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Price Code

Volume 885: debated on Thursday 30 January 1975

The text on this page has been created from Hansard archive content, it may contain typographical errors.

10.22 p.m.

I beg to move,

That the Counter-Inflation (Price Code) Order 1974 (S.I., 1974, No. 2113, a copy of which was laid before this House on 18th December, be approved.

With this we are taking the following motion:

That the Counter-Inflation (Price Code) (Amendment) Order 1974 (S.I., 1974, No. 2158), a copy of which was laid before this House on 19th December, be approved.

After the Price Code Order had been made and printed—and it is the revision of the Price Code that we are discussing tonight—an error in the reference to the stage 3 Price Code Order was brought to my attention. Since the stage 3 code is now to be replaced by stage 4 it seemed to me unacceptable that this should be allowed to stand uncorrected, with an opening for argument whether or not the old Price Code Order had been revoked. I mention that because the second order we are considering is purely procedural and I trust that we shall not have to debate it further beyond my explanation. I apologise to the House for the error, which was essentially a printing error, and it has now been put right.

I should like to turn to the substantial points raised by the new code and the changes I have introduced in comparison with the original stage 3 code and, in particular, those changes that have been introduced as a result of the period of consultation through which I and my Department have gone. There are three matters to which I shall refer, although I shall not speak at length because I recognise that there is not much time for debate and no doubt several hon. Members on both sides of the House will wish to take part.

The first matter on which I wish to touch is the new investment relief. Over the years Opposition Members have often spoken about the importance of investment and have said a great deal about the need to encourage it, but the truth of the matter is that the previous Price Code gave no recognition to the importance of investment. Indeed, no provision was made in the Price Code as it stood to reflect increases in investment and new investment. I find that puzzling, and it is a marked improvement that the Price Code should now contain provision for investment relief. Two-fifths of the relief given will be linked directly to investment that actually takes place. I shall come in a moment to the system of monitoring which the Price Commission, at my instruction, has established with a view to making sure that this investment takes place. We believe it right and proper that there should be an easement of the code for firms which invest and not for firms which do not invest, and that there should be a link between the two.

We are also glad to say that in the last few weeks since the revised Price Code was published marked interest has been shown by firms in the new investment relief. We have reason to believe that this will be very substantial indeed. Investment is not a once-for-all activity. The hon. Member for Aylesbury (Mr. Raison) on 2nd December raised the very pertinent question of what the Government could do to establish the investment relief as an ongoing incentive. It was a fair question, because if a firm invests and receives relief at the rate of 17½ per cent., it needs to be sure that the relief will continue to make it worth while. The firm cannot take a gamble.

What we have done, so far as we are able within the restrictions imposed by the period through which the Counter-Inflation Act lasts—which is until the spring of 1976 only—is to make it clear that we are able to meet the hon. Gentleman's point at least to the extent of providing that firms which have raised their prices or profit margins under the investment relief may continue to hold prices at this level.

With regard to the details, we have extended the investment relief in two ways. First, we have extended relief to warehouses, these being of particular significance to the food industry and the food manufacturing industry. Secondly, after consideration, we have extended it to include industrial buildings and other plant and machinery which has been obtained under long-term leasing and hiring arrangements or under hire-purchase agreements. This was done in response to a number of representations which were made to us by a number of firms involved in the processing industries.

What we have not done at present is to extend investment relief to cover commercial vehicles. The order books in the autumn for the export of commercial vehicles were good, and the commercial vehicles sector of the motor industry was facing the problem of delivery rather than the problem of orders for export. However, if that situation changes, and in the light of the extent to which investment relief is taken up, I repeat what I have said previously—namely, that we would be happy to consider again whether to extend investment relief in this way. But I must make it clear that the two factors which must be taken into account are the state of the export order books, and how far the investment relief is taken up in other directions.

The other point in repect of investment relief is that we have taken steps to limit the extent to which price increases can be loaded on a single product, but we have given a degree of scope because of the problems a firm may have in respect of the market in spreading increases over a wide range. Finally, we have taken some steps in respect of industries which have small price increases in currency terms, of which the newspaper industry is perhaps the best example.

I wish some of my hon. Friends had stayed for this part of the debate because there is something I should like to say to them. However, I shall have to ask them to read it in Hansard. Investment relief is closely tied to a monitoring system to make sure that it takes place. We have arranged for the Price Commission to take a further look at whether a price application could be sustained it the investment for which a firm had applied for relief did not take place. This is to be done on a rolling basis—that is to say, there will be constant monitoring of the situation on a quarterly basis.

I want to assure my right hon. Friend that I have heard every word.

