Charge of Corporation Tax for Financial Year 1973.

Clause 7 – in the House of Commons at 12:00 am on 21st May 1974.

Alert me about debates like this

4.17 p.m.

Photo of Mr Maurice Macmillan Mr Maurice Macmillan , Farnham

1 beg to move Amendment No. 19, in page 6, line 17, to leave out '52' and insert '50'.

The right hon. Gentleman the Chancellor of the Exchequer said not long ago that no one now believes that profits is a dirty word. He added that the Government would keep a close watch on how profits are going, in order to see that investment was not endangered. In the same speech, he indicated that he would give a boost to demand if the economy looked like becoming too depressed. Previously the Chancellor had expressed a similar concern and had given similar indications about company liquidity.

The purpose of this amendment is to seek from the Government, through whoever is to reply to this debate, a more detailed exposition of the Government's views on future trends and to try to get from them a clearer indication of the kind of policies they mean to develop to meet these trends and to deal with the kind of difficulties that the Chancellor himself, in speaking at the CBI annual dinner, showed that he felt might at least be possible.

My hon. and right hon. Friends and myself will argue that both the profit situation of companies and their liquidity problems are already very great and are already large enough to constitute a medium and long-term threat to the possibilities of investment, capital formation and stock building. I shall seek to ensure, and we shall try in our arguments to ensure, that the Chancellor not only practises what he preached to the CBI but also does so in time for his action to be effective.

This is, therefore, a probing amendment to enable the Committee to explore these important matters. I shall not be advising my hon. and right hon. Friends to divide the Committee. For two percentage points over stocks expected seems less of a threat to profitability than many other factors to which I shall come in the course of this discussion and later. It is less of a threat to liquidity than the provisions of Clause 10 on which we shall be seeking to press our amendments to a Division unless we can get satisfactory assurances from the Government. But the Committee should have an opportunity for a general debate on these vital matters in full before we rise for the Whitsun Recess.

Before I come to the main point of my argument I have two points to make, one a general point and one concerning a matter of detail. I take the matter of detail early in my speech to give the Minister time to consider it and to answer it if he can. I accept that he may not be able to do so in answering the debate since it could be a matter which we would wish to raise either in Committee upstairs, if that is in order, or, later, on Report.

The matter concerns preference dividends. It has been suggested to me that these should not be grossed up at the current rate of advanced corporation tax but taken at the original fixed amount. I raise the question at this moment rather than on Clause 10 because, according to my information, the increase in the corporation tax rate and the increase in advance corporation tax itself result, because of Schedule 23(18) of the Finance Act 1972, in a curious situation. If I am right the taxable income of preference shareholders is greater than the actual income which is stipulated in the terms in which the preference shares have been issued. This is a matter of detail. I have raised it early in order to give time for it to be worked on.

My more general point is to warn the Committee of the dangers of what might be called the marginal argument. That type of argument has ruined more gamblers and heavy spenders, and done more damage, than almost any other when it is applied to money. I said that I thought that an increase of only two percentage points on the basic rate of corporation tax was perhaps less of a threat to profitability than many other factors. But it is just that sort of argument— although I make it myself—that I must warn the Committee is so dangerous. It is a favourite argument of Treasury Ministers who are advocating increases in revenue. It is also a favourite argument of spending Departments when they are advocating increases in Government expenditure, which, happily, are resisted by Chief Secretaries of the Treasury.

It is this argument that leads the gambler to put on yet another bet to get back what he has lost; this argument leads people to spend a little more than they can afford because that little bit extra will make no difference. It is the argument of the Victorian maidservant who was dismissed for having a bastard child and who told her mistress "It may be a bastard, but it is only a little one". It is the argument that my right hon. and hon. Friends and I will not permit the Government to keep getting away with— and I make the point with this degree of vehemence because we are allowing them to get away with it this time.

In view of many considerations I think I should declare a personal interest. I am the chairman of a company which is affected by the rate of corporation tax. The profits from my family business, like other companies' profits, will be reduced. We shall have greater problems of financing an increasing turnover, especially since some of the increase in that turnover is purely inflationary. We shall have greater problems in investing for the future.

My main point today concerns the profits and liquidity of companies and the consequences for the future of stock-building and investment. In our earlier debates on the Budget the Chancellor referred to a significant increase in the share of the national income going to companies. I think that he was factually wrong about that, whether he was taking account of stock appreciation and capital consumption or not. The Financial Secretary admitted in reply to a Parliamentary Question that if stock appreciation and capital consumption were excluded from profits the figures looked very different. Stock appreciation is an element in profit which is not available either for distribution to shareholders or for reinvestment in the business itself. Capital consumption is too often in these days of high inflation simply the provision of extra working capital required to finance a turnover which may be static in real terms although increasing in money terms.

Excluding these two factors, the trading profits of companies expressed as a percentage of the national income were in 1964, 13 per cent.; in 1972, 7-1 per cent.; and in 1973, 6-8 per cent. That is hardly a significant increase in the share of the national income.

In giving the figures I must express my indebtedness to Lloyds Bank Review for April 1974. Taking the longer-term pre-tax situation, both the share of profits in the national income and the rates of return on capital have been steadily declining since the early 1950's. In the situation after tax, the share of profits in the national income has been declining since at least the mid 1960's, and the share and rates of return on capital have been declining from the early 1960's. In the article I am quoting the gross trading profit expressed as a percentage of national income was 12-6 per cent, in 1950; in 1951 it was 14 per cent.; in 1952 14-1 per cent. But in 1970 it was 67 per cent.; in 1971 6-6 per cent. and in 1972 6-7 per cent. For those last three years, if investment grants are included, the figures were 8 per cent., 7-8 per cent, and 7-4 per cent.

Without investment grants, therefore, 1970, 1971 and 1972 were significantly worse than the equivalent period in the 1950's, and even with investment grants profits were considerably lower. This may be evidence of some neglect by all Governments of the need to maintain company profitability. However, it makes a nonsense of the Labour Party's arguments and attacks, which still persist, that the company sector is getting far too much of the national cake. It makes great sense of the Chancellor's new view that profits is not a dirty word and that profits must be protected to ensure that investment is not endangered. What, after all, is the function of profits? It is partly for them to be distributed to shareholders—and these are not simply individuals, the few or many who happen to own shares in companies. They are, in fact, the great mass of people who hold an indirect interest in the profitability of companies through pension funds, life assurance policies and unit and investment trusts; and I think I am right in saying that about 26 per cent, of the shares in quoted companies are held in pension funds.

So there is a wide interest from the point of view of distribution in the profitability of companies. It is an interest which goes far beyond that of the large individual shareholder or even the small direct shareholder and there are many people whose savings and pensions are dependent on profits distributed through the institutions.

4.30 p.m.

The second function of profits—and this is perhaps even more important—is that they should be used and be available for investment and stockbuilding for the future, and it is that which is worrying us on this side of the Committee.

The third function is to provide the funds required by the Government in tax, and it is not enough to refrain from killing the goose that lays the golden eggs. It is also necessary not to starve the goose, or the eggs that it lays will be small and short of nourishment.

The new charges on companies by way of corporation tax as set out in the Budget Speech and the Finance Bill will be a heavy burden. It is estimated that the corporation tax changes will amount in total to about£420 million extra on companies in the tax year 1974-75. while the employers' share of the National Health Service contribution will be about£348 million.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

Can the right hon. Gentleman expand on the figures that he is using? With what is he comparing the figure of£420 million extra? Mr. Macmillan: These are the total burdens of the addition over the 50 per cent, and the extra by way of advance corporation tax—not extra on the rate alone.

Companies will be faced with the effect of increases in nationalised industry prices both directly and indirectly through the effect on the resale price index, and it has been estimated that the cost to companies of triggering off the threshold agreements could be anything between£100 million and£200 million. There is a heavy burden that will have its effect on both profits and cash flow, and perhaps I may quote here from the Financial Times Monthly Survey of Business Opinion, published on 6th May. It says: The median forecast increase for unit costs now exceeds 10 per cent, and for total unit costs over 12 per cent, virtually double the level of a year ago. Because of price controls, output prices are expected to rise less rapidly which will mean a further squeeze on profit margins. Dealing with investment, the same survey speaks of expansion plans being shelved with a smaller rate of increase than was being predicted last summer. The Chancellor said he was delighted that the CBI's survey shows firms expecting a significant rise in employment over the next few months, but the Financial Times survey goes on to say: For manpower, the tendency seems to be to step up work forces in the short run to clear off the backlog of orders and then to cut back if demand turns down. On orders and output, the outlook is of 'lower expectations all round'. That is reinforced by the CBI Industrial Trends Survey for April which the Chancellor quoted, but he did not quote that passage which said that never before in the history of the survey have fixed capital investment prospects collapsed so rapidly and, on this evidence, the outlook on investment from the turn of the year has become quite gloomy…there are twice as many references to financial contraints to investment now compared with six months ago. I turn from profits to the problems of liquidity. The Government estimated that company liquidity at the end of 1973 was about£10,000 million, but that did not take account of bank advances totalling about£14,000 million, which meant that there was a negative liquidity of£4,000 million. That is due partly to the factors which I have mentioned. These also affect the reduction which we can see coming of£1,000 million to£1,200 million in company liquidity which will be affected, too, by other factors in the tax year 1974-75. There will be the higher rate of corporation tax and accelerated and larger payments of advance corporation tax. The offsets built up in July and October 1973 and January and March 1974 will reduce the 1975 corporation tax payment in January, but this reduction will be outweighed by the extra advance corporation tax payment.

One can assess the market shortages caused by corporation tax payments— and here I include the whole range of increases brought in by the Government —for the next year, 1974-75, as totalling about£3,000 million. What is perhaps even more significant is that the same calculations show that there is a minor peak in July 1974 of£300 million and a larger peak in October 1974 of£350 million, but in January 1975 the market shortages caused by corporation tax demand may reach£750 million, and in February of that year the figure may be£500 million.

There is another significant factor in considering company liquidity in relation to the rate and impact of corporation tax. The figure of£350 million in October 1974 compares with between£50 million and£100 million in 1972-73. The figures in January and February 1975 of£750 million and£500 million compare with between£400 million and£450 million in 1972-73. On the other hand, where the impact is less at any given time—for example, in August and September of this year—one finds that the 1974-75 figure is£100 million compared with£50 million in 1972-73.

The changes mean that the impact of corporation tax as a whole is greatest at the peak periods. The effect of the changes is greatest at the time when the normal payments of corporation lax tend to be highest anyway. This represents a threat to the liquidity of companies in July and October of this year, and even more so in the early part of next year.

The Chancellor of the Exchequer has perhaps made too little of this—or perhaps from his point of view he has not. It is noticeable that this year's forecast is not taken into the first quarter of 1975, but my argument has been the practice in the past, as is borne out by the Government's own estimates. They are using the Budget to transfer the borrowing requirement from the public to the private sector. If we take the public sector component from the Financial Statement and also assume—as one is entitled to assume, unless the Government make such a mess of it that the forecasts go all wrong—that the non-oil deficit is eliminated during 1974-75, then the public sector and the overseas sector together show about£1,300 million financial surplus, which must mean a substantial financial deficit in the corporate sector for industrial and commercial companies.

If I am right, and if the figures which show the improvement in the financial situation of the public and overseas sectors do, as I believe they must also show a substantial deficit in the corporate sector, then companies, in order to restore that deficit, can only reduce capital formation and stockbuilding. The effect of this will not be seen at once. Judging by the experience of past cycles, there is a time lag of about one and half years in stockbuilding and of nearly two years in capital formation.

I hope that we shall hear not only about the present effect of corporate taxation on company liquidity and profitability and the resulting effects on stockbuilding and investment but also about the effect in the longer term of the present tax situation. The Chancellor has undertaken to watch the situation carefully and in doing so he has shown some kind of awareness of the problems that he could be facing towards the end of the year. But his Budget and the changes that he has made in company taxation must adversely affect the profitability of industry over a period and must damage the capacity of the nation to maintain a standard of living comparable with that of other developed countries because of its effect on stock building and investment.

If he is creating a situation in which industrial and commercial companies are forced into financial deficit so that their economic activity declines, he must end by increasing the public sector deficit and borrowing requirement either because of the loss of revenue from tax receipts or because he has to subsidise companies which are in difficulty.

As we have said, the Chancellor is recklessly spending the taxpayer's money on benefits that time will show to be illusory. I hope that the Paymaster-General will be able to show that this is not an exercise to buy temporary approval with the electorate's own money, that he will show it by replying to the questions which will be raised in this debate and that he will give the Committee some indication of what he thinks are the prospects in the corporate sector for industrial and commercial companies in January 1975. It is on the general confidence now about what is likely to happen then that our ability as a country depends, both in dealing with our present difficulties and in creating future prosperity.

4.45 p.m.

Photo of Mr Dick Taverne Mr Dick Taverne , Lincoln

One would not have guessed from the atmosphere in the Committee that we were debating the country's economic future. When this debate began I counted nine Conservative Members present. Since then, no doubt attracted by the electric delivery of the right hon. Member for Farnham (Mr. Macmillan), these numbers have increased. There are now about a dozen. During these debates from this side there are occasional worthwhile contributions from the hon. Member for Loughborough (Mr. Cronin) and occasionally some learned contributions from the hon. Member for Gateshead, West (Mr. Horam); and that is the substance of the debate.

Photo of Mr John Peyton Mr John Peyton , Yeovil

While the hon. and learned Gentleman is calling the roll of Members of this party—something which no one invited him to do— perhaps he would like to mention the numbers of his erstwhile colleagues who are present.

Photo of Mr Dick Taverne Mr Dick Taverne , Lincoln

I have just been referring to my erstwhile colleagues. I said that there were at least two of them——

Photo of Mr Dick Taverne Mr Dick Taverne , Lincoln

There are several of them present—about four. I was referring to those who took a dynamic part in the debates and said that they amounted to half that number—namely, two—apart, of course, from the Paymaster-General, for whom I have the greatest respect.

