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Corporation Tax for Financial Years 1983 to 1986: Charge Rates and Consequential Provisions

Orders of the Day — Finance (No. 2) Bill – in the House of Commons at 5:51 pm on 1st May 1984.

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Question proposed, That the clause stand part of the Bill.

Photo of Mr Roy Hattersley Mr Roy Hattersley , Birmingham Sparkbrook

The Committee will recall that clause 18 deals with corporation tax and lists the reduction in the rate of that tax from 50 per cent. to 35 per cent., which the Government propose to apply between now and 1986. When that reduction was announced, it was greeted with unqualified joy by Conservative Members. Those of us who stayed up until after 3 am this morning assumed that we would be encouraged to remain for a long time today by a phalanx of Conservative Back Benchers, all of whom would be in their places to proclaim the reduction in corporation tax. Just four are here tonight, but no doubt they will make the best of what has turned out to be a bad job.

It was assumed by the more naive, when the Chancellor announced the reduction in corporation tax, that the net result would be industry paying less tax and getting an increased return on its investment. As the Financial Times pointed out, euphoria at that prospect lasted about a fortnight. Indeed, that newspaper described the reaction to clause 18 as the slow burn from the Hollywood cartoons of the 1950s, in which Donald Duck or Mickey Mouse walk out along a broken branch and take a few steps into the air before realising that they are about to fall fiat on their faces. The euphoria, necessarily and inevitably, evaporated when it was discovered that, as a result of the Budget package as a whole, a comparison and combination of clauses 18 and 57 mean that in the long term companies will pay increased corporation tax and suffer from a reduction in their return on investment.

The cut in corporation tax encompassed in clause 18 is more than compensated for by the withdrawal of the first year capital allowances when they come into full effect. Thanks to clauses 18 and 57, there will be a small investment boom as companies bring forward investment plans to take advantage of what remains of capital allowances. As a result of clause 18 there will be a brief double bonus, because companies will bring their investment forward to take advantage of the remaining years of capital allowances, cheered by the knowledge that the benefits that they obtain from so doing will increase revenue as a result of the reduction in corporation tax.

Whatever happens in the short term, the result of the interaction of clause 18 with clause 57 will mean that industry will pay more in the long term. I hope that we shall obtain the agreement of the Financial Secretary that that is the case. We have already had it confirmed by that most mystical of beings—the Treasury spokesman. I hope that it will be made flesh by the Financial Secretary's confirmation of what has been said by various authorities. The chairman of the north-west region of the CBI, in a letter to the Financial Times on 20 March, said: Over the period proposed for the transition"— the period of transition during which tax is cut through the operation of the clause but when tax allowances will be reduced through a subsequent clause— it is possible to demonstrate that tax payable under the present regime will more than double under the proposed system. In The Guardian of 16 March it was calculated that the combination of the two clauses, far from reducing industry's burdens, was likely to result in it being raised by about one third. The Guardian article went on to quote a Whitehall source, which said that The Guardian figures were on the high side, but confirmed that the trend was correctly described.

I ask the Financial Secretary to underline and confirm that the reduction in corporation tax embodied in the clause will not compensate for the reduction in capital allowance proposed in a later clause and that, as a result of the overall package, industry will be disadvantaged.

I am talking about industry as a whole, but the Committee will understand that manufacturing industry in particular will be badly hit. The service industries—with the exception of the banks because of a special problem in relation to leasing that I hope the Committee will discuss later—are by their nature less able to take advantage of capital allowances. The reduction in corporation tax under the clause will, therefore, produce a net benefit for many of them.

The benefit will be provided at the expense of manufacturing industry — a sector that the Chancellor seems to have written off. Let me remind him of the position of investment in manufacturing industry. Since May 1979—I choose the month at random—there has been a 42 per cent. drop in manufacturing industry investment. The Budget, by a combination of reductions in capital allowances and corporation tax, will accelerate that trend. That seems to be a matter of no concern to the Chancellor. He is openly sceptical about the role that manufacturing industry will play in the long awaited recovery of British industry.

The Chancellor was openly sceptical when he discussed those matters with the Treasury and Civil Service Select Committee. His scepticism was reported in the Committee's fourth report. He told the Select Committee how he expected Britain to compensate for the inevitable decline in oil revenues. He was, in the words of the report, unwilling to be specific. He

preferred instead to rest his case on market forces. The Treasury and Civil Service Select Committee's fourth report chose to be more precise than that in its references to capital allowances and corporation tax. It said: We believe that, of necessity, the declining oil revenues will need to be replaced with increased manufactured exports. That is surely right. Yet, the proposals in clause 57, when they are balanced out by the proposals in clause 18, will make the recovery in manufactured exports—indeed, in manufacture in general—much more difficult. I must make it clear that the Select Committee's conclusion, which the Committee will find it difficult to contest, is that the Government have made the recovery more difficult by introducing clauses 57 and 18, because investment is less likely.

he Select Committee's decision is wholly unrelated to the classic argument whether investment in industry is best encouraged by a generally low rate of tax that allows entrepreneurs and owners to make their investment decisions from a high profit base, or by tax allowances specifically geared to encourage new investment. In the Budget debate I said that the provision of high levels of profit would not of itself bring high levels of new industry. In the past two years, a great deal of money has been, in the City's language, "sloshing about" in the British economy. Much of it has been exported and some of it retained. At least one British company — GEC — has what amounts to a profit mountain that it feels reluctant to invest, for several reasons. Much money is available for all sorts of purposes.

I do not believe that the provision of higher profit levels will cause increased investment levels, but that argument should not concern us. The combination of clauses 57 and 18 does not allow us to use that argument, as that will provide a lower level of retained profits in British industry, not the higher level proposed by the Chancellor—at least, a lower level of retained profit in the manufacturing sector.

Despite the weak-minded enthusiasm with which clause 18 was greeted on the Conservative Benches on Budget day, the net result of the package, of which the Minister of State reminded us to take proper cognisance, is that by 1986 companies in general and manufacturing companies in particular will be paying more tax.

I shall conclude by asking, perhaps rhetorically—who knows, perhaps this is the debate in which our questions will be answered for the first time—why the Chancellor chooses a course that requires industry in general and manufacturing industry in particular to pay more. His first object is, of course, to raise extra revenue from industry—perhaps as much as —1·5 billion in a full year. I understand that need. If the Chancellor pushes up taxes each year, as he does, the money must come from somewhere. This may be one of the sources of that additional annual tax burden of £21 billion.

The second reason, which the Chancellor would be more likely to give openly and publicly, is the adjustment of relief on specific investment and the increase in general profits for the use of investment that is implied in clause 18. That is to avoid what the Chancellor chooses to call "investment distortion". By that he claims to mean—or he says that it exists—a phenomenon by which industry invests according to the tax allowance that it is likely to receive rather than the innate profitability of that investment. I am extremely sceptical that that will ever happen.

In order to avoid the distortions described by the Chancellor, to give general relief provided by the clause and to remove the specific relief in clause 57, the Chancellor has engendered two years of intense and continual distortion. Companies are bringing forward investment plans to catch the last two years of capital allowances — a system that can best be described, according to the Select Committee, as "capricious investment timing." I make it clear that, in relation to the reduction of corporation tax embodied in the table in the clause, I want to see more capital investment in manufacturing industry. I believe that that will come about only through direct fiscal encouragement and direct investment. Such direct investment creates new jobs and improves efficiency.

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However, unfortunately we are burdened by a Chancellor who is, at best, neutral about new investment in manufacturing. He sees our economic survival, or our economic revival — if he sees it at all — as coming through the service industries. The combination of clauses 18 and 57 is specifically intended for, and will have the result of, shifting investment out of manufacturing and increasing the opportunities for the service sector. The two clauses constitute an act of discrimination, pushing the balance of advantage in one direction and reducing it in another.