Some of my hon. Friends—not my hon. Friend the Member for Newcastle-upon-Tyne, East (Mr. Thomas)—have argued that they do not believe that the investment relief through the Price Code is a proper way of doing it. I urge two propositions upon them.

The first is that any Government would be irresponsible if they did not take steps at this time in our economic cycle to encourage investment in future growth. They should try, as far as possible, to break out of the straitjacket which has time and again afflicted British industry under both Governments. They should do this by ensuring that capacity is not increased in a period of less economic activity. When the period of economic activity improves, they should not immediately run into restraint of capacity in terms of both plant and machinery and skilled men and women. I believe that we should take the opportunity—a sad opportunity—of a period of less activity and of some redundancies not to allow this to happen but to try to use it to break out of this restraint on a long-term basis.

Another thing that I would have said to my hon. Friends had they still been here, and will say to them through Hansard, is that the link between investment and prices is not a bad way of attempting what I think would be the best use of a planning agreement; that is, to relax the Price Code where firms are determined to get growth.

I turn next to the productivity deduction. Hon. Members will know that there has been pressure for a still greater cut in the productivity deduction than the one that we have made. We have not been able to meet this pressure fully. Indeed, we would not think it right to do so, because we could not accept the complete removal of the productivity deduction at a time when pressures on costs are still great.

We have endeavoured to meet some of the points made to us by introducing a transitional rate. This transitional rate applies to firms which made wage settlements prior to 1st November 1974, on which date the revised code came into force. We recognise that some wage settlements fell due in September and October. Therefore, it is not fair to penalise them to the extent of 50 per cent. for what might be a year, or even longer, because they had traditional dates for wage settlements.

We have tried to meet these points by bringing in a transitional rate of 35 per cent., which is set midway between the 50 per cent. that they believed they would have to pay and the 20 per cent. that those who had wage settlements after 1st November have had to pay. This has been welcomed by firms in that position.

Another point about the productivity deduction concerns the sliding scale. By that I mean the higher productivity deduction for firms with a high capital intensivity. I would not argue the case for this over a long period. Indeed, I do not think that it would be proper to do so, because capital intensive industries are among the most rapidly growing of our industries and, therefore, most likely to have to carry the weight of this country's export and economic growth over the next decade or so. But in the immediate situation the problem that above all faces us is that of redundancy and unemployment. Therefore, I think it proper to provide for a lower rate of productivity deduction for firms whose labour costs form a substantial part of the whole. Incidentally, these firms are often in the low-paid sector—textiles, some of the food industries, and so on. They are not, by and large, to be compared with the higher-paid industries which are typically capital intensive, such as oil refining and chemicals.

I turn now to the safeguards. Throughout I have made it clear that I do not believe that a régime of safeguards is the prime use of a Price Code. Indeed, the worry is that safeguards make no distinction between the well- and the ill-managed, the efficient and the inefficient, those with good and effective labour relations and those with bad labour relations. Safeguards in the end are a licence to survive to good, bad, competitive or uncompetitive companies.

So we have tried not to invoke the régime of safeguards too much and, therefore, have put the weight of our reliefs on investment relief and the productivity deduction. Nevertheless, one cannot completely remove the safeguards in the old code, so we have done two things in addition to what I said when we were discussing the original consultative document.

First, we have responded to the desire of industry to be offered one or other of the safeguards. The first is the original stage 3 safeguard which allowed a firm to retain 90 per cent. of its profit margin but only in relation to erosions created by the Price Code itself. As an alternative, we have offered firms a new safeguard under which they are protected if there is an erosion of their profit margins of about one-third, although this may arise from any cause whatsoever—that is to say, it does not have to be shown to be entirely due to the Price Code.

Those hon. Members who are interested in, and indeed understand—God help them—the intricacies of the Price Code will know, as I do, that it has often been very difficult for a firm to prove that the erosion flows from the Price Code rather than from some other cause. Indeed, it would require a theologian of the level of the thirteenth century canon lawyers to be able to establish invariably the source of the erosion of profits.

So we have introduced, now slightly conceded to 30 per cent., a fresh alternative safeguard and, therefore, a firm may select which of the two it believes more relevant to it. But that firm must make a choice once and for all. There is no other possibility; indeed, the only way that we could introduce an option was on the understanding that there must be one choice and that that choice must be for the remainder of the period of the Counter-Inflation Act. Anything else would create impossible administrative and bureaucratic difficulties.