We have debated in the past whether the Finance Bill should be considered in Committee upstairs, and I believe that there is something to be said for taking the whole lot upstairs, considering the amount of interest that is shown here. The only snag is that proceedings in Standing Committee can go on until inordinately late hours, sometimes until early in the morning.

I remember one Finance Bill debate in Standing Committee in which I, as Minister of State, and the right hon. Member for Manchester, Central (Mr. Lever), then Financial Secretary, took part. At four o'clock in the morning, the hon. Member for Wycombe (Sir J. Hall) asked whether he could be told which of the two Ministers would be answering the debate so that he could be woken up. It was the right hon. Member for Manchester, Central who was responsible, and he answered the hon. Gentleman, quick as a flash—that was a tribute to him at that hour of the morning—that he was no more justified in inferring from the fact that our eyes were closed that we were asleep than anyone would be in inferring from the fact that the hon. Member for Wycombe's eyes were open that he was awake. This is the kind of atmosphere in which our great economic affairs are debated.

The words of wisdom spoken on this procedure were those of the Select Committee on Procedure, which some time ago recommended a Standing Committee on taxation. There are a large number of questions which are just not answered but should be answered. We are today discussing corporation tax—not a minor item, but something which in a full year would increase taxation by about£130 million. One would not have guessed from the attendance so far that this was a major item.

We do not know what the effect of this increase in corporation tax will be. Some people suggest that corporation tax is a splendid thing to increase if taxation has to be increased at all because it is a tax on dividends and may be paid out of capital. It is certainly assumed in the Treasury that an increase in corporation tax does not have a great effect on consumption. I cannot remember the exact proportion which the Treasury allows in its allocation of the effect on consumption, but it is not very large—about 20 to 30 per cent.

It has always been assumed, therefore, that increasing corporation tax helps towards redistribution of income. But this does not necessarily follow. There is very little information about the effect of an increase in corporation tax. One or two studies in the past which have suggested that it was a tax on capital bear out what the Treasury has been assuming, but some interesting evidence was given to the Richardson Committee on VAT, I think in 1963, when Professor Kaldor, who is not a million miles away from the present Government, advocated that we should substitute VAT for corporation tax because the latter in prac- tice had a direct effect on prices and was very regressive and if one substituted VAT one benefited manufacturing industry because the burden of taxation was redistributed towards services. The burden of the argument was that corporation tax, if it were increased, directly affected prices, in which case it is anything but redistributive.

Many of us—I do not know how many —are awaiting the results of a profound study being undertaken by the Department of Applied Economics at Cambridge by Wynne Godley and Professor Nondhaus about the effects of corporation tax on prices. That is an incidental part of the study. I should not be surprised if the result shows that corporation tax is passed on to prices. An interesting article appeared in The Guardian on 14th November, written by a bright young economist from Cambridge, Mr. Mervyn King, about the general picture of profits. He rather disputed the general allegation that profits have steadily declined. He says that, while profits before tax have declined, profits after tax have not. Why? Because the burden of corporation tax has dropped.

Mr. Mervyn King wrote: Comparing profits after tax with total labour costs we find that the profit share has been remarkably stable. Expressed as a moving average to smooth out cyclical fluctuations, the share of profits after tax never once deviates from a range between 25 per cent, and 27 per cent., and if we exclude 1965, when profits were high because of an unusually low tax bill due to the transition provisions for the changeover to corporation tax, the range is even narrower with profit sharing lying between 25 per cent, and just over 26 per cent, in every year. Mr. Mervyn King says that the reason for that is that, because of the decline in the burden of corporation tax, there has been no real decline in after-tax profits.

Photo of Sir John Hall Sir John Hall , Wycombe

I do not dispute the figures given by the hon. and learned Gentleman, although they do not apply to the current situation with the increase in corporation tax. Do the figures show that profits did not decline in real terms or in money terms?

Photo of Mr Dick Taverne Mr Dick Taverne , Lincoln

They suggest that the picture if one quotes pre-tax figures is nothing like as bad as if one quotes after-tax figures.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

It is the other way round.

Mr. Taveme:

I will put it simply—that the post-tax figures are better than the pre-tax figures. I am not concerned about the real effect. I am concerned about the implication of the effect of corporation tax. The suggestion is that corporation tax has a much bigger effect on prices than is generally assumed, and that perhaps the Treasury is wrong in always assuming that corporation tax does not have the effect on consumption and prices that it has.

I will not build a great deal on the articles of Professor Kaldor in 1963 and Mr. Mervyn King in 1973, except to suggest that perhaps we do not know a great deal about the effect of corporation tax. We should know more about it before we start to make confident assertions, as perhaps the Paymaster-General will—although I know him too well to think that he will dogmatically assert anything for which he has no evidence— about the effect of the taxes, and before we start to assume, as Government supporters may, that corporation tax can be increased without great harm to the cost of living.

I am doubtful whether the increase in corporation tax is such an attractive source of income as it has sometimes seemed, as merely affecting the overall balance of public sector and private sector spending. This matter should be explored more fully by a permanent committee on taxation rather than in a desultory debate in Committee. This is not a matter which the Opposition—probably rightly—will force to a Division. It is a matter which is clouded in uncertainty. Let us not be too dogmatic about the effect this rise in corporation tax has or does not have on the cost of living or on the nation's economy.

Photo of Sir David Price Sir David Price , Eastleigh

I wish to support the amendment. It is a serious mistake for the Chancellor to raise corporation tax this year. The right hon. Gentleman the Paymaster-General knows me well enough to know that I have no ideological objection to increasing corporation tax under the appropriate conditions. Following the remarks of the hon. and learned Member for Lincoln (Mr. Taverne) and my right hon. Friend the Member for Farnham (Mr. Mac-millan), I suggest that there are several powerful reasons why it is wrong this year to increase corporate taxation.

Before I do so, I should, in the spirit of tomorrow's debate, declare my continuing interest and personal involvement in the health of British industry as well as that of many of my constituents. I am as much an industrial animal as I am a political animal. During my working life I have done various things which it would be tedious for me to relate in detail to the Committee. I hope that I have your permission, Mr. Thomas, not to go through my apologia pro vita sua, although detailed reading of Motion No. 9 on tomorrow's Order Paper would suggest that I have to start with my apprenticeship.

Currently, I am involved with the Institution of Works Managers. I come from industrial management, and I am proud to feel that I still have a working connection with that body. I am also a non-executive director of a wholesale meat company, which is no different from being a non-executive director in any other company. Coming to my expectations for the future, it would be unduly conceited of me to have any expectations at all. I mention that because it is relevant to what we shall discuss tomorrow.

The Chancellor has three main reasons for increasing corporation tax this year. The amendment is designed to leave corporation tax as it is. The three reasons adduced or implicit in the Chancellor's decision to raise corporation, tax are misguided in this current year.

Because of the Government's commitment to major increases in Government expenditure, the Chancellor is landed with a consequential commitment to increase taxation to achieve his judgment of a broadly neutral Budget. I do not disagree with the Chancellor on his broad Budget judgment of neutrality this year, particularly as he has taken the reserve position of having a second look at things in the autumn. But I am entitled to say to the Paymaster-General that, agreeing with his right hon. Friend's broad Budget position, I would not have increased Government expenditure to the degree that the Chancellor has and, therefore, if I were sitting on the Treasury Bench I would not find myself in the right hon. Gentleman's position of having to find extra taxation to achieve this broadly neutral position. Therefore I start with this basically different point of departure from the right hon. Gentleman and his hon. Friends.

Secondly, following the Chancellor's self-enforced need to raise taxes, his eye has settled upon British industry as being a politically suitable victim. The Chancellor has followed the traditional advice offered by that great French statesman, Colbert:

The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing. As the leaders of British industry are collectively political eunuchs and of no electoral consequence, the Chancellor has felt that he would safely ignore them. I listen hopefully for their hissing, but I do not find it coming very strongly from the leaders of British industry.

5.0 p.m.

I suggest that the Government make a mistake in thinking that the so-called captains of British industry represent the whole of industry. There are also the shareholders who, as my right hon. Friend the Member for Farnham reminded us, are the legal owners of British industry.

Let me take the point a little further and remind the Committee that shareholding in British industry is not confined to the wealthier classes. There is a vast and growing army of people whose savings are invested in industry through pension funds, life assurance policies, unit trusts and investment trusts. Although they are not direct equity shareholders, it must be emphasised that they are shareholders through the prudential institutions. In purely personal terms they have a pecuniary interest in the health of British industry and any Government will ignore that factor at their peril.

The Chancellor's view that British industry has a broad back has been taken up repeatedly in these debates. The Chancellor in his Budget statement said: Companies have in general been doing rather better in the last year or two and profits last year reached a very high level. There was, in fact, a significant increase in the share of total national income going to companies. In these circumstances, it is only right that companies should bear their share of the cost of putting the economy back on course." — [OFFICIAL REPORT, 26th March 1974; Vol. 871, c. 319.] On paper figures the Chancellor is correct, but if we allow for inflation the picture is very different. Speaking from the Opposition back benches, I believe that the whole of our challenge to this Finance Bill is in terms of inflation.

The question we must ask is: do the Government proposals make sense in terms of the health of our economy in a highly inflationary situation? I do not blame the Government for inflation and, although we can make marginal criticisms, I think all will agree that we are in a situation where incipient inflation is growing into hyper-inflation. I do not want to detain the Committee by quoting the inflationary experiences of other countries throughout the world, but suffice it to say that all major industrial countries are facing vastly higher rates of inflation in the current year than was the case in the previous three or four years. Therefore, we can genuinely talk about the risk of hyperinflation.

In these circumstances, is it right for the Government to increase the taxation burdens on British industry in such an inflationary situation? The Paymaster-General may argue that companies benefit from fiscal drag and are always a stage ahead of inflation. However, I suggest that this is not the case, for two reasons. First, there is the competitive situation. There does not need to be a perfect competitive situation for us to say that we have for many of our products a competitive market. This restrains the degree to which any company can increase its profits through its prices to take care of inflation.

The second factor is the existence of the Price Commission. I believe that there is greater restraint on the degree to which any company can pass on the effects of inflation than is generally recognised. If we did not have a competitive situation or price control, there might be a case for increasing corporation tax this year, because the Chancellor would cream off the company equivalent of fiscal drag. The mere fact of inflation ensures that existing tax rates will increase the revenue going to the Treasury. Companies are not similarly placed.

There is the further point to be considered—and this point is not always fully accepted—that inflation must be examined in terms not simply of interest rates but of compound interest rates. A rate of inflation amounting to 10 per cent, a year means a doubling of the cost of living in 7-3 years and—even more frightening—in 11| years the figure is trebled. Currently we are suffering an inflation of about 15 per cent, a year. In compound interest terms this means a doubling of the cost of living in less than five years.

Let us think of that concept in respect of the replacement of an asset. Much of industry is not run on a shoe string or on a year-to-year basis, but operates on a five, 10 or even 15 year basis. If an industry is dealing with ships, chemical plant, oil refineries it does not begin to see a return in the short term; the return is over a very long term. We must have a system of corporate taxation which makes it possible in real terms to replace capital assets.

The Paymaster-General and I could agree that neither corporate accounting under the Companies Act nor our taxation system is adequate to deal with the real situation presented by the present rate of inflation. I am in favour of the proper taxation of real profits, but I question whether we are taxing real profits and whether in fact we are not taxing purely paper profits. This concept goes wider than the amendment and the question of reducing the rate from 52 per cent, to 50 per cent. But I am saying that until the present Government, or another Government, get down to these matters with industry—and this may mean amendment of the Companies Act—we shall be taking a grave risk if this year we raise taxation on companies. This is the concept we oppose.

I should like to sum up the situation by quoting a question once posed of Mark Twain: "What is the difference between a taxidermist and a tax collector?" Mark Twain replied, "The taxidermist takes only your skin." I suggest that the Chancellor of the Exchequer has made a good start in gutting as well as skinning British industry—and that is against the interest of my constituents.

Photo of Mr John Cronin Mr John Cronin , Loughborough

The hon. Member for Eastleigh (Mr. Price) and the right hon. Member for Farnham (Mr. Macmillan) made persuasive speeches. The latter produced a mass of figures which could mean almost anything. From the common sense point of view, it is obvious that the country is facing a severe economic crisis and it is reasonable that industry should have to carry on additional burden. Industry this year is expecting a corporation tax of 50 per cent. To increase it by a further 2 per cent, is a marginal increase in view of the terrible economic mess in which the Tories left this country. I suggest that there is no case for accepting this amendment.

We must agree that, by and large, the Chancellor's Budget judgment has been very satisfactory as far as one can see into the future, and I will not quarrel with that. But having said something complimentary to my right hon. Friend, I should like to sound a note of warning. It is that I should not like this or any other Government to regard company profitis as an inexhaustible source of revenue.

It has become fashionable in this Committee to declare an interest. The right hon. Member for Farnham declared one. The hon. Member for Eastleigh declared one. My own is a very tenuous one. I am a non-executive director of a company. It gets one morning a week of my time. I have a very modest remuneration and even smaller share in the company.

It will not be in the national interest if there is any further substantial increase in corporation tax. Company profits are either distributed or, in the main, kept for investment in stocks, in new buildings and in plant. Profits which are distributed are subject to a very effective form of progressive taxation. We need not concern ourselves with that. But the part of the profit which is retained has to be used for investment, and obviously the future economy of the country depends very much on how much money is available for investment.

It is essential that companies should have adequate funds for investment and for expansion. If the Chancellor of the Exchequer uses corporation tax more extensively than it is used at present, there will be liquidity crises in many companies.

The Chancellor of the Exchequer is subject to many influences. He has always the problem of raising revenue. Most of the electorate are indifferent to how much corporation tax is charged. They are concerned only with their per- sonal taxation. The Chancellor of the Exchequer also has to placate the trade unions. He has to indicate to them that the social contract is being carried out and that their members are not having to bear an unfair burden of taxation.

The Chancellor of the Exchequer also has to look over his shoulder, to an extent, to some hon. Members who feel that it would be best if most industry were under public control. That may or may not be desirable; it depends on one's political point of view. But I think that most hon. Members agree that inefficient private industry is not a good substitute for the public control of industry. For that reason, it is very important for the Government to ensure that the private sector has adequate funds for investment and for expansion and has no risk of a liquidity crisis.