I do not believe that the shift thereby involved—the encouragement of the service industries at the expense of manufacturing—offers the remotest prospect of reducing unemployment to an acceptable level. I in no way want to denigrate the importance of service industries, both public and private, but they are not an alternative to manufacturing. We should particularly encourage the so-called sunrise industries, yet clause 18—and clause 57, which must be read in conjuction with it — fails to provide the special incentives that those industries require. That combination will result in a reduction in liquidity in those new and innovatory industries when the change, with benefit from one scheme and disadvantage from another, comes about. All those so-called sunrise industries — the high technology industries — have complained about the disadvantage that they will suffer when the change comes about.

I do not have to remind the Financial Secretary of the other industries that have complained that the reduction in corporation tax will nothing like compensate them for the abandonment of the capital allowance that we shall debate later. The most spectacular example is the British film industry, which believes itself to have been cruelly deceived by the Government into the belief that, with its remarkable recent success, its earning capacity and its contribution to the British economy, it was to be advantaged by the Government's policy. However, it now discovers that the new system — by which capital allowances are abandoned, with in some way compensation through a reduction in corporation tax — will provide no benefits, but will penalise it.

I could give many other examples, but I shall conclude by repeating the central thesis of my complaint against the clause. It was said on Budget day that the scheme would provide more retained capital for industry and would therefore encourage investment if entrepreneurs behaved in the way in which, in the Chancellor's romantic imagination, they are supposed to behave. In fact, when the result of the clause is compared with what comes later in the Bill, we discover that industry suffers a net disadvantage. It transcends all the arguments about investment inducements and all the disputes about whether the measure should be specific or general. The fact is that in 1986 industry will be worse off. I hope that the Financial Secretary will have the grace to confirm that that is an arithmetic fact and will explain how the Chancellor can justify that position.

Several Hon. Members:


Photo of Mr Michael Shaw Mr Michael Shaw , Scarborough

Order. Before we continue with the debate, I should remind the Committee, although I do not wish to criticise the speech of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley), that inevitably there is some crossfiow of argument between clauses 18 and 57, and I hope that any mention of clause 57 will be made, as the right hon. Gentleman did, only in relation to clause 18.

Photo of Mark Fisher Mark Fisher , Stoke-on-Trent Central

As my right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) said, the most curious thing about the change is the fact that the Chancellor chose to justify it by saying that he desired to eliminate tax inconsistencies made by artificial and external tax structures and anomalies in the tax system. However, the Chancellor is creating greater inconsistencies and anomalies, not only through the phasing mechanism that my right hon. Friend mentioned, so that there will be an artificial rush of investment, as companies seek to enjoy the tiny tax advantages, but—this is an important matter—between the advantages of raising money for companies by loans and through equity. If, as I suspect, over the next two years inflation begins to increase, the disparity between raising capital for industry through loans and through equity will increase. That will have a serious and unbalancing effect on industry.

I believe that the Chancellor is going against many of his avowed intentions. In so far as he does, it is at the expense of creating a general disincentive to invest. As my right hon. Friend said, that is confirmed by the report of the Select Committee on the Treasury and Civil Service.

The interesting context for this matter is that the Government appear to have done a U-turn on their entire policy. I understood that the thrust of the medium-term financial strategy proposed by the previous Chancellor was to reduce inflation and interest rates. One of the main purposes that the right hon. and learned Gentleman kept on emphasising was that the reduction of inflation and interest rates would help investment. Apparently we still have the medium-term financial strategy—at least it is nominally intact, although possibly many people on the Select Committee and elsewhere consider that the Government's stance has changed quite a lot in practice. However, these tax changes discourage investment. That is a complete volte face by the Government and should be recognised as such.

We said in the debate yesterday — no doubt, unfortunately, we shall say on amendment after amendment and clause after clause—that the Chancellor has introduced the measure without, apparently, any consultation with British industry, certainly not with British manufacturing industry. The 1982 corporation tax Green Paper said: full and informed public discussion …is an essential precondition for any further major change in corporation tax. After the Government gave themselves the good advice that if they were to change corporation tax they needed to consult British industry, the Chancellor has gone ahead and taken action without consultation or recognition of the real effects. The Chancellor received plaudits from the press on day one after his speech for, apparently, an imaginative and brave step. He characterised it as a shift from capital to labour. That was a misleading and disingenuous description. Whatever the right hon. Gentleman said on the day of his speech, the people have seen that that is not so and that he should have consulted British industry. Had he done so, he would not have made a mistake.

Not only has the proposal been made without consultation, but the Select Committee evidence shows that it was done without figures that could be reliable or helpful to the Chancellor. When the Treasury officials were questioned, they were asked about the acceleration in investment, to which my right hon. Friend and I have referred, and which we believe is artificial. One official was asked whether that acceleration would be artificial, and he agreed that it would.

When asked what figures Treasury officials had been able to give the Chancellor to show the artificial acceleration and the fact that any acceleration would come only from the phasing out mechanism, the official said: It is very difficult to estimate that. We can give you some figures of the incentive to accelerate the reduction in the cost of investment if it is carried out a year earlier. When asked again the question:

The Chancellor's statement was not made on any figures you gave him but was more a hope that this would happen?", the Treasury official replied:

We did provide some figures which are included in the forecast. When asked whether he could give those figures, he said:

These figures are very unreliable. There is a very wide margin of error around them. We can now see that the increase in investment from 4 per cent. in the autumn statement to the 6·5 per cent. mentioned in the Red Book was artificial, and, on the Treasury's admission, the figures on which the decision was made were unreliable and have a wide margin of error. This important change for British industry was not only introduced without consultation with the industry but based on figures that the Treasury has said are in part unreliable.

As my right hon. Friend said, these changes in corporation tax, when taken together—I shall not refer to this except in passing—with the changes in stock relief and capital allowances will hit manufacturing industry and its desire and need to invest. Manufacturing investment is already down 42 per cent. on its 1979 level. In that sorry and reduced position, this corporation tax change hits it again. What is worse, the part of manufacturing industry that will be most affected is the capital-intensive industries with expensive research and development. That will mean high-technology industries such as computers, which one would have thought any sane Government would have realised should be encouraged.

If the Financial Secretary addresses himself to these points when he answers the debate, can he explain how it is that the Chancellor allowed himself to introduce changes in corporation tax that single out capital-intensive industries such as the sunrise industries, which we desperately need for tackling the problems of the next generation of industrial development? Why is it that corporation tax pinpoints and targets them for attack and disadvantage? It is extraordinary.

Some interesting work has been done by the Institute of Fiscal Studies, which took a profitable manufacturing company which is investing, as all hon. Members have been urging manufacturing industries to do and has reasonable-sized stocks, and looked at its tax position before and after the Budget. This is a remarkable and educational exercise.

The company has £25 million of profits, the capital that it invests in any one year is £20 million and it has stocks running at £50 million. Before the Budget, the capital allowances of such a company would be £21·4 million, the taxable profit would be £3·6 million and the tax payable would be £2·9 million. Before the Financial Secretary picks me up on this, I add that there would be £1 million in national insurance surcharge to be paid in addition. After the corporation tax changes, the capital allowances will be £7·7 million, the taxable profit will be £18·3 million and the tax payable will be £6·4 million. That is more than double the tax payable on just the sort of company that one would have thought that we should want to make more profitable — a manufacturing company making profits and investing. Surely, leaving politics aside, that is the sort of company that the Government should be encouraging. Instead, they are taxing it twice as heavily.

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One of the Chancellor's claims is that his Budget helps labour and that he sees it as a shift from plant and machinery and investment to helping labour and employment. That claim does not stand up. It will be interesting to hear the Financial Secretary try to justify this rash statement by the Chancellor. Does anybody seriously believe that when companies in the real world get an increase in profits—I suspect that many companies such as the one that I described will not get one—they will put it into higher wages, increased investment or perhaps both? We can be pretty sure that in the present climate the profit is unlikely to go into increased employment. The answer to the Chancellor's claim that the changes in corporation tax will lead to more employment can be seen in the unemployment figures every month, in which the real underlying rate of employment goes inexorably up.

