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Stock Appreciation

Part of Orders of the Day — FINANCE (No. 2) BILL – in the House of Commons at 12:00 am on 16th July 1975.

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Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley 12:00 am, 16th July 1975

I beg to move, That the clause be read a Second time.

The purpose of the clause is to extend stock appreciation relief for a further year. I recognise that the Government have acted to relieve companies from the effects of inflation on their stocks. Admittedly they have done so rather late in the day, but there is no doubt that the assistance has been of great benefit to companies and has been much appreciated by them.

We understand that the cost of the relief contained within Clause 52 and Schedule 9 is approximately £3,895 million over two years. The cost will be approximately £1,300 million this year, part of that amount covering 1973–74 but the greater part of it—namely, £1,125 million—covering 1974–75. The cost of the relief next year will be about £2,600 million. Of course, that depends on whether the companies will claim the full amount next year or whether some of it will be transferred for later on.

We need to know from the Government—I hope that the Chief Secretary will answer this point—what progress the Sandilands Committee is making. Have the Government received its report? If not, when do they expect to receive it? When do the Government expect the consultations to be concluded which will follow consideration of the report? When can we expect to know the Government's proposals following the report? It is very important that the House should know what is happening as regards the Sandilands Report.

With all due respect to the Chief Secretary, it is not enough for him to leave the matter in the way in which it was left on Second Reading, when he said. I give the assurance that it is extremely unlikely, now that the basis of stock valuation for tax purposes has been altered, that it will ever be possible to go back to cost or market value."—[Official Report, 8th May 1975; Vol. 891, c. 1747.] It is unlikely but it is not, unfortunately, a bankable assurance or an accountable assurance, as the Chief Secretary will recognise. Nor can firms make any real calculations about future cash flow with only an assurance that some form of stock relief will be available. Companies' accountants and auditors will continue to insist that a tax equalisation account is provided. That will mean that funds which might have been used for investment or plain survival will be frozen.

The greatest indictment of all is that so much money has to be returned to companies in this way. The return of this money is not the result of any sudden generosity on the part of the Government; it is merely the result of inflation. The vast sum of neatly £3,800 million represents the Government's failure to control inflation. It represents in a real way the cost of the social contract and the Government's total failure to curtail their own expenditure. In fact we are confronted by increased expenditure as a result of the additional subsidies which were introduced last July and at the same time the reduction in the rate of VAT to win the last election. The price of inflation that industry was expected to pay is now being borne by the taxpayer.

There is another consequence to be considered. The greater part of the relief, amounting to £2,600 million, will come next year and may be offset against this year's profits. This seems to show how much the Government expect inflation to rise next year. The level of profits on which stock appreciation is based will be very low. We can see how the Government view the expected rise in inflation.

It is becoming increasingly difficult this year for companies to earn real profits as opposed to stock profits. The evidence is there for all to see. The Financial Times this morning contains an article by Sam Brittan, prominently placed on the front page, to the effect that it is now official thinking in the Treasury that unemployment will rise to 1½ million by the middle of next year. I hope that the Chief Secretary will say something about the present situation. In a week's time we shall have the June unemployment figures, and they may be over 1 million. That shows the state of confidence in industry. If there were confidence in industry, there would not now be so many unemployed, nor would the prospects ahead for employment be so much worse than they are now.

The latest monthly economic assessment shows a fall of 8 per cent. in manu- facturing investment in the first quarter of the year. The Department of Trade's Investment Intentions Survey carried out in May showed a forecast fall in the volume of manufacturing investment of 15 per cent. I do not recall such a marked loss of confidence in manufacturing investment. The Chief Secretary may be able to correct my impression—I hope he will be able to do so—that I recall no time when the prospects for manufacturing investment were so poor. The situation appears to be rapidly deteriorating. The survey appeared only recently, but the Financial Statement, in April, forecast a fall in manufacturing investment of about 10 per cent. That is a further sign of deterioration.

Let us take another indicator, which is the best growth record the Government can boast—namely, the record of bankruptcies. In 1974 there were 5,716 bankruptcies, 45 per cent. more than in 1973. In the first quarter of this year there were 1,938 bankruptcies, nearly 50 per cent. more than in the same quarter last year. How much longer can this go on? One has only to talk to any businessman to see how much firms are cutting back, wherever they can, on investment, stocks and employment. The limit of £6, regarded by the TUC as a minimum, will make things worse.

The Chief Secretary recognises that it is not much use killing the golden goose of industry, which his hon. Friends below the Gangway would like to do. But the goose has long since lost its glitter. It has become lean and scrawny, increasingly dependent on the Government for handouts, for these stock appreciations provisions and all the rest. Meanwhile, in another part of the farmyard lurks the fat, prognathous hog of Government expenditure, seizing all resources that it can get and producing nothing in return. That is the position. We can see it from the financial flow statistics and also horn empirical evidence that already exists.

If we work on the principle that nobody can borrow unless somebody is prepared to lend, it means that the financial deficit in the public sector of £7,571 million for this year has to be met by a surplus in the private sector from persons and companies and from the surplus arising overseas from our balance of payments deficit. Recently that balance of payments deficit has been improving, and that is an encouraging sign. We may now be running a current balance of payments deficit of about £1,200 million a year, or even less. That in turn means that there has to be a correspondingly large surplus in the private sector for individuals and companies to finance the deficit in the public sector.

9.0 p.m.

If there is an anticipated deficit in the public sector for this year of about £7,500 million—this must be the very minimum estimate, because the Supplementary Estimates we saw last week were just short of £2,000 million—and if the balance of payments deficit for this year is a great improvement on that of last year and amounts only to approximately £1,200 million, apart from any residual items that there might be, this must mean that a surplus has to be earned by the private sector of some £6,300 million to balance the equation. Therefore, the private sector—whether individouals or companies—would have to save, rather than spend on consumption or on physical assets, on a scale which has not been dreamt of before. It means that individuals will have to accept less in real terms and that there will be very little room for any form of investment in industry.

This is a most lop-sided and ludicrous position. One end of the seesaw is permanently occupied by the oppressive dead weight of Government expenditure while the other end, the private sector, is up in the air desperately trying to make contact with the ground. This is what is so depressing about the White Paper which adds to public expenditure this year but does nothing to ease the position of industry.

Let us suppose that there is a recovery of world trade next year. How will industry take advantage of that unless it is able to invest at that time, and preferably able to invest before? However, when we get to that stage industry will perforce have to be competing for resources with the Government. The consequence will be that interest rates will be forced up or, as we have seen in times past, there will be an increase in the money supply which will start the whole weary cycle once more. That is how I foresee the situation developing.

There is only one way to put the situation right, and that is to cut public expenditure now.