Whether we like it or not, about two-thirds of industry is in the private sector. The Chancellor of the Exchequer has to co-operate with that private sector industry if we are to achieve satisfactory expansion and emerge from our present unattractive economic situation. This involves co-operation with managing directors, chairmen and the large industrialists whom one hon. Member called "political eunuchs". I do not think that that is the case. Many of them are rather bigoted Conservatives. Nevertheless, it is essential for the Chancellor of the Exchequer to co-operate with them, otherwise we are in very serious trouble.

Last Tuesday, the Chancellor of the Exchequer dined with the Confederation of British Industry and said: I can assure you that the Government has no intention of destroying the private sector or encouraging its decay. It is unfortunate that it should have been necessary to say that. But what my right hon. Friend was saying in so many words was, "I have no intention of cutting the country's economic throat, because we are dependent on the private sector." There is no escaping that as matters are at present.

Industry is carrying some quite severe burdens at present. Some of those burdens have been brought about by the policies of the previous administration, especially the massive increase in inflation, now running at about 18 per cent, a year, the ill-judged and ill-timed attempts at expansion last year and the year before, the three-day week, and the nationalised industries' price increases. These are all very heavy burdens on industry, and additional burdens are price control, short-time working and the shortage of components. I suggest that industry is at present carrying some quite severe burdens and therefore that it is desirable that the additional burden of unduly decreased liquidity should not be thrust upon it.

5.15 p.m.

British industry is in harsh competition with firms overseas to obtain a fair share of the export markets. That will not be obtained successfully if British firms are experiencing liquidity difficulties vis-a-vis foreign firms. I suggest that, although the present rate of corporation tax is probably just and reasonable in the circumstances and would not have any undesirable effect on the economy, my right hon. Friend the Paymaster General should bear in mind that it is not desirable that company profits should always be the place from which increased taxation should be raised.

Company liquidity is all important in expanding industry. It is important to jobs. It is important to our standard of life. So it is very important that the private sector of industry should be assured beyond all doubt that it is having the full co-operation of the Government and is not likely to have to expect a further large increase in corporation tax.

Photo of Mr John Peyton Mr John Peyton , Yeovil

I was fascinated just now to hear the hon. Member for Loughborough (Mr. Cronin) attribute some of our misfortunes to what he described as the previous administration's ill-timed attempts at expansion. It is a classic case of being wise after the event—unless the hon. Gentleman is on the record as expressing different views from those which were held by a large part of industry, the entire trade union movement and, so far as I know, every right hon. and hon. Member on both sides of the Committee except some who were very gloomy——

Photo of Mr John Cronin Mr John Cronin , Loughborough

I should have thought that it was obvious to a large number of people, including myself, that a general expansion of the kind attempted by the right hon. Gentleman's party would inevitably cause balance of payments difficulties and that the only satisfactory form of expansion was an export-led expansion, which is what we are entering into now.

Photo of Mr John Peyton Mr John Peyton , Yeovil

I accept all that. I merely comment on the fact that the previous administration's policy of expansion, growth and the rest of it, however ill or well judged, had the overwhelming support of all right hon. and hon. Members and that, so far as I know, the hon. Gentleman did not then say, "Let us be careful. Let us restrict this expansion."

Photo of Mr John Cronin Mr John Cronin , Loughborough

Mr. Cronin indicated assent.

Photo of Mr John Peyton Mr John Peyton , Yeovil

I am obliged to the hon. Gentleman for his admission, because I was about to ask to have my attention called to some remark on the record to the contrary.

My hon. Friend the Member for East-leigh (Mr. Price) described himself as at least as much an industrial animal as a political animal. I have some claim to being a political animal. That apart, the only other adjective that I would adopt at the moment is "gloomy". I am a very gloomy and an exceedingly depressed animal when I view our future prospects.

I had no intention of taking part in this debate until I heard the very interesting speech of the hon. and learned Member for Lincoln (Mr. Taverne). He speaks as a member of that small band of people who have once worked and served inside the extraordinary institution of the Treasury and come out alive— though how much one can add to that "unscathed", I am never quite certain.

The hon. and learned Gentleman made a bold speech, from time to time casting his eye—I hope it is not improper to say that—to the left beyond his right hon. Friend the Paymaster-General as if looking for confirmation from others that he was on reasonably firm and not too dangerous ground. He advocated a suggestion that has been made before—the setting up of a permanent committee on tax. He stated that one reason was that many important questions on tax had not been answered. Judging by results, almost any system other than our present one is to be preferred. The shortcomings in our procedures for discussing tax and fiscal matters are so obvious that we would be hard put to it to resist any sensible suggestion. I accept the hon. and learned Gentleman's suggestion as a preferred alternative.

The hon. and learned Gentleman, in a moment of great boldness, questioned how far Treasury assumptions are borne out. I should like to ask with great depression and gloom, how far have Treasury assumptions ever been right? How far have any of the forecasts made by successive Governments since the war been borne out and, if they have been wrong, why? We must face that fact very clearly.

Mr. Taveme:

Does the right hon. Gentleman recognise that, unfortunately, it is part of the science of economics to be better at telling people tomorrow why what one predicted yesterday did not come true today?

Photo of Mr John Peyton Mr John Peyton , Yeovil

That is a splendid question. If I may have a look at it in writing afterwards, I will willingly give the hon. and learned Gentleman an answer. Sir J. Hall: Perhaps I can help my right hon. Friend. I think that the hon. and learned Member for Lincoln was saying that if all economists were laid on the ground they would stretch in all directions. Mr. Peyton: I wish that I could do that. It would cause me no distress to see some of these sages on a rack which might cause them to express some note of regret, or even apology, for the many occasions on which they have been wrong.

The hon. and learned Member for Lincoln warned us against the dangers of being dogmatic about the effects of raising corporation tax. I support what was said by my right hon. Friend the Member for Farnham (Mr. Macmillan) in an interesting, pungent and well-argued speech on this subject. Socialist Governments are always so confident of the fact that they are planners—at least, planners by intention—but in practice they are guided more often by the wastrel's maxim, "Let tomorrow look after itself."

I welcome this short debate, because it gives the Paymaster-General an opportunity to stand at the Dispatch Box and, tempted as he may be to pick up debating points or mistakes that have been made, to tell us what he, his Department and the Government think are the likely prospects for investment in British industry.

Attempts that have been made to stimulate investment in British industry since the war have not been all that successful. I cannot resist the temptation yet again to refer to the fact that where investment is most closely controlled and influenced by the Government the effect is baleful. I refer, of course, to the nationalised industries.

Recently, Mr. Richard Marsh attacked the policies of successive Governments on railway investment. I found myself in entire agreement with everything that he said, though it might have been fair and friendly—[Interruption.] Before the hon. Member for Gateshead, West (Mr. Horam) laughs again, perhaps he will allow me to finish the sentence. It might have been fair and friendly if he had gone on to say that I had produced some proposals which, if any Government cared to adopt and pass them through the House, would make a far better blueprint for railway investment than anything we have yet had.

I go back to my original question: what does the right hon. Gentleman think are the prospects for securing anything like adequate investment in British industry? How are those prospects affected by this increase in corporation tax which, unlike the hon. Member for Loughborough, I deplore.

[Sir MYER GALPERN in the Chair]

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

My hon. and learned Friend the Member for Lincoln (Mr. Taverne) said that on this amendment we were discussing the economic future of the country. I should point out that we are debating whether corporation tax should go up from 50 per cent, to 52 per cent. My hon. and learned Friend evidently thought that this would be a wide-ranging debate. I thought that it would be a narrow debate on this limited question whether the rate of corporation tax should go up from 50 per cent, to 52 per cent.

Admittedly it is an increase of 2 per cent. It compares with an increase of 3 per cent, in income tax. I should not have thought that it was the kind of increase that would bring howls from British industry, some of which we have heard, in reaction to the Government's measures.

My hon. and learned Friend said that we did not know the full effect of corporation tax and that there was a need to study its effect very carefully, particularly on prices. I agree that we need to study the effect of corporation tax increases on the British economy and on industry.

We are discussing a limited step to be taken by my right hon. Friend the Chancellor of the Exchequer in a serious economic situation. It should be regarded as a limited step. Admittedly, it is an increase, but it is not the kind of increase that can be argued as having damaging implications for British industry.

The right hon. Member for Yeovil (Mr. Peyton) wanted to know what estimate we have made of the prospects for investment during the coming year. Estimates are included in the Financial Statement and Budget Report. I am sure that the right hon. Gentleman will have studied them very carefully.

Photo of Mr John Peyton Mr John Peyton , Yeovil

I did not ask what the right hon. Gentleman inferred. I asked what estimate the Government had made of investment prospects for British industry. In case it is news to a Treasury Minister, by "prospects" I mean something well in excess of one year.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

I shall discuss later the likely effect, as I see it, of the increase in corporation tax on British investment and the prospects for British industry.

The right hon. Gentleman admitted, or stated—I will not use the word "admitted"—that measures taken by successive Governments since the war have not had the effect of raising the level of investment by British industry in the way that many of us would have wished in order to raise the growth rate of our economy.

5.30 p.m.

I shall certainly not suggest that the effect of this increase in corporation tax will have either the negative effect which Conservative hon. Members suggest or, indeed, any positive effect in itself. Very much wider influences have to be brought to bear on British industry before we have any hope of achieving an increase in manufacturing investment such as our economy requires. I merely point out that there happens to be an estimate in respect of this year in the Financial Statement and Budget Report.

The right hon. Gentleman should not blame us too much for being planners by intention. After all, the previous Government were planners by U-turn. They also found that it was necessary in making decisions about the British economy to use foresight, limited though it is in these matters. No one claims to be able to make forecasts on these matters with a very high degree of reliability, but how one manages the economy without attempting to assess the likely effects of one's actions, I do not know.

Behind this debate there has been an attempt to discuss the present Government's attitude to the private sector of British industry. Indeed, that is, apparently, the only reason for tabling the amendment. The Opposition will not vote upon the amendment. I think that in their hearts they know that an increase from 50 per cent, to 52 per cent, cannot have the exaggerated effects which in their speeches they have tended to prophesy. What they want to discuss or, in some cases, to make unfortunate allegations about, is the present Government's attitude to the private sector of British industry.

There can be no possible doubt—and there cannot be any other possible attitude for a British Government—that in a mixed economy the success of that economy depends upon the success of the private sector of industry to a very large extent. The hon. Member for Easitleigh (Mr. Price) suggested that we thought that British industry was a politically suitable victim. But it is in our interests, as a Government, and as a country, that the private sector of industry should be successful. If we thought that this increase in corporation tax would have damaging effects, we would not make it.

My hon. Friend the Member for Loughborough (Mr. Cronin) warned us that we should not regard British industry as an inexhaustible source of revenue. I agree that we cannot do that. British industry has not merely to survive. It has, I hope, to flourish, and to flourish rather more successfully than it has in the past. But I emphasise that what we are discussing is an increase in corporation tax from what was expected to be 50 per cent, to a figure of 52 per cent.

What troubles me in the whole debate, in the House and outside, is the way in which British industry tends to react to measures honestly taken by the present Government in attempting to improve the economic situation of this country, and the language that is used—as though the Government had a deliberate intent to damage British industry. This sort of language casts a more serious reflection on industry that it can possibly cast on the Government. British industry must realise, after all, that our record of industrial development since the war is not magnificent. I, for one, am perfectly prepared to accept that there is a very large degree of responsibility upon the British Government for that, because of stop-go policies which have, perhaps, exaggerated the cycle of our economic development. I do not deny that and have frequently stated it.

Nevertheless, it is not for industry to deny that it, too, hag some responsibility in this situation. Industry should be more reasonably looking at the merits and reasons for the policies which the Government are adopting, rather than using the sort of language which we have so frequently read recently in the Press and in statements by leaders of British industry. There are always too many excuses found in actions of Government for faults that would be better corrected by industry in attending to its own industrial development.

Photo of Mr Cecil Parkinson Mr Cecil Parkinson , Hertfordshire South

When the right hon. Gentleman talks about the attitude of British industry to his Government, bearing in mind the remarks of some of his colleagues about company profitability just before the General Election—the remarks, for instance, of the right hon. Member for Bristol, South-East (Mr. Benn), the Secretary of State for Industry—the deliberate imposition of the increase in ACT and this measure, does he think that a few honeyed words from the right hon. Member for Manchester, Central (Mr. Lever) and from himself should be more than enough to counterbalance the actions which have been proposed and promised?

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

I do not expect anyone to be at all influenced by my honeyed words. I notice that they are a great deal more influenced by the honeyed words of my right hon. Friend the Member for Manchester, Central (Mr. Lever). What I am discussing are the actions of Government. I emphasise that we are discussing an increase in corporation tax from an expected 50 per cent, to 52 per cent. We shall be discussing later the ACT supplement. But as an immediate response to the hon. Gentleman, I say that that supplement is merely an advance payment of corporation tax and that my information is that corporation tax, or tax on profits, is paid on average later in this country than it is in many foreign countries. Therefore, perhaps the complaints even on that score, which we shall discuss later, are less justified than the hon. Gentleman suggests.

Photo of Mr Michael Alison Mr Michael Alison , Barkston Ash

The Paymaster-General lays great stress on the modest factor of the extra 2 per cent, that he is raising by the increase from 50 per cent, to 52 per cent. But will he bear in mind that the 50 per cent, corporation tax in the last financial year produced£2,245 million, and in the current financial year is expected to yield£3,265 million? Will he, therefore, apply to himself the discipline of associating an extra£1,000 million yield when he talks about the extra 2 per cent.?

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

If the hon. Gentleman wants to know the figures of the financial effect of this increase from the expected 50 per cent, to 52 per cent., I remind him that they were given by his right hon. Friend the Member for Farnham (Mr. Macmillan). In a full year this represents£130 million additional payment. According to our estimate, in the current financial year it represents£65 million additional payment. That is against a corporation tax yield expected of about£3,200 million. This again emphasises the nature of the amendment. I repeat that to pin on this fact the sort of arguments which hon. Members have attempted to pin on it is unreasonable, to say the least.