My other point on safeguards is on that which applies to distributors. Here we have agreed that retail distributors may go up to a limit of 105 per cent. of the gross margins to achieve a net profit margin safeguard, which has now been set at 80 per cent. Therefore, the gross margin has been loosened for purposes only of achieving a net profit safeguard, because it was pointed out to us—although it is not strictly true—that many firms believe that if they once reached the gross reference margin level they would have to fall below their safeguard level and would be playing a sort of somersault and leapfrog mixed up one with another. This was not, in fact, so, but many firms believe it to be the case, and so we have tried to simplify this very complicated section of the Price Code.

I should like to mention one or two other essential changes in the criteria under which the Price Commission will deal with applications from nationalised industries. These are in paragraphs 98 to 105 of the new code and they are, of course, in line with the Government's desire to put nationalised industries increasingly on the same basis as private industry in the matter of controls and constraints.

However, it would be impossible in a short period to bring nationalised industries away from the subsidy situation that we discussed earlier. Consequently, Ministers will still have the power within the difference between the absolutely basic covering of costs and the maximum allowed under the Price Code—that is to say, the 10 per cent. on investment of capital or the 2 per cent. on turnover—to exercise their powers. But at least the range is now basically the same for nationalised industries as for private industry, and we believe that this should be commended by those who essentially want a proper relationship between the public and private sectors.

I am not besotted or enamoured of Price Codes. In many ways, they are complicated bureaucratic expressions. We have done our best with the Price Code that we inherited because, as most fair-minded Members will recognise, it would have been impossible simply to sweep it away when inflationary pressures were what they have been over the last couple of years. Indeed, we are bound to look at the American experience, which was the experience of a very sudden leap when they removed their price controls.

In saying this, I do not mean—as some Opposition Members will wish I meant—that I am totally opposed to any form of price control. I am not. I simply do not feel that the elaborate system of the Price Code is necessarily the most effective way to create dialogue on the whole question of prices, investment, growth and all the rest. I myself, in many ways, would prefer the French system, which, although in some respects rather crude, has operated effectively in terms of growth and not too ineffectively in terms of prices. As we move towards the system of planning agreements—industry ought not to be as frightened or suspicious about these planning agreements as some are—we shall be able to provide a better answer to the problems which beset economies such as ours.

I commend this Price Code to the House on the simple basis that at long last it recognises the need for investment, that this should always have been a basic feature of it, and that it is at least an attempt to meet what are the real problems of indusry, on both sides—trade unions and employers. When firms are threatened with growing redundancies, with problems about the cash to keep themselves viable and going, we have made at least some contribution, I hope, towards what I regard as the essential 'job of trying to avoid a recession deeper than it otherwise needs to be.

10.41 p.m.

I share the Secretary of State's regret, though not her embarrassment, about the lack of Labour back-bench Members on her side of the House—with the exception of the hon. Member for Newcastle upon Tyne, East (Mr. Thomas).

The Secretary of State quoted the thirteenth century canon lawyers. I have a suspicion that those lawyers and theologians, if alive today, would not have had to exercise themselves very much about their favourite question—how many Labour back benchers can one get on the head of a pin. They would see remarkably few.

Clearly, the new code gives some overall improvement on the previous code. Because it is an improvement, we shall not oppose it. Not merely do we say that the code represents an improvement, but we welcome the concessions which have been made since the draft code was debated in the House a few weeks ago. The fact remains, however, that in some respects the changes do not go far enough. I shall return to that matter shortly. I want, first to make some general comments on the code.

There are two lines of objection to the code. The first is that it is screwing industry down at a time when in some cases it is in desperate need of greater profitability. The second is that the code is increasingly irrelevant, as competition is anyway holding prices below permitted levels. On the face of it, those two objections are contradictory criticisms of the code. But both can be true at the same time, because these lines of attack apply to different areas.

One of the difficulties is that one cannot generalise all that easily about the effects of the code. They vary from industry to industry. Nevertheless, one generalisation is very true—that is that the economic situation is very different to that pertaining when the code was launched by the Conservative Government. Then, the truth is that prices were making all the running, with profits and commodity prices contributing. Today, the pressure is coming overwhelmingly from pay and wages. Goodness knows, prices are high enough at present, with the December retail price index up by 19·1 per cent. over the previous year. The Government have failed clearly and disastrously to fulfil their pre-election claims. But it is neither raw material costs nor profits which are responsible for the present upsurge. It is labour costs.