By implication, the Chancellor also appears to be saying in the Budget that some industries are investing too much—they are investing artificially and should not be investing in the things in which they are investing. Can the Chancellor believe that? Can the Financial Secretary, when he answers the debate, say that he believes that there are manufacturing companies that have spent too much on investment, have too heavily capitalised, and are spending too much on research and development? Is that his experience of companies in his constituency and other constituencies?

Which of us, going back to our constituencies, goes into a manufacturing company and says, "By gum, there is too much plant and machinery here—we are far too much ahead of the world in this."? That is the most absurd idea. In the companies in my constituency, and I suspect those of other hon. Members, the exact opposite is the case. We go into manufacturing companies and see plant and machinery that are old and outdated and we are told that the Belgians, the Italians, the French or the Dutch have more modern machinery which does the same job faster. That is what we need to invest in, but because of high rates of interest over the past few years companies have found it increasingly difficult and expensive to invest in such machinery.

In the real world, the Government have given disincentives through real interest rates being too high in the past four years. Despite that, there are changes in corporation tax which will provide further disincentives for those manufacturing companies. We are seeing changes in corporation tax that will speed the shift from manufacturing industry and apparently, according to the Chancellor, towards the service sector.

I fear that that is what will happen. Yesterday's trade figures clearly show the stupidity and tragedy of that. The figures underlying the trade figures show that in manufactures this country is almost ceasing to exist. Were it not for North sea oil, our economic and industrial policies would be revealed as bankrupt. When the Financial Secretary answers the debate, I hope that he will address himself to that problem. Does he feel, like the Chancellor, that it is somehow inevitable — a fact of history—that our manufacturing industry will go down the drain, or does he recognise that beneath the thoroughly cosmetic and short-lived figures of North sea oil we are witnessing a de-industrialisation, a de-manufacturisation?

This corporation tax change will accelerate that trend and make it worse. That is a serious prospect. The oil revenues will level out; we should address ourselves to that problem now. It is no good saying that the money will all be taken by the service industries, because, apart from the invisibles, few service industries can be exported. We have relied on our manufactured exports and the figures yesterday show that we are in a disastrous position on manufacturing exports. The Financial Secretary may say, as the Chief Secretary said so often yesterday, "What is the alternative? What could we have done apart from this?" I believe that the existing system, for all its inadequacies and anomalies, is better than the one that the Chancellor proposes to introduce.

It is possible that the Chancellor could have looked on a flow-on funds base for corporation tax. He could have considered the 1978 Meade committee report and examined its recommendations. If he really wants neutrality between different forms of assets, and in the investment potential in different economic circumstances, whether inflation increases or decreases, if he really wants neutrality in the advantages of raising capital by debt or by equity, as the Meade committee showed, there are many advantages in a flow-on base for corporation tax.

The fact that the Chancellor appears to have ignored the report of the Meade committee shows that his motivation is not a search for a more neutral corporation tax position, but a thoroughly ill-considered and ill-judged reaction in favour of the fashionable idea of service industries, and away from the much more fundamental and necessary element in the country's economic structure, which is manufacturing industry. This is not a neutralisation of corporation tax. These changes in corporation tax will seriously damage our manufacturing industry and, in so doing, will damage the entire economic structure. It is a disaster against which I hope all hon. Members will vote.

Photo of Mr Robert McCrindle Mr Robert McCrindle , Brentwood and Ongar

I seek to detain the Committee for a short time only to draw its attention to the disadvantageous effects of clause 18 on the operation of insurance companies. Insurance companies are specifically referred to in subsection (4). I hope to persuade the Committee, and even the Financial Secretary to the Treasury, that in the casting of the clause there is a considerable disadvantage to insurance companies which, in the long term, is likely to work through and prove to be a disadvantage to life insurance policy holders and to those of us who look to the insurance companies to provide our pensions in the future.

It has been said correctly that the service industries in general, and, I suppose, insurance companies in particular, have not been able to take major advantage in the past of capital allowances, so that few tears will be shed on the reduction of capital allowances in respect of insurance companies.

Secondly, it may be thought to be good news that insurance companies can look forward to a rate of corporation tax in 1986 of 35 per cent. , and in that there will be no difference from other companies, whether they be in the service industry or in manufacturing industry. For a considerable time, a static rate of 37·5 per cent. has been payable by insurance companies, as referred to in subsection (4). Therefore, the advantage to insurance companies in the period between now and 1986 is substantially less than that which will accrue to other companies. It is true that, by 1986, at a rate of 35 per cent. , the insurance companies will be paying 2·5 per cent. less than they have been paying for some time. However, there is concern among the insurance companies that, in moving to that situation, they are being asked to sacrifice one priceless advantage—that they have known in advance the maximum and minimum rates of corporation tax to which they will be subject.

Insurance is notoriously a long-term business. In terms of investment, so as to produce the bonuses under life insurance and endowment policies, and in terms of pensions, so as to produce, it is hoped, a reasonable standard of living for millions of our fellow citizens, it is necessary to know well in advance what the corporation tax liabilities are likely to be. If the Committee agrees to include clause 18 as it stands as part of the Bill, I respectfully suggest that that will become increasingly difficult to do. I have to ask the Financial Secretary to the Treasury what sort of advice he has to offer to the insurance companies, assuming that the Committee agrees that clause 18 should stand part of the Bill. If it is not putting it too strongly, I suspect that in some ways the insurance companies would prefer, even in 1986, to be taxed at a rate of 37·5 per cent., as they are at present, provided that they are then able to continue to have the assurance, which they have had for a considerable number of years, that they will be subject to that rate alone.

We hear a great deal from Government sources about the opportunities that are opening up from the service industries in terms of employment and suchlike. I think it will be agreed that one of the service industries that has provided opportunities for employment over the last decade is, indeed, the insurance industry. It has expressed the view to me frequently that the disadvantage implicit in the proposed change in corporation tax will be a major setback to it.

In the past, Governments clearly have presumed that it is correct to give some special consideration to insurance companies, I think partly because of the long-term investment point that I have already made. If it has been considered correct to give that special consideration in the past, I have to ask my hon. Friend the Financial Secretary why, in moving in the direction which the majority of companies in the United Kingdom must welcome, it is thought appropriate now to withdraw the special consideration to which the insurance companies have been privileged. In terms of continuity, which is important in long-term investment areas, I draw the Financial Secretary's attention to the unsatisfactory nature of this change in respect to insurance companies, and I ask him what advice he may have to offer to enable them to continue service to the public by way of life policies, endowment policies and pension policies, which have been the hallmark of the achievement of British insurance companies in the past.

Photo of Stuart Bell Stuart Bell , Middlesbrough

In making his Budget statement, the Chancellor said that he was seeking to remove what he described as undesirable distortions, because he wanted to get the corporation tax rate as close as possible to the basic rate of income tax. If he were to do that, it would take us back not to the Victorian era, which is so pleasing to the mind of the Prime Minister, but to the Edwardian era. Not until 1915 were corporate tax and personal tax on the same basis. We are taking a step back into the past in seeking to accommodate the Chancellor's wish to bring corporation tax in line with income tax.

It has been said that some parts of the Budget are the jewel in the crown of the Chancellor, a remark that I believe was made in relation to personal taxation. I was under the impression that the jewel in the crown was the reduction in the rate of corporation tax. The reduction in the rate of corporation tax can be brought about only by the abolition of stock relief and capital allowances. I shall not fall into the trap that has been clearly demonstrated in the debate of speaking to clause 57, which the Committee will consider later.

The result will be that in two or three years more companies will fall into post-tax profit liability than at present. The euphoria among Tory Back Benchers and the support from the City for the Chancellor's proposals began to evaporate once the computers had calculated the result. All the banks, both large and small, have had to revise their balance sheets to provide for the time when they will have to pay a reduced rate of corporation tax, which will nevertheless catch a larger number of firms.