The hon. Member for Eastleigh referred to the various burdens imposed by the Government in addition to this— corporation tax increase—the ACT supplement, nationalised industry price increases, national insurance, and price control. But the price code was arranged, in their wisdom, by Conservative hon. Members. There is the factor of allowable costs. These are allowable costs, and there are here allowable costs. The basic question that we have to decide is whether we have a prices policy. If we are to have such a policy there will have to be controls over the prices of manufacturing industry, and that policy will have to be conducted sensibly. We shall have to take account of the effect of a prices policy on investment prospects —but a prices policy, after all, there has to be.

The hon. Member for Eastleigh also told us that what we were discussing was the problem of inflation, and the Budget in the context of that problem. There is a later amendment on the Order Paper, tabled by the Liberal Party, about the importance of inflation accounting. I think that there are new clauses on that subject. No doubt we shall come to that question in due course. The hon. Gentleman discussed companies' fiscal drag and suggested that under conditions of price control companies did not benefit from fiscal drag as much as, perhaps, they once did. I thought that that was his argument. But there is one aspect of fiscal drag from which companies do benefit—if that is what one wishes to call it—and that is the considerable delay that we have in the payment of corporation tax after the profits are earned. That is something which certainly goes to the benefit of industry.

The main point here, and I emphasise it in the context of the hon. Gentleman's remark, is that the Budget and the Finance Bill are not in themselves inflationary. There has been great discussion about the influences which the Budget is likely to have on investment. This has been the experience of successive Governments since the war. It is inevitable in the economy that we run that whereas Governments may to some extent be able to influence investment, the decisions about investment are made by the private sector in respect of the private sector. The question is, how can we influence investment decisions favourably?

The right hon. Member for Yeovil was discussing whether we should have had this great burst of growth last year, and he asked how many hon. Members were on the record as having been rather sceptical about the burst for growth and the going into deficit, with the unfortunate prospect that has so often occurred in the past when going into deficit—the necessity to bring the economy to too harsh a halt. If the right hon. Gentleman wants the names which were recorded on that subject, I give him my own name. A much more sensible strategy for the country's economy is, and always has been, a steady sustainable rate of growth, rather than the attempt to speed up the rate of growth beyond the country's current capacity, which the last Government undertook—not, as they said, because they had thought it out and found it to be a reasonable course of action but because they were in a state of panic and saw the danger of there being 1 million people unemployed in the winter of 1971. It was in panic that the previous Government changed their course too fast and too hard and went into deficit. This is now a major part of the present situation——

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

It is very important that the right hon. Gentleman should not perpetuate that myth, because there is a danger that it will distort our judgment of the present situation. Clearly there has been a major change in oil prices and other short-run but important factors, but one misjudges the situation if one does not consider and analyse the position as it was when those events to which the right hon. Gentleman referred occurred. I suggest to the right hon. Gentleman that if he analyses the figures he will find that they will not bear out the view he has just expressed. If he thinks about it he will recognise that it is not in the interests of the country, or of the present Government, that that view should be expressed. No doubt we can discuss the matter on another occasion, perhaps during the debate on the regulator, but the point should be corrected at this stage.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

The hon. Gentleman has now put on record the official Conservative interpretation of those events. I do not agree with that interpretation. I have thought about the matter and I think that my interpretation is much nearer the truth than that presented by the hon. Gentleman.

Photo of Mr John Nott Mr John Nott , St Ives

I apologise for the fact that I was not present earlier for the debate, but if this burst for growth was such a major failure of the previous Conservative administration, why were the circumstances such that the Chancellor of the Exchequer felt that a neutral Budget was required?

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

The hon. Gentleman surely knows the whole history of the previous Government. He was in the Treasury and he knows that certain steps were taken regarding public expenditure in December which had an effect on the rate of economic growth. The Government have had to take into account all the steps then taken.

The principal prospect for the development of the British economy lies in a steady rate of growth, export led as far as possible, and fortunately we now have that prospect. Export demand is now expected to rise strongly for some of our goods because of the overseas competitiveness for manufactured products. This has greatly increased since sterling was floated in June 1972, by 14 to 15 per cent.

The availability of these export opportunities, given the fact that British manufactured goods are now highly competitive, provides the opportunity for us to improve on our rate of growth in the future. But the decision which is to be influenced will be made by British industry and it is for British industry to take account of this new situation, to invest for exports, and to take account of the fact that the economy is, increasingly I hope, export oriented and that a higher proportion of investment must be made for supplying exports which are now highly competitive.

5.45 p.m.

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

I apologise for intervening again, but this point is so important that we should get it right. What the right hon. Gentleman has just said reflects the underlying forces which were at work at the earlier stages, indeed some months ago. But it is important that he should not give the wrong impression on the situation which has arisen, which he described as stop. He must analyse the fact that it is due to the two sets of factors which I have mentioned and that it is not a stop in the traditional sense. If he expresses the view that it is a stop in the traditional sense, he will encourage industry in the view that we are in a perpetual state of stop-go. I do not believe that this is so or that the right hon. Gentleman believes that it is so. It is important that we should not encourage industry in that view.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

If the hon. Gentleman is trying to claim that the steps taken by his right hon. Friend the then Chancellor of the Exchequer last December were voluntary or planned, or were a U-turn by intention, he is deceiving himself and the Committee.

We have not changed investment incentives. We are hoping that the economy will grow on the targets which we have included in the Red Book. We indicate the availability of these export opportunities. It is the market forces, plus price control, which make it more profitable to export at the moment— about which industrialists also complain —and these in my judgment represent the best prospects for sustaining and increasing investment at present.

Photo of Mr Norman Lamont Mr Norman Lamont , Kingston upon Thames

The right hon. Gentleman referred rather coyly to the forecasts for investment in the Red Book, but should he not tell the Committee that the forecasts are for a decline of 2 per cent, in investment?

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

Yes, but they are for an increase in manufacturing industry. I would have gone on to deal with the matter in a little further detail and given figures, but when I mentioned figures to the right hon. Member for Yeovil he immediately rose and rebuked me and said that was not the relevant point, so I abandoned the matter immediately.

Photo of Mr John Peyton Mr John Peyton , Yeovil

The right hon. Gentleman must not mislead the Committee and must not misquote me. I was not seeking to inhibit him from repeating what is in his book. All I asked—I suspect that he will not give an answer—was what was the present Government's view of the investment prospects in the years ahead for our country.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

I must leave it to the right hon. Gentleman to sort out with his hon. Friend whether I should read out what is in my book.

I turn now to the question of company liquidity. There was a discussion about Government statements on company liquidity, and figures were given as to the net position compared with the figures which the Government had quoted after taking account of company indebtedness. The£14,000 million referred to as the current company indebtedness, which is to be set off against liquidity figures stated by the Government, is not expected to be called in. I would not expect any Member of the Opposition to suggest that this money would be called in. We think that the figure of£10,000 million fairly represents the position. At any rate, we have no evidence that there is any serious liquidity problem. If there were to be such a problem, that would obviously be a factor of which we should have to take account.

My right hon. Friend the Chancellor has indicated to the banks that he would wish them to assist where necessary with investment and stock building. We are not at present aware that there are serious dangers in that situation. There may be dangers for particular companies, and in those cases we shall have to take account of them, and we hope that the banks will also take account of them.

Photo of Sir David Price Sir David Price , Eastleigh

Do I take that as an undertaking that if industry can provide any evidence over the latter part of the summer, which is about the time scale in which it is likely to happen, of being caught between inflation on the cost side and price control, so that companies have a liquidity problem, his Department is open to receive representations?

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

We would certainly want to know where there were such problems, if companies could not be helped in the ordinary ways from the various market sources.

As to the effect on investment, I emphasise that we have left unaltered the investment incentives handed to us by the previous Government. I think particularly of the 100 per cent, depreciation which should be, given the availability of demand, a great encouragement to investment. By international standards it is a considerable encouragement.

I know that certain companies are making representations that the investment grant system should be restored. We do not want to mess around again with that system. We think it much better that there should be stability in the matter, that companies should be able to rely on the position. Nevertheless, with that belief goes the hope that they will take advantage of the investment incentives, and 100 per cent, depreciation represents a considerable investment incentive.

There are also the regional development grants, and there is the decision to continue the regional employment premium. The reduction in interest rates which we have brought about should have a beneficial effect on manufacturing investment. As to price control, we have given an assurance that when the code is reviewed we shall have in mind the likely effect on investment of any decisions. Finally, we have announced that if we find that the Budget judgment was in any serious way incorrect there will be a second Budget this year, when there will be an opportunity to correct the direction if that should be necessary.

Photo of Mr Maurice Macmillan Mr Maurice Macmillan , Farnham

I apologise for being absent at the beginning of the right hon. Gentleman's speech, but I do not believe that he has dealt with the question of the sector flow of funds. If the flow of funds to the public and overseas sectors together is as the Government say it is, that will produce a flow of funds away from the third sector of the economy, the private sector, which could result in a deficit of£1,300 million to£1,500 million for industrial and commercial companies.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

According to our information, there is much liquidity in the possession of companies which is not being used for manufacturing investment. We would expect companies to take a rather careful view of their stock-building plans. I think that it is agreed that stocks are relatively rather high in this country. Nevertheless, if companies have liquidity difficulties we would expect them to go to the banks, and expect the banks to be influenced by my right hon. Friend's request that, wherever necessary, they should take account of companies' investment and stock-building requirements.

It seems to me, on the basis of our information from the various reviews, that industry expects to keep busy in the course of the recovery from the three-day week. There is no sign so far of any cash flow problems on a wide scale. There is, as the latest trade figures show, a promising improvement in the non-oil deficit. There is a good export performance, with every prospect of a better performance, given the relative competitiveness of British manufacturing industry and the fact that it has been found that the three-day week was less damaging than it was thought to be at the time. That in itself should have had less serious effects on industry's cash flow position, and less serious implications for the investment decisions of manufacturing industry.

In view of the position I have described, we have no doubt that the 52 per cent, corporation tax level can be accepted by British industry without damaging effects. But I emphasise once more that we shall watch the position, and we have an opportunity to review it later in the year. If the course of the economy needs to be corrected at that stage, we shall do so. But I do not believe that there is anything in either our economic position or the proposal we are discussing to dissuade British industry from profitable investment intentions.

Photo of Mr Thomas Boardman Mr Thomas Boardman , Leicester South

The right hon. Gentleman does not appear to have directed his mind to the critical point that investment decisions cannot be turned off and on just because he will review the situation later in the year. Decisions to postpone investment will have been made in the light of the Budget, and will be confirmed or otherwise according to the right hon. Gentleman's reaction to the amendment. It is no good his telling companies, "We shall look again at liquidity later in the year and hope that you will defer making a decision on investment plans until we do so."

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

The hon. Gentleman does not provide evidence that significant investment decisions are being deferred because of the change in the rate of corporation tax from 50 per cent., as expected, to 52 per cent. On the contrary, I read this morning of the decision by ICI since the Budget to increase its investment budget. I have no evidence that there has been any large-scale deferment of investment decisions as a result of the Budget. However, we shall watch the situation, as is sensible, and if the course needs correcting later in the year we shall correct it.

Photo of Mr William Clark Mr William Clark , Croydon South

To put it mildly, the Paymaster-General is being very complacent about companies' liquidity problems. He talks all the time about an increase in the tax from 50 per cent, to 52 per cent., but that is not the whole story, as he knows.

Corporation tax was 40 per cent. My right hon. Friend the Member for Altrincham and Sale (Mr. Barber) increased it to 50 per cent., but the carrot for that increase was the imputation system, whereby a company could distribute its profits and in doing so receive a certain amount of alleviation of tax on its dividend distribution. That was splendid, until the Prices and Incomes Board intervened and we had dividend limitation.

It is complacent of the Paymaster-General to talk about an increase from 50 per cent, to 52 per cent. It is an increase from 40 per cent, to 52 per cent., and we know that dividend distribution can rise by only 5 per cent. This is an extremely important point. It is one of the matters that is affecting investment in industry and industry's liquidity.

6.0 p.m.

From a psychological point of view when there is taxation of over 50 per cent—namely, 50 pence in the pound—there is a tendency for people to say, "All right, we shall incur this cost. After all, the Revenue is paying most of it." That is a matter which we must keep in the back of our minds.

I hope that the right hon. Gentleman will look again at the free depreciation allowance, which he said would be an added incentive to investment. It is an added incentive if it is truly free depreciation. The Chief Secretary will understand the point. If a person invests it is all very well saying that the rate will be 100 per cent, in the first year, but it may be that his profitability in the first year will not be sufficient to write off the depreciation. In that event he must carry forward. If he carries forward he is not allowed to write it off the next year and he is back to the 20 per cent. rate. If it were truly free depreciation for the investing company, the managers of such a company could determine how to write off the 100 per cent. —for example, 50 per cent, in the first year, then 40 per cent, and then 10 per cent. That would help investment.

I urge the right hon. Gentleman not to be complacent and not to put it about that industry is prepared to accept increased corporation tax from 50 per cent, to 52 per cent. The background is that industry has suffered an increase in corporation tax from 40 per cent, and it is not able to take advantage of the imputation system.

Photo of Mr Robert Carr Mr Robert Carr , Sutton Carshalton

On this occasion I do not want to take issue with the Minister about his partial account—indeed, most of my right hon. and hon. Friends would say that it was an inaccurate account of the events of the past few years. However, I may wish to do so on another occasion either on the Floor of the House or in Standing Committee. I think that the right hon. Gentleman should approach the matter with a little more humility and at least admit that there was a great deal of hindsight, to put it at its best, in what he was saying.

I remember being Secretary of State for Employment at the time to which he was referring. He said that my right hon. Friend the Member for Altrincham and Sale (Mr. Barber), who was then Chancellor of the Exchequer, over-reacted to the pressure of rising unemployment. I remember the attitude of the Labour Party when I was Secretary of State for Employment. I remember having to reply to debates month after month when the Labour Party was screaming at the Government to increase expenditure in many directions and to create expansion. Whoever is entitled to say that we over-reacted at that time it is certainly not the Labour Party, which was urging us to react twice as much as we did. That should not be forgotten.

