Price and Pay Code

Part of the debate – in the House of Commons at 12:00 am on 5 March 1973.

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Photo of Sir John Hall Sir John Hall , Wycombe 12:00, 5 March 1973

That is a great relief to me. When I looked at that paragraph the first time I was very worried. I am delighted to receive that assurance from my right hon. Friend.

Paragraph 36 refers to price reductions, and says that a fall in raw material prices should be fully reflected in price reductions in general. At what stage are such price reductions expected? If there is a fall in raw material prices most of them will probably be known to the general public because raw material prices are published and become known before they can be reflected in reduced prices. In many industries it takes a long time for raw material costs to work through to the production line. I should like to know how this provision will be made to apply in practice?

When these decreases in raw material prices have worked through to the production line, the costs may have been overtaken by increases in other directions which more than offset the fall in the raw material price. How will that be taken into account when we look to a firm to reduce its prices because raw material costs have fallen?

Paragraph 40 was touched on briefly by my right hon. and learned Friend. It refers to the situation where the reference level of the profit margin has been exceeded. As I understand it, firms—certainly those in categories I and II—will be expected to make quarterly returns. If it can be seen that the profit in any quarter exceeds the firm's reference figure at that time the firm will be expected to reduce prices.

Presumably, if a firm can show that its profits tend to vary from quarter to quarter—that there may be higher production or higher turnover in one quarter and lower production and lower turnover in another—perhaps because trade is seasonal, the firm will be able to use that as a reason for not reducing prices at that time. In that case, there would have to be a longer period before the firm could be told to reduce its prices. What is that longer period to be? Is it sensible for these changes to be possible at periods as short as a quarter? Periods of half a year might be all right, but quarterly checks may be too difficult.

The restrictions on price increases and net profit margins are likely to have some rather interesting effects. There may be an increase in investment. If a company saw that its profit margin was likely to be higher than the average of the next two years, or whatever the formula is, it would be encouraged to borrow money to invest in plant and machinery, and more capital investment, so as to offset interest charges and increased depreciation against profits and thus bring profits down to the pre-freeze and normal net profit margin. That could be a good thing in the long-term view.

On the other hand, it could encourage a good deal of wasteful expenditure. It could encourage the kind of expenditure that we had at the time of profit limitations. It could encourage excessive expenditure on advertising which might not be particularly desirable, commercially or socially. It could encourage the loosening of control of business expenses—a feature of the time when we had excess profits taxation. It could encourage a good deal of wasteful expenditure in other respects of which hon. Members can think without too much difficulty. What sort of control are we likely to have to prevent that kind of thing?

My own philosophy is that if there is a real improvement in profits, that is, if net profit margins increase because of an increase in turnover or efficiency, or a combination of both, the increase should be split three ways—to the consumer, through a reduction of prices; to the workers, through an increase in wages; and to the shareholders, who are entitled to some share in the increased productivity of the company. That seems a sensible and logical way in which to deal with increased profits. Under this system, there would be a decrease in prices, which would benefit the consumer, which is the Government's intention, or the company would use the excess in other ways so as to reduce profit margins to an acceptable level.

How long will it take to deal with applications for a price increase? There are special provisions for applications from food processing firms. That is essential, because food processing firms may have to deal with changes in the prices of foodstuffs daily and if their applications are not dealt with quickly the food processing firms will find themselves in difficult circumstances.

But other concerns, too, find themselves at the mercy of prices—especially the prices of imported raw materials—and they may find themselves in difficulties unless their price increase applications are dealt with speedily. I cannot see them being dealt with speedily, because the staff to be made available to the agencies will not be large. In the first year or so—I ought not to say "In the first year or so"; I ought to say, "In the first few months", because I hope that the system will not last for a year or so—the staff will tend to be overwhelmed with applications.

The pay code rightly concentrates on the benefits for the lower-paid workers. An interjection earlier in the debate suggested that it was thought by some that lower-paid workers would be restricted to the £1 plus 4 per cent. increase, but it is nothing of the kind. The figure of 4 per cent. applies to the total pay roll and it is up to the unions responsible for negotiations to decide how much of an available increase in a firm or industry should go to the lower-paid workers and how much to the more highly paid.

After having heard so often from the Labour Party and the trade unions that lower-paid workers should be better treated and given larger increases it will be interesting to see whether trade unions are prepared to allow that in practice—whether they will be prepared to permit a greater proportion of the 4 per cent. of the total salary roll to go to the lower paid and a smaller proportion to go to the higher paid. I have a feeling that they will go on demanding a straight increase across the board, as they have tended to do throughout.

My final observation relates to dividends. No doubt partly because of my own stupidity, I do not fully understand paragraph 131. It would seem possible for a company to declare the same percentage dividend on its capital and yet, having taken into account the adjustment of the new form of dealing with corporation tax, to make a net payment to shareholders greater than the net payment for the previous year. I should like to know whether I am right in that assumption. If I am, I am not sure whether that is what the Government intend. To make certain that I am not misunderstood, I shall say it again. If a company pays the same percentage dividend this year, after the freeze, as it did before the freeze, because of the adjustment of the way in which corporation tax is treated, it may end up paying to shareholders a larger net dividend. I wish to know whether I am correct in that assumption.

I hope that the Government will take the opportunity to deal seriously with those questions and others, so that this becomes a discussion about the nature of the document rather than a general, wide-ranging debate about the philosophy behind it and the whole subject of a pay pause. I hope that my hon. Friend will be able to answer those and the many other questions that will be put in the course of the debate.