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The Chancellor said that in his view the reduction would be an incentive for firms to take on more workers. The last such scheme—Lord Barber's dash for growth in the 1970s—resulted in a dash to invest abroad and in property rather than in jobs. I fear that the present reduction in corporation tax will also not create jobs in either the service sector or the industrial sector. Both sectors have been dealt with in the debate. We believe that it is desirable to support both. They are not mutually exclusive. There is no need to hinder or handicap manufacturing so as to support the service sector.

The reduction in corporation tax will affect the banks and leasing. The banks have gone into leasing in a big way, offsetting their profits by leasing equipment to businesses on favourable rentals, thus assisting the firms involved. We shall deal with the impact of the abolition of capital allowances later, but it is clearly an illusion for the Chancellor to state that there will be any assistance to manufacturing or to employment.

The Chancellor also made the following statement in introducing the Budget:

The substantial reduction in the rate of corporation tax will bring a further benefit. Our imputation system allows a company to offset in full all interest paid"— that is, interest paid to banks.

But only a partial offset for dividends is allowed. Companies thus have a clear incentive to finance themselves through borrowing and in particular bank borrowing rather than by raising equity capital."—[Official Report, 13 March 1984; Vol. 56, c. 297.] That is an extraordinary statement, encouraging firms both large and small to borrow money, and scarcely reflects the Prime Minister's comment in February 1981 that we should get rid of borrowing and excess spending.

The Chancellor is encouraging firms to borrow money from the banks rather than raise investment capital in the market, which one would expect a Conservative Chancellor to support. It must surely be wrong for any company in our society to put itself into the hands of the banks. Yet that is supposed to be one of the advantages of the Chancellor's corporation tax proposals. We shall seek to show that it is not a bonus but a handicap because most money is borrowed on a short-term rather than a long-term basis and the interest rates are those of the market. If interest rates rise the cost of borrowing rises, affecting not only the cash flow but the future prospects of the firms involved.

The Chancellor said in his Budget statement that the tax reformer's path was a stony one, but we see no reforrn in his proposals. Banks and leasing corporations will be badly affected and it is clear, that company boards are most concerned about their tax bases rather than commercial considerations. All must now re-analyse their future growth prospects as a result of the Budget proposals on corporation tax, which emphasise the service sector rather than manufacturing industry. My right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) referred to the 42 per cent. fall in manufacturing investment since the Conservatives came to office in 1979. Nothing in the Budget or in its proposals for corporation tax will improve that trend.

Another aspect that the Chancellor has not taken on board is the effect of inflation. We accept that inflation is down to 4·5 per cent. The Chancellor believes that it will be about 4·5 per cent. in the autumn, but even that will be an increase as it means that costs will go up by 4·5 per cent. a year.

The abolition of stock relief will not assist firms in handling their cash flow problems because inflation is no longer part of the equation. Such abolition may be bold, but it may also be reckless. Given that no one can tell what will happen to interest rates in the United States after the presidential election, no one knows what will happen to inflation worldwide. We therefore hope that the Chancellor has not been imprudent in abolishing stock relief in relation to corporation tax.

My hon. Friend the Member for Stoke-on-Trent, Central (Mr. Fisher) mentioned various alternatives, such as the Meade committee in 1978 which discussed a flowof-funds base for corporation tax. The Chancellor has not taken that on board. However, the corporation tax Green Paper in 1982 stated that there would be a full and informed public discussion", and added that that

is an essential pre-condition for any further major change", and that

before bringing forward any further major change in structure"— of corporation tax—

the Government would wish to establish very carefully whether there was a general consensus that the benefits of change clearly exceeded the costs of making it". Again we have taxation without consultation. There have been reductions in corporation tax without proper discussion. There has been no proper discussion of the impact on, and possibilities for, our industrial sectors. Here we have the principle of the unforeseen consequence. In my view, that will not mean that more firms will have to pay corporation tax but that industry as a whole will suffer. No doubt we shall be able to expand that argument when we debate clause 57.

Photo of Austin Mitchell Austin Mitchell Chair, Treasury & Civil Service Sub-Committee, Opposition Whip (Commons)

It is extraordinary that yesterday, when we discussed important social issues, so few Conservative Members attended. It is even more extraordinary that fewer have attended today, when we are discussing a question that is of central and paramount interest to business—[HON. MEMBERS: "What about the Opposition Benches?"] But we are discussing corporation tax, which affects business men.

This issue is central to the sector of the economy that Conservative Members claim to represent, yet there have been few contributions from them and, apparently, even less interest.

The changing balance between clause 57 and clause 18 and the abolition of stock relief means a substantial change in the climate in which business must operate. In 1979 when it came to power, the Conservative party said that it would provide business with a climate of fiscal certainty in which to plan ahead in the knowledge that there would be no drastic changes in tax policy.

The Government have certainly provided the climate—that of a Frigidaire or the graveyard, in which a large section of industry has perished and the number of bankruptcies has rapidly increased. Apart from that, there has been a substantial change in the regime now facing industry, with new uncertainties accruing from the combination of clause 18 and the allowances.

As a result of the abolition of stock relief and the reduction in the allowance, there has been a dramatic shift from machinery and capital to labour. This sudden change, which will have far-reaching consequences for industry over the next three or four years, has been introduced by a Government who claim to have provided continuity and certainty.

Far from being the philosopher of the tax system, which the Chancellor often claims to be, he is reacting like a journalist. However, I do not put him on the same level as my right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) who I regard as a writer, but the Chancellor is reacting like a journalist by changing for the sake of change. That is happening in the balances as they are affected by the clause and by clause 57. That provides uncertainty for the industry.

Photo of Mr John Townend Mr John Townend , Bridlington

The hon. Gentleman's constituency is in the same part of the country as my constituency. Has he discussed the corporation tax changes, the abolition of stock relief and the changes in capital allowances with business men and industry in his constituency? During the weekend I attended a meeting with most of the leading business men and industrialists in Hull. They strongly recommended the changes because under the old system there were far too many distortions.

Photo of Austin Mitchell Austin Mitchell Chair, Treasury & Civil Service Sub-Committee, Opposition Whip (Commons)

The hon. Gentleman rightly says that we have constituencies in the same area. My constituency does not want to be in the same part of the world as his constituency. I say that not for personal reasons, but because it does not want to be in the county of Humberside.

In the 1982 corporation tax Green Paper, the Government said that full and informed public discussion …is an essential precondition for any further major change …before bringing forward any further major change in structure (of corporation tax), the Government would wish to establish very carefully whether there was a general consensus that the benefits of change clearly exceeded the costs of making it. There has not been consultation. This sudden, drastic change is being introduced without the consultation that the Government said was central to their policy.

The hon. Member for Bridlington (Mr. Townend) asked whether I had consulted. Of course I consulted. There is a continuous dialogue in my constituency. In such a dialogue we discover the real grievances of industry—not the glossy, public relations platitudes put out by the supine and servile CBI, which has been rejoicing in its own destruction for so long.

My central point is that there might be a case for shifting the balance of incentives from machinery and capital investment to labour. The Treasury and Civil Service Select Committee said in its report:

Given existing levels of employment, which is the prime consideration for the Committee, we welcome the fact that the Government has taken steps to lower the relative cost of labour. Will that change, which might be acceptable in a theoretical sense, provide the incentive to investment that we all want if the country is to succeed industrially? The problem will not be a shift from capital to labour, but the fact that there will be a cut in all investment because of the measures in the Budget and the changing balance between the rate of corporation tax and the allowances in clause 57. Laggardly investment — which has always been the case in Britain — needs encouragement and incentive if it is to be sustained at even its mediocre level to date.

Industry, especially the international trading sector, works in a climate of international competition in which it must invest—not necessarily because it wants to do that, but because investment is the only sure route to survival in an increasingly intense competitive position. Any attempt to shift the balance in the way that the Chancellor is doing will mean a faltering of investment, which has always been laggardly, and has reduced drastically under this Government.