I do not intend to speak for long but I wish to re-emphasise why it is that we have proposed the amendment. It is a fact that it is our driving concern that there should be good investment prospects for British industry. Investment by industry in all our productive resources is the source of our future welfare as a country. Such investment is a source of security for our future level of employment. Unless we invest more effectively, as well as in greater quantity than we have done as a country during the post-war period, we shall not be able to achieve our ambition to improve the compassion, fairness and general standards within our society. That is at the root of our hopes and fears for the future.

I emphasise that our concern, as expressed by the amendment, is about our future prospects. As my right hon. Friends the Members for Yeovil (Mr. Peyton) and Leicester, South (Mr. Board-man) made clear, what is being spent this year by industry in investment results from decisions taken long before this Government took office. Indeed, much of what we spend next year will result from decisions taken long before this Government took office. We are worried about the decisions that will be taken by industry from now onwards. Those decisions will determine the level of investment from 1975 onwards. These are the prospects about which we are concerned.

We are concerned because even in the short run we do not find the information especially encouraging. My hon. Friend the Member for Kingston-upon-Thames (Mr. Lamont) pointed out to the Paymaster-General that his Red Book indicated a fall in investment. The right hon. Gentleman replied "Yes, but not in manufacturing investment." Perhaps I have not read the book carefully enough, but it does not appear on the face of it that the right hon. Gentleman is correct. If we look at Table 4, page 11, we see that as between the second half of this year and the second half of last year the Government are expecting public investment to decline by 4J per cent, and private investment to decline by 2 per cent. Further, they are refusing, unlike their predecessors in successive Governments, to give any forecast for the first half of 1975 compared with the first half of this year. I have pointed out to the right hon. Gentleman on many occasions since the Budget that the Government's refusal to make such a forecast does not increase our confidence or the confidence of industry and outside observers. As I have said, we are concerned about the prospects and we fear that the Government are being extremely complacent.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

The right hon. Gentleman will agree that on the argument that he has just used the decline in investment is likely to be as a result of the policies pursued by his Government, including the three-day week. As for his reference to the forecast level of investment by manufacturing industry, the reference to that is to be found in paragraph 35 of the Red Book.

Photo of Mr Robert Carr Mr Robert Carr , Sutton Carshalton

We can argue further about the cause, but the immediate prospects for expenditure in investment this year are not all that brilliant.

We are concerned about the prospects for expenditure in investment in 1975 onwards. As the Minister has pointed out, the record of investment by British industry has been inadequate. It has been poor compared with that of many other industrial countries. It is common ground that British industry's record at investment is one of the main causes for concern. It is not easy to discover the reasons. There are many reasons, and I doubt whether we know them all. Further, I doubt whether we are sure of the reason for our long-term relatively poor level of investment, and particularly the record of manufacturing industry, compared with that of other countries.

We are not pretending that this is only a matter of tax levels. It is something more profound and deep-seated than that. However, we say that it cannot be denied that the availability of cash for investment is clearly an essential ingredient if we are to maintain, let alone improve, the level of investment over the next year or two. It may be that industry will have the cash but will still not invest it. It is true that if it does not have the cash it will not be able to invest on the level which we believe, and the Government appear to believe, is necessary. We do not think that the Government are matching their hopes and beliefs with the action that is needed to bring them into effect. What we cannot escape is that much more money is now needed by many companies, as was mentioned by my hon. Friend the Member for Eastleigh (Mr. Price), to replace assets.

Therefore, to maintain the level of real investment much more cash in money terms is required, year by year, merely to meet the extra costs of new buildings, higher prices and new machinery. We are in a situation where industry needs more money, not less, merely to maintain the current rate of investment. Now, when the urgent need in industry is for more money for investment, the Government are taking four distinct actions all of which are designed to decrease the amount of money available to industry for investment.

First of all, they are intensifying the squeeze on profit margins. We admitted, by our actions under our counter-inflationary policies when in Government, that when we ask people to refrain from obtaining the biggest pay increases their markets and their bargaining power could command, it is a matter of justice that we should put a restraint on profit margins to make sure that those who fix profit margins cannot get the maximum margins which their power on the markets could demand. This Government not only believe in that, but say that they must do it more severely than we were doing it. As a Government we were under considerable criticism from industry for squeezing too hard, bearing in mind future investment prospects.

Secondly, the Government are to a major extent financing the big increase in pensions by increasing the employers' contribution. Unless that is passed on in prices, and I fear that inevitably some of it will be, it will lessen the cash available to industry. Thirdly, there is the change in the rate of corporation tax, which means that a bigger proportion than was expected from reduced profits will be taken by the Chancellor, again reducing the amount of cash available to industry for investment.

Fourthly, under Clause 10 of the Bill the Government are saying that of this bigger total percentage of tax industry has to pay a larger proportion at an earlier date. That, too, will have a big effect on cash availability in the current year, or for as long as the surcharge on advance corporation tax continues.

It could be—and here we say exactly what we said about personal taxation—that a case could be made out to justify any one of these four elements which could operate to reduce the amount of cash available to industry. But what industry looks at is the effect of all four together. It is the totality of all that the Government have done and are doing that, we feel, carries a real danger of damaging the prospects for investment by affecting adversely the decisions which industry will be taking this year about the investment expenditure on which it feels justified in embarking in 1975 and onwards.

We cannot turn the tap of investment on and off at short notice. What is needed is general confidence now about what is to happen in about a year's time. It is that general confidence which will be crucial in influencing company decisions over the next few months and which, we believe, is being damaged by the totality of the Government's actions in this Budget. We fear that the Government are complacent and are underestimating the danger which the Budget carries with it. As an example of this complacency—and I am sorry that the Chancellor has left the Chamber—I draw attention to the Chancellor's attitude towards the latest CBI industrial trends survey. The survey had just been published at the time of Second Reading and most Members had not perhaps had the opportunity to study it. The Chancellor said: This new confidence"— he had been speaking about what he believed was the growing confidence in industry— is reflected in investment intentions."— [OFFICIAL REPORT, 9th May 1974; Vol. 873, c. 620.] When I got hold of the survey the following morning, this is what I read: The buoyant investment intentions of 1973 are no longer apparent. It was an exact contradiction of what the Chancellor claimed was the sense of the CBI survey about the prospects for investment.

6.15 p.m.

I am sure that the Chancellor did not mean to mislead the House. It can only be that the wish was father to the thought and that his complacency about this is leading him to read into the information coming from industry things which are simply not there. Industry is not confident about its investment prospects. Quite the contrary. The investment confidence, the buoyant investment intentions of 1973 are no longer apparent.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

The buoyant investment intentions of 1973 were knocked rather severely by the three-day week. My right hon. Friend was comparing the April CBI review with the January review. That showed a moderate improvement in confidence.

Photo of Mr Robert Carr Mr Robert Carr , Sutton Carshalton

That is a totally different matter. Even if that was what the Chancellor was trying to say, and I do not believe that was the case, it would be an incredible view for any Chancellor to take. Whatever we may argue about the events at the beginning of this year—and I will not go into that now—if the Chancellor and the Paymaster-General are right in saying that it was the events at the beginning of the year which knocked investment confidence for six then there is all the more reason to build confidence up again. Instead of doing that, he is knocking it further down. The fact is that the buoyant investment intentions of 1973, which certainly received a check because of the events of the winter, are no longer apparent. Far from encouraging them to reappear the Chancellor is causing them to disappear even further.

This is our fear. This is why we have suggested this probing amendment. We wish to sound a warning and say to the Government "We believe you are doing things which will have an effect upon industry which neither you nor the country wants and which, if you do not correct things pretty quickly, will lead to less prosperity and much higher unemployment, which no one wants."

Amendment negatived.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

I beg to move Amendment No. 46, in page 6, line 17, at end add: 'on profits calculated in real terms on the basis of assets valued by reference to the movement of the Retail Price Index since the date of purchase.' We are dealing here with inflation accounting. We have already looked at the problem of indexation during Second Reading and in Committee. I also raised it some months ago in a debate on general economic policy. We dealt with it during a debate on an amendment tabled by Tory back benchers last week. We return to the issue now, but in a very specific form.

What we are debating is a fraud. Yesterday we debated the fraud perpetrated upon small savers. Unfortunately, I was not able to be present because I was attending a meeting of the Public Accounts Committee. My hon. Friend the Member for Colne Valley (Mr. Wainwright) spoke from the Liberal benches on that occasion. Last week we were debating fraud on surtax payers. Now we are debating fraud on companies and shareholders, the fraud inherent in stated company profits. As I have already indicated, it is part of the overall debate on indexation, it is specific, and it seems to me that it is a very important debate in the context of the effect that our present accounting system will have on investment and industrial renewal.

The Government are afraid of accepting the fact of inflation, as I understand from speeches we have had on previous debates on this issue, and any Government are afraid of accepting it. They regard it as a sin. But in my view inflation and the acceptance of inflation is something with which we have to come to terms—and we had better come to terms with it sooner rather than later because to recognise that inflation exists is no more foolish than to recognise in a previous era that German rearmament existed before the war. The parallel is not entirely irrelevant.

Many people then knew that German rearmament was taking place but they did not like what they knew so they invented a cloud cuckoo land to accord with their own wishes. They pretended that German rearmament did not exist—at least, did not exist to an extent which made it necessary for us to do anything about it. The argument went as follows: "I am opposed to rearmament of all kinds. Any facts which lead me to the conclusion that Britain ought to rearm are therefore decidedly unwelcome. Any recognition of the extent to which Germany has rearmed would be a fact which might lead me to conclude that British rearmament was necessary; therefore, I will ignore the fact." So it is with inflation.

None of us likes inflation but few of us are willing to accept the measures necessary to conquer or even to meet it. Therefore, we do not want to know about it and we will not recognise it and the Government will not recognise it. If I may put it in context, on Friday of this week the Government will announce the Retail Price Index for the latest month. It will probably show an increase of 1-7 to 1-9 per cent. In annual rates that is a rate of inflation of between 21 and 23 per cent. That is unparalleled, certainly since the 16th century. In my view it is on the verge of catastrophe and it is the greatest single crisis that this country faces.

Perhaps I may move from the parallel of military dictatorship in pre-war Germany to the present military dictatorship in Brazil—although the example of Brazil is not necessarily relevant to indexation. Brazilian money correction has been quoted in these debates so far, often as an example of how modern economies ought to deal with the prob- lem of hyper-inflation. There is a great deal more to the Brazilian attack on inflation than indexation. There is, for example, the statutory prices and incomes policy enforced by the Brazilian Government. There is the whole question of the floating exchange rate within crawling pegs.

To revert to the specific point that we are discussing, I raised this issue in the debate on the Second Reading of the Finance Bill when I spoke of inflation as creating disunity, as opposed to war which generally united a nation. In facing up to inflation, and in particular advocating indexation, I was endeavouring to remove the disunity factor, the disuniting effect of inflation in our society. Unless we remove that disunity effect we shall not make the united attack on inflation that in my view is necessary.

Specifically turning to company profits —and here I believe growth in the economy generally and profits are very closely linked, whatever the Government may feel—sound investment, by which I mean profitable investment, is linked to profitability. We have therefore to consider what kind of investment is profitable. I am amazed, for instance, at what some company chairmen, in their public pronouncements about their companies' efforts over the past year or so, say when they are endeavouring to attract savings and to encourage their shareholders' morale. They seem to me to be overstating the case at least, if not indulging in a direct fraud. Perhaps they are comparing themselves and the performance of their companies in terms of return on capital with the advertisements which, unfortunately, I have to look at on my way to the House, on the Tube stations day after day—"Mr. 9 per cent." of the National Savings advertisements.

I, and I believe most company chairmen, would regard as totally unacceptable such a rate of return on investment in British industry, but incredibly, many company chairmen seem to think that 15 per cent, is acceptable. In the present inflationary situation it is entirely unacceptable. Why should I invest money in any British company at a rate of 15 per cent, bearing in mind the rate of inflation, which is over 20 per cent., and bearing in mind the net return after tax?

A few major companies in this country are now offering a return of more than 15 per cent, and in my view even that is not enough. What is the position over profits in the present state of accountancy? Of course they look high. They are constantly attacked—at least last year's figures are—as being very high. We see all kinds of very fancy figures. Chairmen of companies are as responsible as anybody else for making these figures appear even more fancy than they are. But they are fooling us—and one often feels on reading the detailed statements that they seem to fool the company chairmen who make those announcements and—much more important—they also fool the shareholders and the employees.

What is the reality of the present situation in British industry? De Zoete and Bevan, in a survey which has been circulated to many hon. and right hon. Members of the House, have established the position of a hypothetical company started in 1966. They assume a rate of inflation starting at 4 per cent., dropping to 3 per cent, and then rising, in 1974, to 16 per cent. I cannot think there is any hon. or right hon. Member of the House who would deny that rate of inflation in 1974. Certainly, in the financial year 1974-75 it will not be less than 16 per cent. Under existing methods of accounting the basic pre-tax earnings of such a company would seem to have quadrupled in this eight-year period. In facts its post-tax earnings calculated in real terms have fallen and show no increase at all. This is a nil growth company, in spite of the fact that according to the Exchequer and all the official figures, the earnings of this company have quadrupled over the period.

The NEDO Report which was produced on 126 engineering companies' accounts between 1965 and 1971 showed that these accounts demonstrated that these 126 companies ploughed back over£124 million of their profits. Splendid!A marvellous rate of investment!In fact, in real terms they ploughed back only£10 million—and that is not just a recipe for stagnation, it is walking backwards for Christmas with a vengeance. Phillips and Drew, in an investigation of 64 engineering companies, showed that the methods of inflation-accounting proposed by the professional accountants would produce real profits only one half those actually stated in 1972.

6.30 p.m.

