be referring to some other change with regard to the Public Works Loan Board and the market. Even if we cannot get a clear reply this evening, because I realise I am asking a number of complicated questions, it would be worth while spelling out what the other changes are which the Chancellor mentioned in his speech and to which he apparently does not later return explicitly, as far as I know, at any subsequent stage.

I have a few questions to ask about the presentation of the accounts, at a technical level. The way in which our national accounts are presented has been a matter of controversy for a great many years. A White Paper was entirely devoted to this in 1963. A lot of the trouble, then and since, turned upon the question of the debateable line, and the idea that accounts were divided into those which were above the line and those below.

The Economist at that time, in May, 1966, pointed out that: The present line is admittedly annoying to any logician: it separates expenditure for which there is merely a general power to borrow from expenditure for which there is (largely by historical accident) a specific power to borrow, a legalistic distinction that has little significance. As I understand it, the effect which the Government are covering by this Resolution will be to adjust our accounts in the way I have described. I am not entirely clear whether this will effectively eliminate the line and the idea of dividing general from specific borrowing rights. Perhaps the hon. Gentleman would consider whether it would be helpful at this stage to spell out exactly how that controversial object will be affected and whether there will be a radical change in the form of our accounts.

Despite the reconciliation which takes place each year when we have a financial statement between the purely accounting concepts and the national income concepts, there is no doubt that anything which enables us to reconcile those two sets of figures and, as far as possible, to put the national accounts of an accounting sort on the same basis as the national income statistics is likely to be advantageous. I hope that it will be possible, if the Bill is passed and comes into operation, to formulate the accounts in such a way that it is easy to establish precisely what the Government surplus or deficit is for any year in national income terms or in Keynesian terms, because this is an important concept if we are to ascertain whether the economy is in such a situation that the Government should take inflationary or deflationary measures.

It may well be that the measures which the Government are initiating tonight will eventually make it easier to understand precisely what action they are taking at Budget time, although I suspect that it will be necessary to add one or two tables concerning that borrowing, such as local authority borrowing, which will still take place, to some extent, outside the new National Loans Fund.

We do not at this stage wish to prejudge the Government's Bill, which we have not yet had an opportunity of seeing. For that reason, we do not propose to vote on this Motion or the Money Resolution. This is a matter which we must leave open until we see the Bill. However, it would be helpful if the Financial Secretary could give an indication of the answers to some of the questions which I have asked.

9.2 p.m.

Photo of Mr Harold Lever Mr Harold Lever , Manchester Cheetham

I am very grateful to the hon. Member for Worthing (Mr. Higgins) for raising these points, because although it would be improper for me, Mr. Irving—

Photo of Mr Sydney Irving Mr Sydney Irving , Dartford

May I remind the hon. Gentleman that we are now in the House and that I wear a different hat.

Photo of Mr Harold Lever Mr Harold Lever , Manchester Cheetham

I beg your pardon, Mr. Deputy Speaker. I was about to say, especially having regard to the rank to which you have drawn my attention—and it is quite inappropriate that it should have been necessary for you to do so. Mr. Deputy Speaker—that I must not allow my passion for the aesthetic and financial attractions of the Bill to carry me over the narrow line of explanation and exposition appropriate at this stage. I must reserve the full flower of passion and feeling for the Second Reading debate when the hon. Gentleman and his colleagues will have considered the controversial implications of the Bill.

I have been asked whether the debates on the Consolidated Fund Bill will be affected by this Motion or by the Bill to follow. Hon. Members on both sides of the House will remain in the same unfettered enjoyment of all privileges, ancient and modern, relevant and irrelevant, necessary and unnecessary, which they at present enjoy during those exhilarating debates. No one need fear that any changes will result from the Bill.

I have been asked whether these proposals will clear up the question of Government spending so that the accounts take on a modern or Keynesian look. We cannot undertake to draw our accounts to fit any particular economist's ideal, but the effect of these changes will be to make it clear what the Government have been up to financially, because from now on the Exchequer accounts will simply show what the Government have received in taxation and what they have spent on both capital and current account. As long as they keep their expenditure below the sum they have received from taxation, there will be a surplus which will pass to the National Loans Fund.

If however, the Government spend more than they get in taxation, they will have to resort to borrowing from the National Loans Fund to cover the deficit. All the Exchequer grants in future will record what the Government have collected from an enthusiastic citizenry and the fine work they have done—I am sure this is intended by both parties in Government—with the money. They will also show the citizenry whether or not they have spent more than they have got in taxation. If it is more, they will have a borrowing from the National Loans Fund. On those happy occasions when they spend less, they will have a surplus which they will pay over to the National Loans Fund.

I was asked, will the nationalised industries borrow only here? Yes, all their long-term borrowing will go on as now from the Government and they will borrow from the National Loans Fund. But from time to time some of the nationalised industries have borrowed short-terms from banks. That kind of borrowing and their credits will continue as before.

Interest rates—I am asked, will they be the same for the different nationalised industries? The Government observe strict impartiality in charges to the various nationalised industries because they are all solvent and the Government are responsible for their solvency. It would not be right to make a differential rate between one industry and another.

Will rates to the nationalised industries and local authorities when they borrow from the National Loans Fund rise or fall from time to time? The answer is that they will rise and fall according to the cost to the Government and it is the cost to the Government at the time the loans are made that will be relevant.