There is increasing discrimination against manufacturing, where the need for investment is paramount. The Chancellor is prejudiced against the manufacturing industry, and that is certainly felt by the industry in my constituency. The Chancellor does not have faith in that sector of the economy, yet he should because of the massive job losses of recent years — 2·5 million under this Government; a great achievement of Thatcher economics—1·5 million have been in the manufacturing sector. The jobs that will provide for the future of our children will have to come primarily from manufacturing. Our ability to survive in the world must come from manufacturing. Indeed, the Select Committee pointed out that growth in the economy must come from manufacturing as oil begins to run out. Even more important than that, the service sector, to which the Chancellor attaches great importance, rests on the base of manufacturing, and if that base erodes, as it has been doing under the Conservatives

9.15 pm

Photo of Mr Michael Shaw Mr Michael Shaw , Scarborough

Order. The hon. Member is now firmly, and he has been for some time, dealing with clause 57.

Photo of Austin Mitchell Austin Mitchell Chair, Treasury & Civil Service Sub-Committee, Opposition Whip (Commons)

The effect of the change in clause 18, taken with the change in the allowances in clause 57, is to discriminate against the manufacturing sector of the economy, and that must be pointed out in any analysis of the changes introduced by the Finance Bill.

However, I leave that and move on to the changes introduced in corporation tax, for we are seeing not only a regime that is less favourable to manufacturing but one which still has non-neutralities in it. Debt is still, even with the change proposed by the clause, favoured over equity. We have the extraordinary situation, in the light of the experience of the last few years, of moving the base for corporation tax back to an essentially historic cost one that takes no account of the effects of inflation. That means that the tax system will discriminate against investment in stock.

It also means that the higher the rate of inflation, the greater the degree of tax discrimination in favour of debt and against equity. Indeed, if the inflation rate rises substantially in future, it is inevitable that there will have to be a reintroduction of stock relief, producing yet another of those zigzag changes which I am criticising in the clause.

There might be a temporary windfall gain to existing shareholders, rather than an incentive to new investment, but the long-term burdens in the future for business will be substantially increased. I hope that the Minister will comment on the case put forward by Mr. Jack Summerscale of the City firm of stockbrokers de Zoete and Bevan. The argument is that, because of this change, the Budget conceals an increase in the amount of tax paid by companies and that that could bring the Chancellor up to £1.5 billion in extra revenue in the financial year 1986–87 because the tax paid by firms will rise from about one third to 40 per cent. of their profits, despite the planned reduction in corporation tax in clause 18 from 52 to 35 per cent.

As corporation tax drops, much more of the profits of many companies will become taxable, so that the percentage of their profits that goes to the Government w ill rise for several years, will peak and will then fall. The time at which it will peak is the most interesting part of the analysis, because the peak period will be 1986–87. En other words, a Government who have been relying increasingly on the windfall tax revenues, currently running at perhaps £9 billion a year, from North Sea oil will have a further windfall profit from the taxation of business in that year. That would be a nice climate for a general election. However, I am not asking the Miniser to disclose whether it will be an election year. Instead, I ask him specifically whether the arguments advanced in the report are correct, whether there will be a peaking of company taxation in 1986–87 and, if so, how he justifies that in the light of the Government's desire to stimulate investment and to provide incentives for industry.

Photo of Mr John Moore Mr John Moore , Croydon Central

We have had a short and useful debate during which the interaction of the package of reforms has been considered. I make no objection to that, for it is right and proper that we should try to interrelate the reforms. I accept that it is difficult to segregate one from the other. However, I join my hon. Friend the Member for Bridlington (Mr. Townend) in being somewhat surprised at the tone of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) at the beginning of his contribution, when he suggested that there was some sort of distress in the business community about the nature of the tax reform package.

I remind the right hon. Gentleman of what we heard overnight—it has probably been printed in today's press—about the Institute of Directors' latest survey. I shall quote from the survey of industry and business and not from the institute. Part of the survey states:

The corporation tax structure from 1986 onwards will be an improvement on the present structure …our latest quarterly survey of membership opinion conducted during April shows a remarkable 83 per cent. approving the Chancellor's changes as they affect the gradual reduction of corporation tax rates and matching withdrawal of capital allowances. That is a rather more up-to-date reflection of that which many of us find in our constituencies and throughout the country when we discuss the nature of the business tax reform package.

The clause proposes a four-year programme of reductions in the main rate of corporation tax. The changes are an important part of the package of measures announced by my right hon. Friend the Chancellor of the Exchequer in his Budget and included in the Bill. They will stimulate enterprise and set British business on the road to profitable expansion. Two principles have guided the shape of these reforms. The first principle is the need to make changes that will improve our economic performance over the longer term. The second principle is the desire to simplify the tax system.

There has been much discussion about reducing corporation tax rates and the rates are clearly being reduced. Why has the decision been taken to reduce them? First, we believe that the burden of tax on the corporate sector is currently too heavy. Under the proposals in the clause and elsewhere in the Bill, the tax burden on companies and businesses generally will be reduced over the next two years to the tune of about £900 million.

The right hon. Member for Sparkbrook asked me specifically about the transitional period and the longer term. I refer him to the article in The Guardian on the de Zoete and Bevan report. There may be some increase in corporation tax in 1986–87 but over the period from 1984–85 to 1988–89 the corporation tax changes will, as my right hon. Friend stated clearly in his Budget statement, be revenue neutral. Apart from this, companies will derive a much larger and continuing benefit from the abolition of the national insurance surcharge, especially over the longer term.

During the transitional period these measures will be broadly neutral, but by the end of the 1980s and into the 1990s business will benefit overall from the 35 per cent. rate of corporation tax. In addition, there will be from October the benefit of the abolition of NIS. There cannot be a period of revenue neutrality and even advantage in the first two years without disadvantage in the other part of the revenue neutral period. After the transitional period, we do not expect the corporate tax bill to be increased in the longer term.

The hon. Member for Great Grimsby (Mr. Mitchell) asked specifically about the references to the de Zoete and Bevan report which were picked up in The Guardian on 16 March. My right hon. Friend the Chancellor of the Exchequer did not conceal in his Budget speech that the effect of his stock relief and capital allowance measures and corporation tax changes, taking into account the transitional period, would be some increase in revenue. We believe that the figures quoted by de Zoete and Bevan are too high. Factors may have been overlooked such as the effect of forestalling in bringing forward investment in 1985 as well as in 1984. The overhang of tax losses and stranded ACT are also critical. A factor more difficult to quantify is the prediction of profit buoyancy and the general but stimulating effect of the Chancellor's measures.

The burden of company taxation is not simply a function of the nominal rate of tax. The present nominal rates of corporation tax are too high, partly because, as many hon. Members and the Labour party's economic programme for 1982 have said, of the number of special reliefs and allowances against profit. Cutting back on those aspects enables us to reduce the rate of corporation tax.

I shall give the framework around our proposals.

Photo of Mr Roy Hattersley Mr Roy Hattersley , Birmingham Sparkbrook

It is a new accounting procedure to talk about a four-year period being tax neutral. Will the hon. Gentleman clearly tell the House whether I am right to say that at the end of the transitional period the annual burden of corporation taxation will be higher than it is now at the beginning of the transitional period?

Photo of Mr John Moore Mr John Moore , Croydon Central

I could not have been clearer, but I shall repeat my statement. In a period of transitional change the assistance given to the business community by the benefits of the first two years of change is offset to some extent by the third and fourth years. The right hon. Member for Sparkbrook asked specifically about the period after the transitional period. It is difficult to be specific and to quantify this matter when we expect the proposals to generate increased profitability in British industry. We do not expect the corporate tax bill to be increased in the long term after the transitional period. There will be tax neutrality after the end of that period. We do not expect the corporation tax burden to be increased.