Perhaps I could best describe what the amendment seeks to do by a simple example from the Economist. It will have to be a simple example to enable people outside the Committee, if not inside, fully to understand the point, because accountancy has often wrapped itself up in a mystique of its own creation. All professional bodies tend to indulge in that. The example appeared on 27th April. It concerned a wine merchant who bought 1,000 bottles of wine for£1 a bottle and sold them for£2 a bottle. That foolish wine merchant thought that he had made£1,000—of course, excluding other costs for the moment. Previous experience would persuade him that he had made£1,000 profit and he could then take that money out of the business and happily depart to Majorca to spend it. However, if, in the next financial year, replacement of those 1,000 bottles was to cost him£1,300, he would need another£300 of working capital. I suppose he could go to the market, but the prudent wine merchant would surely set aside£300 of additional working capital from the profit he made this year and declare only a profit of£700. Speaking not as an accountant it would seem to me that£700 was the real profit, and£1,000 was the mystical and monetary illusion.

This has been happening on a national level. In 1973, for instance, British companies made record profits after tax and interest at£8-7 billion. That is a lot of money and represents an enormous increase on the previous year. It is a scandalous amount according to some Left-wing commentators. The money spent on stocks rose fivefold to£2-6 billion and of course that increase has not been taken into account in the calculation of the total profits of those companies. I believe that stocks should be revalued in terms of the change in the retail price index over the year. It is nonsense to leave stocks in the book either at the rate at which they were bought, or, worse still, at a written-down rate, when they will cost between 20 per cent, and 30 per cent, more to replace. I go further than that, however. In my view net current assets should also be revalued to take account of the change——

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

I wonder why, if the hon. Member thinks that a relevant factor for stocks is the replacement cost, he suggests in his amendment that the measure should be the retail price index.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

I shall deal with the retail price index in a moment because it is an important factor and is crucial to the debate which is now raging as a result of the report of the Committee under Mr. Sandilands.

Current net assets should be revalued to take account of the change in the retail price index. The impact of inflation on those assets should be deducted from taxable profits. What effect would that have? There are all sorts of consequences for Government revenue, and I leave the Government to deal with that. They may say that it would result in a diminution of revenue, or they might decide that it would even account for a dramatic increase. There would be a marked redistribution as between companies which have to pay a large amount of tax and those which pay comparatively little—a substantial redistribution of the tax burden as between different sectors of industry.

Perhaps I may quote again from de Zoete and Bevan: The current basis of taxation weighs unfairly upon manufacturing industry and this bias becomes greater the higher the rate of inflation. In the interests of fairness it is necessary to alter the basis of assessing taxation in order to allow for the fall in purchasing power of money even though this means the taxation of unrealised profits of companies holding large property assets. I do not suppose that would be desperately resented by the Government.

Photo of Mr Jock Bruce-Gardyne Mr Jock Bruce-Gardyne , Angus South

It depends on what sort of property assets they were.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

Of course it does. Not all property assets are taxable or regarded by the Government as desirable to be taxed. Philips and Drew have drawn up, in amplification of this general point by de Zoete and Bevan, a table showing how the various company sectors would fare if inflation accounting were in force. It shows that the Chancellor would reap an enormous windfall from property. He would not reap much from motors and distributors, or electricals. In other words, manufacturing industry would show very much reduced taxable profits on this basis. Property, entertainment and breweries would show a substantial increase in their taxable profits. According to Philips and Drew, in the period covered property would have shown an increase of 310 per cent, in taxable profits, whereas motors and distributors would have shown a reduction in their taxable profits of 60 per cent., electricals 50 per cent., engineering and general 50 per cent., and so on. That table merely demonstrates the general truth of de Zoete and Bevan's observations.

On 8th April the Financial Times, in what I thought was a wise leader, stated that inflation accounting ought to appeal to the present Government which wants to encourage production and discourage what it believes to be financial spivvery. I want to encourage production and discourage what I believe to be financial spivvery, and therefore in this case the Government and I are at one and I hope that they will therefore be prepared to accept the amendment.

I do not want to enter into the details of the argument which the Paymaster-General put to me. In assessing how inflation accounting should be operated, whether by simple application of the retail price index or by the replacement cost of particular products and stocks, the simplest formula is the one to go for. Therefore, I see no reason why we should not simply have a coefficient of inflation worked out, as in Brazil, on the basis of the retail price index, though in this country it could cover the whole of the United Kingdom. In Brazil it is possible only to deal with the facts for operating the system in one State.

We should forget all the complications and simply revalue every aspect of company accountancy according to the effect of the retail price index, certainly on stocks and assets. I know that any Government would have reservations about general indexation. Governments would regard that as an admission of impotence in the face of inflation. However, I am a realist and I accept that inflation exists. It must be recognised and faced up to. What is more, I do not regard the present rate of inflation of between 20 per cent, and 23 per cent.—which is what this month's retail price index will show the rate to be on an annual basis—as necessarily the peak. I take the view that there is almost no way in which a democratic Government will be able substantially to reduce it.

I take the view that that rate of inflation is the death knell of democracy, but I also take the view that democracy is almost incapable of facing it, and within the free world—within the western markets—it is inconceivable that a united approach will be made by all Governments, and it would have to be a united approach by all the Governments involved within the near future—by which I mean within the next five years—to bring this problem substantially under control and beat it. Therefore, being realistic, and perhaps even pessimistic, I say that we have to live with this problem, and unless we do our industry will be undermined by the figures which I have quoted.

Indexation is one aspect of the battle against inflation, and I think that inflation accounting on the lines that I have indicated is a simple matter. It would end the distortions within our society. Perhaps I may quote finally from the introduction to the de Zoete and Bevan Report. Dealing with the whole sector of British industry which had been investigated, and with the whole question of British industrial practice, the report says: In particular, this study suggests that the equity earnings of British industry have shown no growth over the last seven years. I believe that the British economic performance has ranged from the disgraceful to the damnable, but if that figure is true —and I see no reason to disbelieve it—it is worse. It leads one to conclude that the British economy is in a steady decline from which it will take far more than the present Government to rescue it.

Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury

I entirely agree with the diagnosis of the hon. Member for Cornwall, North (Mr. Pardoe) of the seriousness of our inflation and of its destructive effects on our society. I should like to deal with two points made by the hon. Gentleman with which I fundamentally disagree before I come to one point with which I entirely agree.

The hon. Gentleman seems to be placing a lot of reliance on the statutory control of prices and incomes. It astonishes me that since we have had a statutory control of prices and incomes the rate of inflation has doubled, if not more than doubled, and how anyone can continue to pin his faith on a Canute-like law to deal with economic affairs which are obviously and clearly out of control bothers me and makes me doubt the hon. Gentleman's conversion to believing that inflation is so serious that it should be tackled at the root—the root being the inflation of the money supply.

The hon. Gentleman seems to cling to the hope that we can blame the foreigners for our domestic inflation, as though we had caught some sort of nasty Asian 'flu that was nothing to do with us. I fear that the reheating mechanism which is causing inflation to take off faster than ever before is caused by our heavy foreign borrowings, which are now mounting and swelling the money supply.

Far from believing that we have reached the peak, turned the corner, or reached the point at which we might stabilise inflation, I believe that it will continue to accelerate in the light of the enormous deficit which the Government are running, coupled with the enormous amount of foreign borrowing, which is on top of the deficit last year and this year. When I hear the Secretary of State for Prices and Consumer Protection talking as though the rise in the price of food was levelling off or flattening out, I wonder how the right hon. Lady can deceive herself so much.

6.45 p.m.

Where I come to complete agreement with the hon. Gentleman is in the substance of what he was trying to say, and I welcome his out-and-out conversion to the feeling that "profit" is no longer a dirty word. Indeed, we have the Chancellor of the Exchequer as well as the Liberal Party and all parties in the Committee now embracing profit not as something synonymous with sin, but something to be encouraged, and I look forward to my Labour and Liberal opponents at the next election, whenever it may be, defending bank profits and the profits of food manufacturers; and urgent higher profits throughout industry, the farming world and every sector of our economy. I look forward to that and will welcome it because the hon. Gentleman is right, in saying that the level of profits is declining, is inadequate for maintaining the necessary reinvestment in plant and machinery and is grossly overstated in the figures that we see before us.

I should like for a few moments to discuss the terms of the amendment, because it must now be common ground that we all need to adopt systems of inflation accounting. The difficult question is what type of system should be adopted, and the hon. Gentleman suggests that assets should be valued in relation to the retail price index. If they go up by more than the index that should be taken into profit, but if they go down in relation to the index that should be knocked off the profit before tax is computed. That is a possible approach to the subject, except that it is impossible to value all assets every year, particularly property and machinery assets. It would seem to me to be a task of superhuman dimensions, particularly if it results in a greater or lesser charge to tax depending on what value is put on which asset.

i do not think that the amendment goes to the root of the problem either, because the root of the problem seems to be basically a question of the replacement of machinery. The heavier the industry, the more expensive its capital equipment, and the longer the gestation period of what it produces, the more severe the problem. Perhaps I should separate those two points.

If one considers the length of time that it takes to produce the goods—the gestation period—if one is selling cigarettes in a shop, one can buy them on a Monday morning and sell them in the afternoon and there is no problem. But if a firm is building a ship, it may be two years from order to delivery, and during that period the firm's profit is destroyed by a high rate of inflation because it cannot curtail its costs, and if it were to tender to allow for high rates of inflation it would not get the job. The firm starts in a fundamentally unprofitable situation in tendering for contracts such as that.

At the same time, however, the firm has to replace its assets. Those assets are expensive, and the question of inflation accounting becomes extremely important. I have heard it said that a shipyard should be replaced every seven years under modern technology, but to replace docks, quays, sheds, machinery, and so on, would cost twice as much at the end of the seven-year period. It seems to me that that type of industry is hit twice by inflation, but the only part of the problem that we can deal with in the amendment is the firm which has to replace expensive machinery which costs far more the second time that it buys the machinery than it did the first time.

In order to achieve inflation accounting we must consider a system based on depreciation. We should link the amount which can be depreciated to the resale price index. We cannot have a system involving annual valuation, since that would be too burdensome. Some work has been done on these lines, but the best work that I have seen relates to linking depreciation to the resale price index.

We should also quote profits in two ways. They should be quoted as to the actual pounds made in the year concerned and also in terms of the depreciated profits from the year previous and the year before that, so that, although profits may be seen to be growing at 10, 15 or 20 per cent, a year, it is realised that in real terms they are hardly growing at all. This would help to remove one of the most unfortunate effects of our present inflation—that it divides the nation, and sets up bitterness, envy and greed.

When people see these large increases there is conjured up for them the possibility that they are available to the shareholders, who are probably a few people with large yachts cruising in the Mediterranean, a process with which another£300 million obviously helps. Alternatively, people think that if only those profits could be "got at", they would be available for wages for workers in the business.

Of course, neither is true. The profits are for investment, for distribution to shareholders, and half of them—or 52 per cent, now—go to tax. So achieving an understanding of what profits represent and how big they are would help.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

The hon. Gentleman referred to tenders under a system of inflation accounts. Would he intend a company to tender on the basis of its inflation accounts or on the basis of the money costs that it had actually incurred?

Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury

I was perhaps wrong to introduce the point, and the right hon. Gentleman does me a service by allowing me to withdraw it. My point is that many of our heavy industrial concerns are bound to lose money in inflationary times because of the difficulty of supplying long-term tenders when there is inflation. It is those companies which are already in trouble which then get hit, because they cannot depreciate their assets quickly enough without inflation accounting.

Companies like those in the heavy electrical plant industry and in shipbuilding early on get into serious financial trouble and have to be bailed out to a large extent on some occasions by Government. It is obviously absurd to design a system of taxation which causes shipbuilding companies to have serious financial problems and then have to give the money back in grants and subsidies, as has had to be done over the years. It is that double attack that inflation produces on those companies to which I was referring. But of course it is not possible to index tender prices, and I would not suggest that it was.

The obstacle, of course, is partly that we do not agree among ourselves on how inflation accounting should be computed. I am not an accountant either so I would not like to push my view too strongly. But one knows that, at the end of every paper that comes up within Government on this subject, there is a note saying, "The Treasury will not agree, of course, because it will lose a great deal of revenue." This is a blocking mechanism on any action by Government, and it is true. The reason that I did not speak on the last amendment is that, instead of criticising a corporation tax rate of 52 per cent., I would prefer to see higher rates still, if necessary, provided that they hit the companies which were making real profits but fell more lightly on companies which were making only paper profits.

Therefore, if it were necessary, following the introduction of inflation accounting which resulted in a different basis of profit computation for tax purposes and a loss of revenue by the Treasury, I would wear an increase in corporation tax to keep the revenue at its proper level. But if we had inflation accounting, and revenue from corporations dropped dramatically, as I suspect it would, it would prove that we were taxing companies too hard; it would prove that half, or whatever the proportion is, of the money that the Treasury gets in corporation tax is the product of taxing paper profits. We should desist and seek other areas in which to raise the money we need for the Government's expenditure.

But at least we should not blind ourselves to the need to know what is happening and to try to make it possible for industry, whether service or manufacturing, heavy or light, to live with inflation. Inflation brings enough problems without destroying our industry.

Photo of Mr Ian Lloyd Mr Ian Lloyd , Havant and Waterloo

The Committee owes the hon. Member for Cornwall, North (Mr. Pardoe) and Messrs. de Zoete and Bevan a considerable debt of gratitude for having given us the opportunity to discuss this interesting problem. It has the same sort of fascination for political economists—which is probably what we all are in the Committee—as the fusion reactor has for physicists. Both seem to contain at their core something which man seems unable to produce a mechanism effectively to contain. Certainly this subject has profound economic and political implications for our society.

The hon. Member for Cornwall, North made an interesting remark when he said that in his analysis we were dealing with a fraud when we applied the existing fiscal system without taking any account of inflation. I wondered whether the index system proposed—many complex and interesting systems have been proposed to deal with this—does not suggest that we are substituting a recognition of a flaw for a fraud. 1 imagine that what we are proposing on a wider and more significant scale could find its analogy in motor vehicles. If a motor car regularly showed 90 mph on its speedometer when it was in fact doing 45 mph sensible people would say "Get a new speedometer which reflects the reality of the situation". Others might argue that this would be too difficult and that we should change all the speed limits in the country from 45 to 90 mph. Then the illusion outside would match the illusion inside.

