Charge and Rate of Corporation Tax for Financial Year 1989

Orders of the Day — Finance Bill – in the House of Commons at 11:30 pm on 9th May 1989.

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

Photo of Mr Ted Rowlands Mr Ted Rowlands , Merthyr Tydfil and Rhymney

If we accept clause 32, we shall be accepting a uniform corporate rate for all companies. I take this opportunity to debate the situation affecting not the smaller firms that were the subject of clause 33 but mature manufacturing sector companies of medium to large size.

I wonder whether the Government have noticed what is beginning to happen among such companies, particularly those in the consumer durable and white goods sectors, which still account for a significant number of jobs and for an important part of the country's ecomomy. I therefore question whether we should automatically endorse rates of 35 per cent. for all companies, irrespective of their current situation.

I represent a community in which the only manufacturing base we have left is what I call the mature manufacturing sector, which is in consumer durables, selling to a replacement market rather than one for innovative products. They are seeking to encourage consumers to replace washing machines and so on—the consumer durable white goods. As a result of this they are finding increasing difficulty in making such sales.

One of the major problems has been the increase in interest rates, which has led to a reduction in consumer power and therefore an increasing problem of growing stocks in this manufacturing sector. I raise this because I have a horrible feeling that we are about to enter another phase in which, for the Chancellor's policy to work, a number of our people will be put out of work. We went through it in the early eighties, and we were told we were over it by the Government, but now again we are seeing the terrible tell-tale signs. As a result of high interest rates and the dampening down of consumption, which I understand is the Government's case for high interest rates, the biggest impact will be not upon the imported manufacturing sector but on the domestic mature manufacturing sector. Sales in a whole area of our existing manufacturing sector will be affected by high interest rates.

The Treasury never understands what happens to the economy. It runs this system, but never looks closely at what happens in micro terms as a result of general, broad economic policy and use of fiscal instruments. For example, high interest rates are a blunt instrument which affects everybody and everything. In the communities I represent, in the industries I know most about because my constituents are still employed in them, stocks are rising, sales are falling and we are beginning to worry about whether we shall have redundancies once again in this sector.

I do not know what the answer is. Should there be a differential rate of interest for the manufacturing sector? Apparently not. So I raise the question whether there should be a differential rate of corporation tax. My right hon. Friend the Member for Llanelli (Mr. Davies) put down an amendment, which was not accepted for an understandable reason, to introduce such a differential. I ask the Minister whether he is happy with the fact that in this mature manufacturing sector there will be problems with employment. Will we go through a new phase of redundancies? Will we yet again find ourselves being put out of work? On the other hand, does he think the economy will grow and we can see ourselves through this?

I am not happy, and I therefore seek the opportunity on this clause to arouse the interest of the Government in this problem. Please will the Minister tell me whether he believes that as a result of high interest rates we shall be out of work, as we were in the early eighties?

Photo of Mr Peter Brooke Mr Peter Brooke Paymaster General (HM Treasury), Party Chair, Conservative Party 11:45 pm, 9th May 1989

I am delighted to respond to the hon. Gentleman the Member for Merthyr Tydfil and Rhymney (Mr. Rowlands). At the risk of extending my family references, my grandfather grew up in Rhymney as the son of the secretary of the iron works, and I am delighted to have this link with the hon. Member. He addressed the set-off between inflation and interest rates, and posed various questions about what the future might hold for us and probed whether the Government understood what was happening. Of course the Government understand the effect of a period of high interest rates on the economy and the level of demand, and the impact of that on manufacturers in the hon. Gentleman's constituency. Without question, however, we regard inflation as a much more serious problem and one that must be defeated and cured. A period of high interest rates is, in our view, a sensible instrument to use to achieve that objective.

Since 1979—I am now addressing myself to the hon. Gentleman's query on behalf of his right hon. Friend the Member for Llanelli (Mr. Davies) about whether there should be a differential rate of corporation tax for the manufacturing side—there has been a major turnaround in the fortunes of manufacturing industries, which are now in a far stronger position than they have been for many years. Output has reached record levels. In 1988 alone it grew by 7 per cent., and the latest figures show that that growth is continuing. In the three months to February, output was 7·5 per cent. higher than it was in the same period last year. The pattern has been observable over a significant period; over the past two years annual growth has consistently exceeded 5 per cent. We have not experienced such developments for a long time.

Photo of Mr Ted Rowlands Mr Ted Rowlands , Merthyr Tydfil and Rhymney

The Minister has drawn from his historic and family experience of our communities. May I bring him up to date? The area that I represent—along with other parts of the Principality and the rest of the country—has experienced threatened redundancies, shorter working weeks and rising stocks in consumer durables. Will the Minister answer a simple question? Dos he believe that for the Chancellor's policy to work more of our people must be put out of work?

Photo of Mr Peter Brooke Mr Peter Brooke Paymaster General (HM Treasury), Party Chair, Conservative Party

It is certainly not my right hon. Friend's purpose that people should be put out of work; it is his purpose, however, that the level of demand in the economy should be somewhat reduced to achieve the beneficial effect on inflation that we seek. The hon. Gentleman cannot press me to make a specific forecast about what will happen in Merthyr Tydfil, which—in a pluralist system—will, by definition, depend on the companies involved. But there is no doubt that, first, manufacturing industry has been doing extremely well in the recent past, and, secondly, the Government see no reason for the differential rate of tax that the hon. Gentleman seemed, by implication, partly to suggest.

Photo of Mr Ted Rowlands Mr Ted Rowlands , Merthyr Tydfil and Rhymney

The Minister winds his words around. I do not ask him to make a forecast; I simply ask him to confirm or deny that the potential consequence of high interest rates in a mature manufacturing sector is more people out of work. The Minister says that he wants to dampen down consumption; one of the effects of that is increased unemployment. Does he agree with that proposition?

Photo of Mr Peter Brooke Mr Peter Brooke Paymaster General (HM Treasury), Party Chair, Conservative Party

The hon. Gentleman is talking about a highly complex interlocking set of equations.

Photo of Mr Peter Brooke Mr Peter Brooke Paymaster General (HM Treasury), Party Chair, Conservative Party

The hon. Gentleman can say that they are only words, but the fact remains that what happens to wage rates in such circumstances directly affects what will happen in his constituency. I would find it difficult to make such a forecast.

What the Chancellor is seeking to do is bring the economy back to a state of equilibrium in which there is no excess demand, inflation can be wrung out of the economy and we can revert to the steady growth that the country has seen over the past seven or eight years—growth that it has rarely known before in its history.

Question put and agreed to.

Clause 33 ordered to stand part of the Bill.

To report progress and ask leave to sit again.—[Mr. Heathcoat-Amory.]

Committee report progress; to sit again tomorrow.