Photo of Mr Roy Hattersley Mr Roy Hattersley , Birmingham Sparkbrook

I am sorry to press the Financial Secretary on this matter, but he answered a question that I did not ask. I did not ask him to prognosticate about what will happen after the transitional period. I asked him about the tax take at the end of the transitional period, for which the Chancellor had budgeted. I suggested to the hon. Gentleman that the tax take from companies at that time would be higher than it is now. I asked the hon. Gentleman to confirm that point. As he is not giving a simple answer to a simple question, I shall tell him the answer. The answer is yes, and Treasury spokesmen agree.

Photo of Mr John Moore Mr John Moore , Croydon Central

I thought that I had put the point on the record as clearly as I could. If I did not, I shall repeat it. There may be some increase in corporation tax in 1986–87. In the period 1984–85 to 1988–89 corporation tax changes will be revenue neutral.

This programme should be introduced in the corporate sector. We are beginning to see the fruits of the firm financial policies that we have adopted since 1979. Inflation, as Opposition Members have generously acknowledged, has decreased to levels not experienced in the United Kingdom since the 1960s. For almost three years there has been a steady recovery in output. Companies can plan their future profitability on such a stable base. That is critical to a period of transitional change. Company profits have improved remarkably, and last year reflected increases in profit margins and turnover. The outlook for 1984 is that the improvement should continue.

Company liquidity has improved also, and by the end of 1983, judging by past standards, was fairly high. Against that background, company real rates of return remain low by historical and international standards. Accordingly, we believe that we can best help companies by encouraging the type of activity that generates decent rates of return in real terms. The way to achieve that is not by offering indiscriminate subsidies to investment, which can make projects with negative pre-tax returns profitable post-tax, but by lowering the tax bite on profits.

Corporation tax with fewer special reliefs and a much lower nominal rate will reward enterprise. The current 52 per cent. rate of corporation tax is far too high, discouraging profit-making activity. We believe that overgenerous tax allowances have led to an excessive concentration on tax-efficient investment. That is not what we need. Investment should be based on assessment of the market, not on assessment of the tax rates. Our proposals will leave business freer to make its own decisions and with more of its own money to back its judgment.

9.30 pm

The subject of employment has been raised. We believe that the lower rate of corporation tax with fewer special reliefs, reinforced by the abolition of the national insurance surcharge, will provide an incentive to increased employment especially in the medium term. The writer of the leader in the Financial Times, in a prescient article on 2 March in advance of the Budget, saw that clearly when he said:

The long-term rise in unemployment, indeed, has been virtually uninterrupted since heavy investment incentives were introduced by the Wilson Government in the late 1960s. The change has not helped growth, evidently, nor profits …but it has accelerated the substitution of labour for capital …a reform of corporate taxation as a whole, reducing distortions and passing back the savings in a lower rate of corporation tax would have enormous long-run effects. A neutral Budget could then contain a strong message of help for the unemployed. I shall be developing that point further because I believe that the points made by the hon. Member for Stoke-on-Trent, Central (Mr. Fisher) merit comment.

The 100 per cent. first-year allowances for plant and machinery have caused the tax system to subsidise unprofitable investment—for example, if a tax-paying company invests in machinery and finances its investment by borrowing it can achieve a positive, after-tax return on its investment even though the real pre-tax return is negative. In short, an unprofitable investment can be made viable by the tax breaks. That does not help the allocation of resources. What is needed, and what our corporation tax reforms achieve, is a more even-handed pattern of incentives so as to improve the quality of United Kingdom investment.

The much reduced rate of corporation tax which we propose will encourage new and existing higher yielding investment. There have been criticisms from the Opposition and in the press about the nature of the proposals — as to whether they have an anti-manufacturing bias. The right hon. Member for Sparkbrook referred to that. The TCSC also cast doubt on the Government's commitment to manufacturing. It is mistaken. The Government are committed to the success of British business—manufacturing as much as other sectors. We want profitable business of all kinds.

The tax system resulting from the Budget does not discriminate against manufacturing. It puts our businesses on a more equal footing by removing costly and indiscriminate tax subsidies for certain kinds of capital expenditure. The savings from that—this is critical—pay for the large reductions in the corporation tax rates which will increase the rewards for profitable investment; the old tax system encouraged investment which often showed a decent return only because of a large tax subsidy. At the same time, a high corporation tax rate discouraged investment in areas not subsidised by the tax system. Is it any wonder that United Kingdom investment as a whole—this is critical in a competitive world—showed a poor return? What is important, and what the Budget seeks to achieve, is to improve the profitability of investment.

The CBI has recognised the opportunities provided in the Budget and the shortcomings of the previous system. At this stage it might be better if I were to try to answer the question which the hon. Member for Stoke-on-Trent, Central asked about what was wrong with the old system. The old system discriminated sharply between different kinds of investment, as he said. It subsidised investment more, and in a more discriminatory way than in most other countries. Our aim is to remove the distortions, make the system simpler and, critically, more responsive to market rather than tax signals.

The old system discriminated in three ways. It discriminated between different categories of assets. They were treated differently. Debt, as he rightly said, was treated differently to equity. Capital was treated better than labour. The generosity and often discriminatory nature of capital allowances, to a considerable extent, reflected outdated economic and political priorities. They were expensive. They interfered with free market forces. They distorted decision making and produced less than optimum allocation of resources in the economy.

It is a comment that in our country the net product of the most generous system of such arrangements was to produce less efficient capital equipment plant behind the productive worker. That is not the kind of system that we would wish to see continued. The results are there for all to see. The old tax system has not led to a high-investment, high-performance economy—that is the critical point—compared with our major competitors. The system was always justified by the argument that the United Kingdom needed more investment. What we need, however, as I am sure is recognised by all hon. Members, is more profitable investment. All the evidence suggests that it is not under-investment as such but the poor quality and low productivity of investment which lies at the heart of the United Kingdom's problem.

Photo of Mark Fisher Mark Fisher , Stoke-on-Trent Central

Is the Financial Secretary saying that he can see companies in his constituency and elsewhere which have too much capital investment? Does he not recognise that, when he was implying that the Select Committee asserted that the effect of corporation tax and capital allowances together was to hurt manufacturing industry, he did less than justice to the Select Committee? It was not an assertion. It was based on the evidence given to the Select Committee by the TUC, by specialist advisers and, indeed, by Treasury officials. Will he address himself to the example I gave of the Institute of Fiscal Studies because that shows that manufacturing industry, far from being helped by these changes, will be paying more tax?

Photo of Mr John Moore Mr John Moore , Croydon Central

I am tempted to answer in detail. I shall write to the hon. Member on that example. I have the full details. I am afraid that they are not conclusive in support of the case that the hon. Member is seeking to make. I shall embarrass him more in private through the mail than in public across the Dispatch Box.

As I was saying, what we need is profitable investment. There is no virtue in investment for its own sake. After all, it pre-empts resources and involves the sacrifice of current satisfaction. A capital project is worthwhile only if the return adequately reflects the original sacrifice. Up to now much investment has not done so. It has been undertaken only because it has been subsidised by the taxpayers as a whole. The Association of British Chambers of Commerce said in its reaction to the Budget:

The existing system by which companies sought by unnecessary expenditure to avoid paying corporation tax on profits was a nonsense. The rates of return on manufacturing capital in the United Kingdom have been consistently lower than those of our competitors. We have produced much less output per unit of capital than our competitors. For example, an estimate for 1980—I referred to these figures in the Budget debate to show our unfortunate history in this area and I put the details on the record then — showed that Germany and the United States produced twice as much output per unit of capital in manufacturing as the United Kingdom. Looking at the use made of additions to capital stock, the United Kingdom has been producing less output for each additional unit than other countries, particularly in recent years.

I accept that there are many reasons why we have made poor use of capital, but it is hard to escape the conclusion that the tax regime has been a contributory factor. Certainly our system has positively encouraged too much wasteful diversion of investment resources to unprofitable projects at the expense of profitable projects. It has encouraged the inefficient use of capital equipment and it has encouraged the over-substitution of capital for labour.

My hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle), who has long had a reputation of sterling defence of out great insurance industry, raised an important point in relation to this clause. The corporation tax rate on income from investment held in connection with an insurance company's life business and reserves for policy holders is limited to a maximum of 37·5 per cent. Subsection (4) proposes to abolish this pegged rate with effect from the financial year 1986 by which time the main corporation tax rate will be down to 35 per cent. As I am sure all hon. Members will remember, the pegged rate was introduced in 1940. At the time it was introduced the income tax rate had risen substantially and there was also a reduction in the income retained by the insurance companies. It was expected that mortalities would rise as a result of the war. Thus the pegged rate was introduced to help insurance companies cope with a combination of wholly exceptional circumstances.

Whatever the historical reasons for introducing the pegged rate, circumstances are very different today. Tax rates are being reduced, not increased. Thus the 37·5 per cent. rate for insurance companies' life business is being abolished from the financial year 1986 because from then it will no longer be necessary. The income of insurance companies, like that of other companies, will be charged to tax at 35 per cent. and the pegged rate provision will become redundant. My hon. Friend has already expressed to me worry that the removal of the pegged rate will leave insurance companies unprotected from possible future increases in tax rates.

Our aim is to sustain the reduced taxation rates that the clause proposes. Certainty in taxation is not designed for the insurance industry alone. That is why we have, unusually, fixed corporation tax rates for four years to give all companies the certainty that will help them to plan ahead. Uncertainty is not the monopoly of the bank and insurance companies. Indeed, there is more certainty in that line of business than in general insurance.

I accept that insurance business is of a long-term nature, but almost all companies have to make long-term investment decisions. For most insurance companies; not only the taxation on future profits from investment is uncertain, but the profit itself. That is the nature of the business. Investors in industry—for example, preference shareholders—are promised a return which is almost as guaranteed as the proceeds from a life assurance policy. I am, therefore, not persuaded that the long-term nature of insurance business justifies the protection of a special rate which was introduced many years ago in different circumstances.

The right hon. Member for Sparkbrook and the hon. Member for Middlesbrough (Mr. Bell) discussed the problem of retained profits and investment. A number of figures have been bandied about concerning company profits and domestic and overseas investment. The right hon. Member for Sparkbrook contrasted improved profits and the sluggish domestic investment in 1982. The background to that is germane to tonight's discussion. Between 1979 and 1981 the company sector was squeezed hard between stubbornly rising cost pressures and falling demand at home and abroad. The first task of companies was to protect liquidity. That meant running down stock, rationalising employment levels and cutting back on domestic fixed capital expenditure.

Liquidity has been improving strongly since 1981 as cross pressures have eased and home demand has picked up. That is reflected in a recovery in profitability. The CBI expects an 8·5 per cent. rate of return to be earned by non-North sea industrial and commercial companies this year compared with the low of 4·5 per cent. in 1982. It is to be expected that there will be a time lag between the beginnings of a recovery in profitability and the upturn in investment. After that lag we are now seeing the improvement in company finances reflected in capital spending.

Domestic fixed investment by business is widely expected to improve sharply in 1984. The Budget forecast is for a 10 per cent. increase in domestic investment by non-North sea businesses. More recently the CBI forecast a 7 to 8 per cent. increase in manufacturing investment this year and next.

It is wrong to suggest that at a time of low investment extra profits were simply flowing overseas. Indeed, overseas investment by industrial and commercial companies fell from £5·6 billion in 1981 to £4·2 billion in 1982 and an estimated £4·4 billion in 1983. Over the same period, domestic fixed investment rose from £14·6 billion in 1981 to £14·8 billion in 1982 and 1983.

About two-fifths of investment overseas in 1982 was direct investment—in a declining pattern—by British companies in manufacturing and other facilities. Such investment helps to support jobs in this country by building up links with markets overseas for British goods and processes. About 30 per cent. of United Kingdom exports are shipped to associated companies overseas.

On the other hand, our portfolio investment by financial institutions has shown a substantial increase in recent years. However, it is wrong to suggest that that has been at the expense of investment by financial institutions in United Kingdom equities. The proportion of funds held in United Kingdom securities was the same in the recent past as in the last year of the Labour Government before exchange controls were removed.

As Government borrowing has been brought under control and domestic interest rates have come down, institutions have been able to move out of Government debt into overseas assets. Their investment overseas generates a stream of income which benefits, for example, the 15 million investors in United Kingdom pension funds.

There is no evidence that British companies are suffering from a shortage of finance for profitable investment. A Finance Bill which provides for a reduction in the corporation tax rate of 35 per cent. should provide ample incentive for investment in the United Kingdom by British firms and financial institutions and foreigners alike. I recommend the Committee to accept the clause.

Photo of Mr Roy Hattersley Mr Roy Hattersley , Birmingham Sparkbrook

The Financial Secretary could not be more explicit in accepting the provisions in the clause and package. The package is tax neutral over the four-year period and moves the tax emphasis from the provision of special incentives to invest to a general reduction in tax on profits. The Opposition regard that shift as wrong.

9.45 pm

My second objection is that the shift moves incentives to invest from manufacturing industry and, therefore, benefits services at the expense of manufacturing industry. We strongly oppose that package and, therefore, we shall divide the Committee and vote against the clause standing part of the Bill.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 233, Noes 126.