There would be a great danger, if we were to move deliberately and openly towards a nation-wide system of reflecting the realities of inflation, that in this way we would be altering all the national speed limits so as to make the illusion outside match the illusion inside. There are some instances in which this is tempting, in many senses of the word, but in a State like ours there are so many areas in which the financial limits are directly controlled by the State that, even if one could accept this argument and apply it to the fiscal system, I wonder whether this would set an example which would have to be widely followed, and whether one would then have to say that all pensions, for example, must be immediately adjusted in relation to some form of indexation. After pensions, one would move to the salaries of civil servants, and there would be no reason for not doing so.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

The hon. Gentleman might care to look at the Members' Pension Fund. He might then change his mind about whether we need a general indexation of pension funds. If ever there was a fraud perpetrated on 630 people in this country it is the Members' Pension Fund in the present inflationary situation.

7.0 p.m.

Photo of Mr Ian Lloyd Mr Ian Lloyd , Havant and Waterloo

I entirely accept that qualification, and it makes my point. The more one looks into it the more one discovers fraud or flaw, whichever analogy one may care to choose, running right through the system.

Are we to attempt to devise an enormous legislative framework which will empower the House of Commons or the executive to deal with the symptoms en masse? That is the only way to do it. I have suggested before that, in a sense, this is a confession of defeat on the part of central Government, and that is what the hon. Member for Cornwall, North said at the end of his speech.

The practical problem of introducing indexation right across a complex modern economy is so vast that we should not underrate it. On that ground I take issue with my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) —not on his analysis of the need or desire for a more sensible recognition of the situation

. Hon. Members may know that there is an unfortunate psychological condition known as hypomania. I wonder whether there is not a sense of national hypo-mania surrounding the present financial situation. The hypomaniac will go into the high street and spend£1,000 which he does not have in his pocket without realising that he has not the resources to back his desires. When he is in an extreme hypomaniac condition the lack of resources presents no difficulty to him. We may possibly all suffer on a small scale from hypomania. I mean by that that every State organisation, private company, organisation or private individual, faced with a limitation of resources, ignores that limitation and says "I will spend 5 per cent. What does it matter?".

Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury

Is my hon. Friend talking about the present Government, the previous Government, or Governments before that?

Photo of Mr Ian Lloyd Mr Ian Lloyd , Havant and Waterloo

My hon. Friend makes the point I was about to make. He suggested earlier that placing one's confidence in State control of incomes and prices does not provide the answer, and he went on to say that the profound cause is the money supply. If one looks at the record of the attempts to deal with these problems by the vast apparatus of bureaucratic State control one sees total failure. The United States went right through phase 1, phase 4 to phase zero and came out at the other end. We have had phases 1, 2 and 3 and we are out at the other end. We both still have inflation.

The hon. Member for Cornwall, North begged the question whether inflation can be controlled by democracies. That is a question which the House should ask and consider seriously. The only qualification I make is that there is not much evidence that the totalitarian States are much better at it. Therefore, a proposal to give democratic Governments for 18 months or two years Draconian powers to intervene in the economic system would not necessarily give us the answer to our problem. We do not want to go too far into the philosophical question of the relationship between particular types of Government and the power which the modern State has to control inflation because we could talk about that all night and I do not think that the Committee would wish to do so.

[Mr. OSCAR MURTON in the Chair]

Photo of Sir John Cope Sir John Cope , Gloucestershire South

This debate is of considerable importance and interest. It is being carried on in penny numbers. We debated the subject in Committee on Thursday night and it has come up again tonight in the context of corporation tax. Potentially, the amendment is much more expensive from the Government's point of view than was the previous amendment, which would have altered the basic rate of corporation tax from 52 per cent, to 50 per cent.

I do not know how expensive the amendment would prove to be—the Paymaster General may be able to help us on that—but we can get an idea by looking at the difference between the outturn of corporation tax last year and the estimate of what it would have been this year if no other changes had been made. The expected increase in the take of corporation tax is£600 million, which is a great deal more than the£130 million which the previous amendment would have cost in a full year. That is a measure of the extent of the fraud, if it is a fraud.

Inflation is not the only reason for the change between last year's outturn and the estimates for this year, but it is a large part of it. We should not take too literally the figures which are provided, because they are not usually accurate. Last year the estimate of the outturn of corporation tax was wrong by about£200 million—10 per cent. It was wrong in the right direction from the Government's point of view because it came out higher than was expected. I suspect that inflation may have had a good deal to do with that.

My main argument concerns whether or not the retail price index should be used across the board. I entirely agree with the hon. Member for Cornwall, North (Mr. Pardoe) that we do not want to get ourselves into too complicated a system—the simpler the system, the better. At the same time, it is no good to say, as the amendment does, that assets—by implication, all assets and, presumably, liabilities as well—should be valued by reference to the movement of the retail price index. The retail price index has not much to do with the way in which property prices move in a particular year or over considerable periods. The application of the retail price index to property figures would not help. That goes, too, for many other items, but property is perhaps the most important example.

It would be nonsense to apply the retail price index to cash assets or to cash value, such as creditors, debtors and so on——

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

If in any year the property index goes up faster than the retail price index it means that property is in shorter supply than all the items categorised in the retail price index. In that case, should not we at that point, through our fiscal system, encourage the provision of more property?

Photo of Sir John Cope Sir John Cope , Gloucestershire South

That may be so, but it is rather a peculiar way of doing it. It brings another set of flaws into the tax system which may have the desirable effect which the hon. Gentleman wants but is not the right way to make market forces move.

Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury

Is my hon. Friend aware that we already have a property tax called rates that is levied annually on all property? It has not proved to be a popular tax among the electorate, especially when it gets high. It is probably the least electorally popular of the various alternatives before us.

Photo of Sir John Cope Sir John Cope , Gloucestershire South

I agree. It is a matter of great regret that when we debated the matter, the Liberals were not present. But surely in talking about the assessment of corporation tax, we must look at property, for it is one of the most important reasons why inflation accounting profits differ from historic cost profits.

My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) spoke about the replacement of machines as one of the crucial factors in terms of inflation accounting. I wish to point out that the replacement of stock is equally important.

Several hon. Members have referred to the tax system as at present based as a fraud, or have used words to that effect. I have on a previous occasion referred to the honesty of Chancellors of the Exchequer. I was somewhat put down by the Chief Secretary to the Treasury, who said that he was not sure whether it would be more honest to index the reliefs and rates and then to increase those rates to obtain the same yield. I believe that it would be more honest to act in that way. The analogy about speed limits and speedometers was an accurate one. I think we tend to fool ourselves if we suppose that it does not matter whether we alter either of these things. If we index profits and increase the rates of corporation tax to raise the same amount of revenue, people will have a clearer idea of how much tax we are raising on those profits, and from whom. We should get a better idea whether this is acceptable in economic terms, and also whether it is acceptable to the public.

Photo of Sir John Hall Sir John Hall , Wycombe

My hon. Friend the Member for Gloucestershire, South (Mr. Cope) said that this was an important debate. My hon. Friend is one of the signatories to new Clause 9, which calls for a provision on the lines required in this amendment by the hon. Member for Cornwall, North (Mr. Pardoe), although it refers mainly to the proposals made by the chartered accountants. I agree that this is a most important debate, and it is a great pity that there are not more hon. Members present to discuss this topic. Because of its far-reaching implications, this is one of the most important debates in the Committee stage.

The hon. Member for Cornwall, North. in an interesting speech, said that the situation was not unlike that which faced this country in the post-war years when we were considering the effects of German rearmament. Indeed, that is an exact parallel. I suggest that rapid and increasing inflation is as destructive as and more desperate even than a war. It certainly is productive of national disunity, whereas when a nation faces an outside threat it tends to create unity rather than disunity.

The hon. Gentleman referred to the little "Neddy" Report on the mechanical engineering industry in 1971. He quoted some of the profit figures which came from that survey, and perhaps I could quote some examples from that report to emphasise the point. The report pointed out that profits over the five years covered by the review grew, not by 57 per cent., but by only 13 per cent.—in other words, by less than 3 per cent, a year. The survey also pointed out that in respect of taxable profit instead of a figure of 41 per cent, going in tax in 1971, the figure was not 41 per cent, but 53 per cent. Therefore, a large number of firms—and the survey covered 126 of them—were left with a false impression as to the nature of profit, the amount put into reserve and the true burden of taxation upon them.

7.15 p.m.

We have heard a great deal in recent years about inflation accounting. This was stimulated at first by the Institute of Chartered Accountants, which published a pamphlet entitled, "Accounting for Changes in the Purchasing Power of Money". If the recommendations in that pamphlet were taken into account, the effect would be to require quoted companies to publish, within the next two years, supplementary accounts showing the impact of inflation on profits and assets. This would be an illuminating exercise.

When the Institute of Chartered Accountants first produced the report— the committee responsible for the document was the Accounting Standards Steering Committee—my impression was that it created a certain amount of concern among members of the Treasury. I believe that it was for that reason that during the Conservative Government my right hon. Friend the Member for Worcester (Mr. Walker) decided to set up a Government Committee to consider again the implications of inflation accounting and how it could be implemented.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

I do not think the hon. Member should be unfair to the Treasury since the then Chancellor of the Exchequer, the right hon. Member for Altrincham and Sale (Mr. Barber), was associated with the right hon. Member for Worcester (Mr. Walker) in setting up that committee.

Photo of Sir John Hall Sir John Hall , Wycombe

I am glad that the right hon. Gentleman has drawn my attention to that fact. I think it is true to say that the Treasury was not favourable to the implications in the report of the Accounting Standards Steering Committee. I understand that the report of that committee will not be published for about two years. Since this matter is important and urgent, I believe that the committee should be asked to speed up its study and produce its report much earlier than was envisaged. It should be able to do that because it has the previous work carried out by the chartered accountants to go on. It is unlikely that it will produce any new factors or arrive at a different conclusion. The situation which now faces industry and the country and the fact that the figures of profits and taxation are not correct emphasise the need for speed.

Let me quote an example from a modestly-sized company in respect of the impact of inflation on accounts and on the present taxation system. A group of companies with which I am personally concerned recently published its end-of-year accounts. Its profits were up fairly satisfactorily, by a figure of 20 per cent., and in money terms this appeared quite reasonable. I am sure that it would have kept the shareholders happy if the true facts had not been pointed out to them in my chairman's review. Unlike the company chairman to whom reference has been made, I was not over-optimistic in drawing the attention of the true facts to my shareholders. When we take into account the profit after tax, it appears that there has been a fall in real profits of nearly 10 per cent. It is true to say that the experience in many other companies has been almost identical, if they apply to their accounts the inflation accounting procedure recommended by the chartered accountants. If this is so, the impact of taxation on a company is far more severe than anybody has been led to believe. We are deceiving ourselves if we think that the tax is as modest as 52 per cent., for the true tax on real profits is a great deal higher.

Only three hon. Members, excluding myself, have taken part in the debate so far, and all of them sit on the Opposition side of the Committee. I am sorry that many hon. Members on both sides have not taken part in order to emphasise the urgency and importance of this problem, if, indeed, it requires emphasising. I am certain that the Paymaster-General appreciates as well as anyone else does the long-term damage which can be done to the economy if the dangers inherent in the present situation are not realised and the fiscal system is not adjusted to take account of the true nature of profits.

We do not want to prolong this debate longer than necessary, and I am sure that we do not have to re-emphasise the points which have been made. I conclude, therefore, by asking the right hon. Gentleman to assure us that the Government-sponsored committee studying the problem will be asked to report not within two years but within the next few months. It should not be impossible for it so to do. The Government should then present the House with the committee's report and recommendations, which would enable us, within the next fiscal year if possible, to bring into operation accounts which would be a much truer reflection of the operations of a company and its profits.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

The hon. Member for Cornwall, North (Mr. Pardoe) initiated an interesting debate. I imagine that that was his intention in moving the amendment. I hope that he does not propose to ask the Committee to divide on the amendment, although I understand that he still reserves his position. If he decides, in the light of my reply, to ask the Committee to vote I shall have to ask my right hon. and hon. Friends to vote against the amendment.

Photo of Sir John Hall Sir John Hall , Wycombe

Am I too quick in assuming that the right hon. Gentleman will ask his right hon. and hon. Friends to go into the Lobby in his support without their having any idea of what we are debating?

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

My right hon. and hon. Friends know what we are debating and will go into the Lobby in the light of their own careful judgment of the subject. I hope that they will take my advice in doing so.

This is the third debate on indexation that we have had in the last few days. We had one yesterday on the indexation of savings. I take it that these debates emphasise the concern in the Committee about inflation and its consequences. I do not want to widen the debate to the question of indexation generally, since I had something to say about that yesterday, but I would point out now that to accept the indexation of accounts has wide implications—indeed, that the cones- quences and implications become wider the more indexation is used. The hon. Member for Cornwall, North speculated about the effect of indexation —of inflationp-roofed accounts—on the tax yield from companies. He did not know whether the yield would go up or down. The hon. Member for Cirencester and Tewkesbury (Mr. Ridley) thought that it would go down and that, therefore, Treasury Ministers had been supplied by their officials with a note which said "Do not agree to this: it will reduce tax revenue". I cannot give any estimate of the cost of the amendment. It is not necessarily a cost. After all, the yield of company taxation depends on the rate of company taxation, and higher or lower profits will yield higher or lower tax dependent on the rate of taxation which is imposed.

The hon. Member for Cornwall, North may be right in suggesting that the real impact of a provision such as he proposes might be to alter the distribution of profits as between companies rather than to have any necessary effect on tax income from the company sector. If one valued the assets of companies according to this principle one would, no doubt, find many companies making very much smaller profits than they imagine they are making at the moment. Some could be making negative profits. I see that the Chairman of ICI, in his statement yesterday, made an estimate of the reduction in profits which would result from their assessment on a basis different from the company's traditional methods. All this is common ground. It is common ground that the present calculation of profits may yield illusory figures.