Without going to the nearest fraction of an interest rate, the Government will lend to a nationalised industry or a local authority at their own cost of borrowing at the time that they are lending—plus certain expenses. If the Government have been prudent and borrowed earlier at a cheaper rate, there is no reason why the cheaper rate should not be available for the customer. If the Government have borrowed sums of money at a higher rate earlier, there is no reason why the borrower should not pay the higher rate.* The borrower will in each case pay the going cost at the time of borrowing on the borrowed money.

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

Do I understand from what the hon. Gentleman said that the rate will not subsequently be changed on loans to the nationalised industries if the rate was negotiated in some future period?

Photo of Mr Harold Lever Mr Harold Lever , Manchester Cheetham

I am puzzled to hear about the loans that have been negotiated in some future period. Does the hon. Member mean in respect of borrowings already contracted for at present by the nationalised industries with the Government?

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

I am sorry that I did not make myself clear. Suppose they borrow next April at a certain rate and then a year later the rate has changed, the loan which they took next April will not then have its rate altered in the light of current circumstances? Is that correct? The rate they are actually charged is the rate at the time they take the loan from the National Loans Board and they will continue to be charged that rate until such time as they repay the loan?

Photo of Mr Harold Lever Mr Harold Lever , Manchester Cheetham

The short answer is yes. The longer answer is that when we lend from the National Loans Fund to any of the borrowers, a local authority or the nationalised industry, the loan will have a term on it and the rate of interest fixed will be the rate appropriate for that term at the time of borrowing.

I was asked why we expect that local authorities will be able to borrow more cheaply from us than in the market. This is because the Government are a very large borrower and have considerable credit and considerable marketability for their stocks which are probably the most marketable stocks in the world The *[Note: For correction, see Vol 756, col. 88.] great attractions to lenders make it worth their while to suffer the fractionally lower rate of interest at which we are able to borrow than are smaller local authorities, and for this reason we can relend rather more cheaply, if we are able or think it right to. On the other hand, if a local authority prefers, or thinks it can do better, it can always go elsewhere and try to get money cheaper. We have no restrictive monopoly on local authorities' power to borrow, which will continue in other respects exactly as now.

I am asked to explain about the Exchange Equalisation Account. This is simplicity itself. What will happen is that the Exchange Equalisation Account will borrow foreign currencies from the International Monetary Fund. In order to do so the Account will have to pay out sterling, because it will be receiving foreign currencies in the first stage of this matter, which it will then pay to the International Monetary Fund. The result, in short, is this. The Exchange Equalisation Account always has a fairly large sum of sterling in the form of Treasury Bills. It will cash in the Treasury Bills and will hand on the sterling to the International Monetary Fund. So we get the position that the indebtedness of the Government will reveal itself, strangely enough, by the credit they have in sterling with the International Monetary Fund. This only occurs when drawings are made the Fund will draw funds in sterling from the International Monetary Fund. The foreign currencies will be held in the Exchange Equalisation Account where, I am told, they are rather fond of foreign currencies from time to time. I hope that that covers that point raised by the hon. Gentleman.

I am asked what future changes we contemplate in local authority borrowing. I think that it would be preferable not to give a fuller, more interesting answer to the hon. Gentleman and to the House and that we should leave that question to the Second Reading of the Bill itself.

Will the line go, I am asked. It must be announced with some gravity that this line, which came into being in 1875, and thereafter has always baffled new hon. Members of the House, hearing learned and ancient Members talk about below the line and above the line expenditure, with which older Members have sometimes baffled by-election arrivals—they will have to think of something more ingenious—will go as soon as the Bill becomes law.

I hope I have dealt with the point, raised by the hon. Gentleman to the sati,- faction of the House.

Question put and agreed to.

Resolved,That it is expedient—

  1. (a) to establish a National Loans Fund and to prescribe its relationship with the Consolidated Fund,
  2. (b) to substitute, or to take power to substitute, the National Loans Fund for the Consolidated Fund in certain enactments, including enactments relating to Government lending and advances and to the Exchange Equalisation Account,
  3. (c) to make further provision as to the rate of interest on Government lending and advances,
  4. (d) to confer new powers of raising money, of creating securities and unsecured liabilities and of entering into arrangements or agreements for varying the terms on which money has been borrowed or securities have been issued,
  5. (e) to pay into the National Loans Fund any money raised or otherwise obtained in exercise of the new powers,
  6. (f) to charge on the National Loans Fund with recourse to the Consolidated Fund—
    1. (i) the principal and interest on any money borrowed under the new powers, or due under securities issued, or liabilities created, under the new powers, any sums required for the purpose of a sinking fund and any other sums to be paid in accordance with the terms on which money is borrowed,
    2. (ii) all existing national debt,
    3. (iii) any expenses incurred, in the past or future, in connection with the raising of money, the issue, repayment, redemption, surrender or exchange of securities, or the management of securities,
  7. (g) to amend in other respects the lass about Government borrowing,
  8. (h) to direct that profits in the Issue Department of the Bank of England shall be paid into the National Loans Fund or applied in meeting any liability of the Treasury to that Department created under the new powers,
  9. (i) to make payable out of money provided by Parliament certain payments now charged on the Consolidated Fund, and
  10. (j) generally to make provision for the management of the Government's financial business.