Division No. 265][9.45 pm
Aitken, JonathanGreenway, Harry
Ancram, MichaelGregory, Conal
Arnold, TomGriffiths, E. (By St Edm'ds)
Ashby, DavidGriffiths, Peter (Portsm'th N)
Ashdown, PaddyGround, Patrick
Atkins, Robert (South Ribble)Hamilton, Neil (Tatton)
Baldry, AnthonyHampson, Dr Keith
Batiste, SpencerHanley, Jeremy
Beaumont-Dark, AnthonyHargreaves, Kenneth
Bellingham, HenryHarris, David
Berry, Sir AnthonyHavers, Rt Hon Sir Michael
Biffen, Rt Hon JohnHawkins, C. (High Peak)
Boscawen, Hon RobertHawkins, Sir Paul (SW N'folk)
Bowden, Gerald (Dulwich)Hawksley, Warren
Braine, Sir BernardHayes, J.
Brandon-Bravo, MartinHayhoe, Barney
Browne, JohnHayward, Robert
Bruce, MalcolmHeathcoat-Amory, David
Budgen, NickHenderson, Barry
Butterfill, JohnHill, James
Clark, Dr Michael (Rochford)Hirst, Michael
Clark, Sir W. (Croydon S)Holland, Sir Philip (Gedling)
Clegg, Sir WalterHolt, Richard
Cockeram, EricHooson, Tom
Colvin, MichaelHoward, Michael
Conway, DerekHowarth, Alan (Stratf'd-on-A)
Coombs, SimonHowarth, Gerald (Cannock)
Cranborne, ViscountHowell, Ralph (N Norfolk)
Crouch, DavidHowells, Geraint
Dorrell, StephenHubbard-Miles, Peter
du Cann, Rt Hon EdwardHunt, David (Wirral)
Evennett, DavidHunter, Andrew
Favell, AnthonyJessel, Toby
Fenner, Mrs PeggyJohnson-Smith, Sir Geoffrey
Finsberg, Sir GeoffreyJones, Gwilym (Cardiff N)
Fletcher, AlexanderJones, Robert (W Herts)
Forman, NigelJoseph, Rt Hon Sir Keith
Forsythe, Clifford (S Antrim)Kellett-Bowman, Mrs Elaine
Forth, EricKershaw, Sir Anthony
Fox, MarcusKey, Robert
Franks, CecilKing, Roger (B'ham N'field)
Fraser, Peter (Angus East)King, Rt Hon Tom
Freeman, RogerKirkwood, Archibald
Fry, PeterKnight, Gregory (Derby N)
Galley, RoyLamont, Norman
Gardiner, George (Reigate)Lang, Ian
Garel-Jones, TristanLatham, Michael
Goodhart, Sir PhilipLawler, Geoffrey
Goodlad, AlastairLawrence, Ivan
Grant, Sir AnthonyLeigh, Edward (Gainsbor'gh)
lennnox-Boyd, Hon MarkRoe, Mrs Marion
Lester, JimRoss, Wm. (Londonderry)
Lewis, Sir Kenneth (Stamf'd)Rowe, Andrew
Lightbown, DavidRyder, Richard
Lilley, PeterSackville, Hon Thomas
Lloyd, Ian (Havant)Sainsbury, Hon Timothy
Lloyd, Peter, (Fareham)Shaw, Giles (Pudsey)
Lord, Michaelhelton, William (Streatham)
McCrindle, RobertShepherd, Colin (Hereford)
McCurley, Mrs AnnaShepherd, Richard (Aldridge)
McCusker, HaroldSims, Roger
MacKay, Andrew (Berkshire)Skeet, T. H. H.
MacKay, John (Argyll & Bute)Smith, Sir Dudley (Warwick)
Maclean, David JohnSmith, Tim (Beaconsfield)
McNair-Wilson, P. (New F'st)Smyth, Rev W. M. (Belfast S)
Maginnis, KenSoames, Hon Nicholas
Major, JohnSpencer, Derek
Malins, HumfreySquire, Robin
Maples, JohnStanbrook, Ivor
Marland, PaulSteen, Anthony
Mather, CarolStern, Michael
Maude, Hon FrancisStevens, Lewis (Nuneaton)
Mawhinney, Dr BrianStevens, Martin (Fulham)
Maxwell-Hyslop, RobinStewart, Allan (Eastwood)
Meadowcroft, MichaelStewart, Andrew (Sherwood)
Merchant, PiersStewart, Rt Hon D. (W Isles)
Meyer, Sir AnthonyStewart, Ian (N Hertf'dshire)
Mills, lain (Meriden)Stokes, John
Mills, Sir Peter (West Devon)Stradling Thomas, J.
Miscampbell, NormanSumberg, David
Moate, RogerTapsell, Peter
Molyneaux, Rt Hon JamesTaylor, John (Solihull)
Moore, JohnTaylor, Teddy (S'end E)
Morris, M. (N'hampton, S)Tebbit, Rt Hon Norman
Morrison, Hon C. (Devizes)Temple-Morris, Peter
Morrison, Hon P. (Chester)Terlezki, Stefan
Moynihan, Hon C.Thomas, Rt Hon Peter
Mudd, DavidThompson, Donald (Calder V)
Murphy, ChristopherThompson, Patrick (N'ich N)
Neale, GerrardThurnham, Peter
Needham, RichardTownend, John (Bridlington)
Nicholls, PatrickTrotter, Neville
Nicholson, J.Twinn, Dr Ian
Normanton, Tomvan Straubenzee, Sir W.
Norris, StevenVaughan, Sir Gerard
Oppenheim, PhilipViggers, Peter
Oppenheim, Rt Hon Mrs S.Wainwright, R.
Osborn, Sir JohnWakeham, Rt Hon John
Ottaway, RichardWaldegrave, Hon William
Page, Richard (Herts SW)Walker, Cecil (Belfast N)
Parkinson, Rt Hon CecilWaller, Gary
Parris, MatthewWard, John
Pawsey, JamesWardle, C. (Bexhill)
Peacock, Mrs ElizabethWells, John (Maidstone)
Penhaligon, DavidWheeler, John
Percival, Rt Hon Sir IanWhitfield, John
Pollock, AlexanderWilson, Gordon
Powell, Rt Hon J. E. (S Down)Winterton, Mrs Ann
Powell, William (Corby)Winterton, Nicholas
Powley, JohnWolfson, Mark
Prentice, Rt Hon RegWood, Timothy
Price, Sir DavidWoodcock, Michael
Proctor, K. HarveyWrigglesworth, Ian
Pym, Rt Hon FrancisYoung, Sir George (Acton)
Rees, Rt Hon Peter (Dover)
Rhodes James, RobertTellers for the Ayes:
Rhys Williams, Sir BrandonMr. Archie Hamilton and
Ridsdale, Sir JulianMr. Douglas Hogg.
Roberts, Wyn (Conwy)
Abse, LeoBarron, Kevin
Adams, Allen (Paisley N)Beckett, Mrs Margaret
Anderson, DonaldBell, Stuart
Archer, Rt Hon PeterBenn, Tony
Ashley, Rt Hon JackBennett, A. (Dent'n Red'sh)
Atkinson, N. (Tottenham)Bermingham, Gerald
Bagier, Gordon A. T.Bidwell, Sydney
Banks, Tony (Newham NW)Blair, Anthony
Barnett, GuyBoyes, Roland
Bray, Dr JeremyLamond, James
Brown, R. (N'c'tle-u-Tyne N)Leadbitter, Ted
Caborn, RichardLeighton, Ronald
Callaghan, Jim (Heyw'd & M)Lewis, Ron (Carlisle)
Campbell-Savours, DaleLitherland, Robert
Carter-Jones, LewisLofthouse, Geoffrey
Clark, Dr David (S Shields)Loyden, Edward
Clay, RobertMcDonald, Dr Oonagh
Cocks, Rt Hon M. (Bristol S.)McGuire, Michael
Cohen, HarryMcKay, Allen (Penistone)
Coleman, DonaldMcNamara, Kevin
Conlan, BernardMcWilliam, John
Cook, Frank (Stockton North)Madden, Max
Corbett, RobinMarshall, David (Shettleston)
Corbyn, JeremyMaynard, Miss Joan
Cowans, HarryMichie, William
Cox, Thomas (Tooting)Mikardo, Ian
Craigen, J. M.Milian, Rt Hon Bruce
Crowther, StanMiller, Dr M. S. (E Kilbride)
Cunliffe, LawrenceMitchell, Austin (G't Grimsby)
Dalyell, TamMorris, Rt Hon A. (W'shawe)
Davies, Ronald (Caerphilly)Morris, Rt Hon J. (Aberavon)
Davis, Terry (B'ham, H'ge H'!)O'Brien, William
Dixon, DonaldPark, George
Dobson, FrankPatchett, Terry
Dormand, JackPike, Peter
Dubs, AlfredPowell, Raymond (Ogmore)
Duffy, A. E. P.Randall, Stuart
Dunwoody, Hon Mrs G.Redmond, M.
Eadie, AlexRees, Rt Hon M. (Leeds S)
Evans, John (St. Helens N)Robertson, George
Ewing, HarryRobinson, G. (Coventry NW)
Fatchett, DerekRooker, J. W.
Faulds, AndrewSedgemore, Brian
Field, Frank (Birkenhead)Sheldon, Rt Hon R.
Fisher, MarkShort, Ms Clare (Ladywood)
Flannery, MartinShort, Mrs R.(W'hampt'n NE
Foster, DerekSilkin, Rt Hon J.
Fraser, J. (Norwood)Skinner, Dennis
Freeson, Rt Hon ReginaldSmith, C.(lsl'ton S & F'bury)
Garrett, W. E.Snape, Peter
George, BruceStott, Roger
God man, Dr NormanStrang, Gavin
Gould, BryanThomas, Dr R. (Carmarthen)
Hamilton, W. W. (Central Fife)Tinn, James
Hardy, PeterWardell, Gareth (Gower)
Hart, Rt Hon Dame JuditWeetch, Ken
Hattersley, Rt Hon RoyWelsh, Michael
Hogg, N. (C'nauld & Kilsyth)Wigley, Dafydd
Hoyle, DouglasWinnick, David
Hughes, Dr. Mark (Durham)Woodall, Alec
Hughes, Robert (Aberdeen N)Young, David (Bolton SE)
Hughes, Roy (Newport East)
Hughes, Sean (Knowsley S)Tellers for the Noes:
Janner, Hon GrevilleMr. Frank Haynes and
Kaufman, Rt Hon GeraldMr. James Hamilton.

Question accordingly agreed to.

Clause 18 ordered to stand part of the Bill.