Nevertheless, in considering any such proposal as this amendment many questions have to be settled. Some of the questions involved in deciding what inflation accounts should look like have been raised in the debate. No doubt, the fact that there are so many questions to be answered led the Conservative Government to invite the Sandilands Committee on Inflation Accounting to study the matter further.

One of the problems is raised in the amendment itself—what index would it be suitable to use as the basis of such accounts? The hon. Member for Cornwall, North suggests the retail price index, and has received a certain amount of support for his proposal. It is a matter for consideration what type of index would be appropriate, or, indeed, whether one index alone would be appropriate or whether we might need to have more than one index to produce this type of accounts. As the Committee knows, following our debate yesterday on savings, I have recently been considering the recommendation of the Page Committee about an index-linked bond.

The Page Committee has made a study of index linking in other countries. For example, it has observed that there is a great deal of index linking in Israel, but that has not, apparently, had any effect on Israel's remarkable rate of inflation. The linking in Israel is to the retail price index, and the committee went on to notice—this should interest the hon. Member for Cirencester and Tewkesbury, who, though normally afraid of Government intervention, apparently agrees with this type of intervention—that one consequence of linking to the retail price index is that Governments begin interfering deliberately with the index.

The retail price index is a highly politically manipulable index. The Page Committee, in considering that fact, decided, therefore, that perhaps it would not be suitable for the purpose, and it sought for other kinds of index which might be appropriate. It came up with one which, I believe, is not so politically manipulable—the gross domestic product deflator. There is the question whether this is a suitable index. Replacement costs might frequently be a better index for the purpose. These are all questions which the Sandilands Committee will presumably consider.

Some increases in value by reference to the retail price index are genuine increases in value. For example, the increase recently in the price of oil represents a real increase in the value of oil. But how does one bring that fact into one's account? A company's monetary debts are also affected by inflation. They can go down in real terms, but how does one bring that fact into the accounts? There is a series of serious and difficult problems in this area on which we need advice—and not merely the advice which has so far been obtained from the various bodies which have considered the matter—before we can come to any conclusion upon it.

7.30 p.m.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

The problems which the right hon. Gentleman is putting forward now arise only if there is a separate index for each commodity. If there is one single index—say, the GDP deflator—all these problems disappear.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

It depends what the index is. Even if we chose the GDP deflator I am not sure that it would solve the problems in producing inflation accounts. That is the kind of question which has to be considered and on which we are looking for advice. I hope the advice which is given will carry general acceptance when it is available. This is the problem which has to be decided. All that I can say now is that the Government are not persuaded that we are in the position to accept an amendment such as this—and for a further reason which I shall come to presently.

In the meantime it has to be borne in mind that, in a sense, companies benefit from inflation. For example, there is a delay in their payment of tax. An average of 18 months from the period in which the tax is earned is a gain to a company. In Brazil—the example which has been cited by two hon. Members—tax debts are indexed. If one followed the course of which Opposition Members are becoming so persuaded presumably we should have to index tax debts as part of the total machinery. This would not be entirely to the benefit of companies. It is, perhaps, one reason why we cannot be sure of the effect on company taxation in adopting such a system.

Here I come to one of the fundamental points in the discussion. It was made clear to the Sandilands Committee when it was set up that it could not be assumed that inflation-proofed accounts would be suitable for tax purposes. This is another matter that we shall have to look at when the proposals come forward, assuming that they find general acceptance. It may be necessary to have a different or amended basis for tax purposes.

After the Sandilands Committee has reported the Government will have to consider what for tax purposes is a suit- able accounting basis that will be fair as between companies, as between companies and other traders, and as between companies and the rest of the economy. But we must have the Sandilands Committee's Report first.

The hon. Member for Wycombe (Sir J. Hall) asked when the Sandilands Committee is expected to report. I am afraid that I have to disappoint the hon. Gentleman. My information is that it is likely to be far more than a few months before the committee reports. It may be more like 18 months. This is a matter which we can discuss with the committee. However, it has fairly serious problems to consider before it reports. It would be of greater value for its report to take a little longer and be persuasive, than for the committee to be hurried.

Photo of Sir John Cope Sir John Cope , Gloucestershire South

I am not sure whether I have followed the right hon. Gentleman correctly. Is he saying that the Government accept the principle of the amendment and that it is merely a matter of feeling their way through, with the aid of the Sandilands Committee, to the proper way of implementing it? If so, that is fairly important. It seems to be behind what the right hon. Gentleman is saying.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

No. I am keeping a completely open mind on this proposal. 1 am saying that we are waiting for a report from the Sandilands Committee which we shall then have to consider both as regards its proposals in relation to inflation accounting as also as regards the relevance of the report for the basis of the tax liability of companies.

I am afraid that I cannot give the hon. Member for Wycombe the assurance that the Sandilands Committee will report in a few months. It will take longer than that. However, it is better that the report should be persuasive and carry with it the companies and those concerned with these matters, rather than that it should be hurried in the way that the hon. Gentleman suggests.

Photo of Sir John Hall Sir John Hall , Wycombe

I appreciate the difficulty of accepting the amendment in this form because of the problems of deciding which form of inflation accounting should be used and whether one or several indices should be used. Nevertheless, I hope that the right hon. Gentleman will at least examine the possibility of hastening the Sandilands Committee's report and that he will inquire into the possibility of bringing it forward much sooner than in 18 months or two years. This is an urgent problem. The sooner that we can come to a decision about it the better.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

Certainly I am ready to look into whether the report can be speeded up. However, my present information is that it is likely to be about 18 months.

Question put, That the amendment be made: —

The Committee divided: Ayes 24, Noes 239.

Division No. 27.]AYES[7.37 p.m.
Beith, A. J.Morgan, GeraintWainwright, Richard (Colne Valley)
Biggs-Davison. JohnNicholls, Sir HarmarWigley, Dafydd (Caernarvon)
Grimond, Rt. Hn. J.Redmond, RobertWinstanley, Dr. Michael
Hooson, EmlynRoss, Stephen (Isle of Wight)Winterton, Nicholas
Howells, Gerainl (Cardigan)Stanbrook, Ivor
Johnston, Russell (Inverness)Steel, DavidTELLERS FOR THE AYES:
Langford-Holt, Sir JohnTaylor, Edward M. (Gl'gow, C'cart)Mr. John Pardoe and
Lawson. Nigel (Blaby)Thomas, D. E. (Merioneth)Mr. Clement Freud.
Maxwell-Hyslop. R. J.Thorpe, Rt. Hn. Jeremy
Meyer, Sir AnthonyTyler, Paul
NOES
Allaun, FrankDoig, PeterJanner, Greville
Archer, Peter (Warley, West)Dormand, J. D.Jay, Rt. Hn. Douglas
Armstrong, ErnestDuffy, A. E. P.Jenkins, Hugh (W'worth, Putney)
Ashley, JackDunnett, JackJohnson,James (K'ston upon Hull.W)
Ashton, JoeDunwoody, Mrs. GwynethJohnson, Waller (Derby, S.)
Atkins, Ronald (Preston, N.)Eadie, AlexJones, Barry (Flint, E.)
Atkinson, NormanEdelman, MauriceJones, Dan (Burnley)
Bagier, Gordon, A. T.Edge, GeoffJones, Alec (Rhondda)
Barnett, Guy (Greenwich)Edwards, Robert (W'hampton, S.E.)Judd, Frank
Barnett, Joel (Heywood & Royton)Ellis, John (Brigg & Scunthorpe)Kaufman, Gerald
Bates, AltEllis, Tom (Wrexham)Kelley, Richard
Baxter, WilliamEnglish, MichaelKilroy-Silk, Robert
Bennett, Andrew F. (Stockport, N.)Evans, Fred (Caerphilly)Kinnock, Neil
Bidwell, SydneyEvans, loan (Aberdare)Lambie, David
Bishop, E. S.Evans, John (Newton)Lamborn, Harry
Blenkinsop, ArthurEwing, Harry (St'ling.F'kirk&G'm'th)Lamond, James
Boardman, H. (Leigh)Faulds, AndrewLatham, Arthur (CityofW'minsterP'ton)
Booth, AlbertFernyhough, Rt. Hn. E.Lawson.George (Molherwell&Wishaw)
Boothroyd, Miss BettyFitch, Alan (Wigan)Leadbitter, Ted
Boyden, James (Bishop Auckland)Flannery, MartinLee, John
Bradley, TomFletcher, Ted (Darlington)Lestor, Miss Joan (Eton & Slough)
Broughton, Sir AlfredFoot, Rt. Hn. MichaelLever, Rt. Hn. Harold
Brown, Hugh D. (Glasgow, provan)Ford, BenLewis, Ron (Carlisle)
Buchan, NormanForrester, JohnLipton, Marcus
Buchanan, Richard (G'gow,Springbrn)Fraser, John (Lambeth, Norwood)Lomas, Kenneth
Bulier.Mrs.Joyce (M'gey,WoodGreen)Freeson, ReginaldLoughlin, Charles
Callaghan, Jim (M'dd'ton & Pr'wich)Garrett, John (Norwich, S.)Loyden, Eddie
Campbell, IanGarrett, W. E. (Wallsend)Lyons, Edward (Bradford, W.)
Cant, R. B.George, BruceMcEIhone, Frank
Carmichael, NeilGolding, JohnMacFarquhar, Roderick
Carter, RayGourlay, HarryMcGuire, Michael
Castle, Rt. Hn. BarbaraGraham, TedMackenzie, Gregor
Clemitson, IvorGrant, George (Morpeth)Maclennan, Robert
Cocks, MichaelGrant. John (Islington, C.)McMillan, Tom (Glasgow, C.)
Cohen, StanleyGriffiths, Eddie (Sheffield, Brightside)McNamara, Kevin
Coleman, DonaldHamilton, James (Bothwell)Madden, M. 0. F.
Colquhoun, Mrs. M. N.Hamilton, William (Fife, C.)Mahon, Simon
Concannon, J. D.Hamling, WilliamMallalieu, J. P. W.
Conlan, BernardHardy, PeterMarks, Kenneth
Cook, Robert F. (Edinburgh, C.)Harper, JosephMarquand, David
Caigen, J. M. (G'gow, Marynili)Harrison, Walter (Wakefield)Marshall, Dr. Edmund (Goole)
Crosland, Rt. Hn. AnthonyHattersley, RoyMayhew,Christopher (G'wh,W'wch.E)
Cryer, G. R.Meacher, Michael
Cunningham,G. (lsl'ngt'n,S&F'sb'ry)Healey, Rt. Hn. DenisMellish, Rt. Hn. Robert
Cunningham,Dr.JohnA. (Whiteh'v'n)Heffer, Eric S.Mikardo, Ian
Davidson, ArthurHooley, FrankMillan, Bruce
Davies, Denzil (Llanelli)Horam, JohnMiller, Dr. M. S. (E. Kilbride)
Davies, Ifor (Gower)Huckfield, LeslieMilne, Edward
Davis, Clinton (Hackney, C.)Hughes, Rt. Hn. Cledwyn (Anglesey)Mitchell, R. C. (S'hampton, Itchen)
Deakins, EricHughes, Robert (Aberdeen, North)Morris, Alfred (Wythenshawe)
Dean, Joseph (Leeds, W.)Hughes, Roy (Newport)Morris, Charles R. (Openshaw)
Delargy, HughHunter, AdamMorris, Rt. Hn. John (Aberavon)
Dell, Rt. Hn. EdmundIrving, Rt. Hn. Sydney (Dartford)Moyle, Roland
Dempsey, JamesJackson, ColinMulley, Rt. Hn. Frederick
Murray, Ronald KingRoper, JohnTierney, Sydney
Oakes, GordonRose, Paul B.Tinn, James
Ogden, EricRoss, Rt. Hn. William (Kilmarnock)Tomney, Frank
O'Halloran, MichaelRowlands, EdwardTorney, Tom
O'Malley, BrianSandelson, NevilleTuck, Raphael
Orbach, MauriceSelby, HarryUrwin, T. W.
Ovenden, JohnShaw, Arnold (Redbridge, lllord, S.)Varley, Rt. Hn. Eric G.
Owen, Dr. DavidSheldon, Robert (Ashton-under-Lyne)Walnwright, Edwin (Dearne Valley)
Padley, WalterShore, Rt. Hn. Peter (S'pney&P'plar)Walden, Brian (B'm'ham, Ladywood)
Palmer, ArthurShort, Rt. Hn. E. (N'ctle-u-Tyne)Walker, Harold (Doncaster)
Park, George (Coventry, N.E.)Silkln, Rt. Hn. John (L'sham.D'ford)Walker, Terry (Kingswood)
Parker, John (Dagenham)Silkln,Rt.Hn.S.C. (S'hwark,Dulwlch)Watklns, David
Parry, RobertSillars, JamesWhite, James
Pavitt, LaurieSilverman, JuliusWhitlock, William
Peart, Rt. Hn. FredSkinner, DennisWilley, Rt. Hn. Frederick
Perry, Ernest G.Smith, John (Lanarkshire, N.)Williams, W. T. (Warrington)
Phipps Dr. ColinSnape, PeterWilson, Alexander (Hamilton)
Prescott, JohnSprings, LeslieWilson, William (Coventry, S.E.)
Price, Christopher (Lewlsham, W.)Stewart, Rt. Hn. M. (H'sth, Fulh'm)Wise, Mrs. Audrey
Price, William (Rugby)Stoddart, David (Swindon)Woodall, Alec
Radice, GilesStott, RogerWoof, Robert
Richardson, Miss JoStrang, GavinWrigglesworth, Ian
Roberts, Albert (Normanton)Strauss, Rt. Hn. G. R.Young, David (Bolton, E.)
Roberts, Gwilym (Cannock)Summerskill, Hn. Dr. Shirley
Roderick, Caerwyn E.Swain, ThomasTELLERS FOR THE NOES:
Rodgers, George (Chorley)Thomas, Jeffrey (Abertillery)Mr. Thomas Cox and
Rooker, J. W.Thome, Stan (Preston, S.)Mr. James A. Dunn.

Question accordingly negatived.

Clause 7 ordered to stand part of the Bill.

Clause 9 ordered to stand part of the Bill.