The latest Price Commission report, which is an extremely interesting and important document, tells this story very clearly indeed when it states on page 4:
"we estimate that, in the three months to November, increased labour costs would have accounted, not for 33 per cent. of price increases, but for 60 per cent."
The problem is certainly not high profits. The commission is again specific. It says:
"In the third quarter of 1974, profit margins of Category I companies have fallen to 51 per cent. of reference levels."
Even if oil is excluded—there are special factors resulting in a loss in the oil sector—the figure is still only 60 per cent. Experience with category 2 manufacturing and service companies is much the same, the third quarter figure being 54 per cent. only. There is one more highly relevant quotation:
"Now that output is no longer rising, profit margins are falling and the effect of the price control is to push them down even faster."
Thus the picture is now of pay racing ahead with the Chancellor's claim that inflation can be down to 10 per cent. this year and into single figures next year looking more and more of a mirage.

The question is whether the code is the right way of dealing with this problem. In these circumstances there is a temptation for the Government to try to use the Price Code as a way of keeping down wages. The Secretary of State's notorious threat last year of introducing penalties through the productivity deduction system illustrates this. I am glad that this idea does not appear in the revised code. I should be grateful for an assurance from the Minister, however, that we shall not see this idea resurrected in a future code.

It is grossly unfair to industry to make management responsible for the weaknesses in the social contract. That seems quite unacceptable quite apart from the fact that anything of this sort would be incredibly complicated and all too liable to be extremely arbitrary. It is hard, if not impossible to reconcile the notion of penalties with the notion of voluntary incomes policy to which the Government are said to be attached.

The Government must look to other ways of dealing with income inflation. Even at 20 per cent., increased wages and falling production mean that the productivity deduction is now inflicting greater hardship than did the old 50 per cent. deduction when it was first introduced in happier economic circumstances. I have some sympathy with the point put to the Secretary of State at a dinner in Birmingham on Tuesday that the deduction should now go.

The Secretary of State raised the question of investment relief. I welcome what she said. This relief is capable of being a help. I see the point about the law expiring in 1976, but the Secretary of State's undertaking was valuable. However, the general liquidity crisis means that many companies have been obliged to cut back their investment programmes and are unable to take advantage of this provision. The investment situation is still very serious.

Next I wish to deal with inflation accounting. It still seems anomalous that calculations on a replacement cost basis should be permitted for taxation purposes but not generally for the purposes of the code. I hope that when the Sandilands report comes out the Government will be able to take it into account in respect of prices as well as on the general question of taxation.

When the Secretary of State reexamines the code, I hope she will bear in mind that there is a good deal in the view that the quarterly assessment of the performance of businesses as regards gross and net margins should be changed to an annual assessment except in special circumstances. Many businesses fluctuate with the seasons, and that presents a problem for them.

These points must be taken into account if and when we have another draft of the code, but increasingly we may be moving towards the position in which the code is no longer effective or desirable except maybe as a piece of politics in connection with the social contract. A comparison of the successive Price Commission reports shows that overall its impact is diminishing. Perhaps even more telling than the quarterly documents is the commission's comment on page 20 of its latest report that
"competitive position, consumer resistance and other economic factors have in general prevented distributors from increasing their prices sufficiently to maintain their margins."
After all, distribution is an area where there has been greatest concern and what has been said there is of very great importance.

What we want at the very least is assurances that the Government, with the commission's aid, will closely watch for signs of the point when the code ceases to hold down prices, and perhaps even tends to bring them up, as could happen in a recession. We hope that the Government will accept the need to do that, and that they will not be swayed by general political considerations.

We shall not oppose the new code, as it is a step in the right direction, and we do not want to see the previous code kept in being. But—like the Secretary of State, I think—we look forward to the day when we can say "Goodbye" to the whole notion.

10.50 p.m.

I first declare an interest, as a director of J. Sainsbury Ltd. and other companies. It will perhaps not be surprising if, having declared that interest, I say that I want to speak particularly about distribution as it is affected by the Price Code.

Before doing so, I should like to make a few more general remarks, particularly to follow up the Secretary of State's excellent statement explaining why we should not have a price code at all. I congratulate her upon a fine exposition of some of the many disadvantages that flow from the operation of a price code such as we now have. There are certain special factors that deserve to be brought out a little more than even the Secretary of State has so far succeeded in doing, ably assisted by my hon. Friend the Member for Aylesbury (Mr. Raison).

We are at stage 4, and the whole shooting match is not yet two years old. It is rather depressing that we have already reached that stage. The emphasis that is rightly being given to investment is very relevant, because the longer one runs a price code that is related to a base date—and it must necessarily be related to a base date—the greater the distortions, disturbances and distractions one introduces into the whole operation of commerce and industry. The longer one operates a price code that refers back more than a year—nearly two years in this case—the more likely it is that one is looking back to a period that is not relevant to circumstances today, and therefore the more likely it is that any encouragement one tries to give to investment will be defeated by the problems posed by the reference periods to which the code refers.

The base date for manufacturing industry unit costs—30th April 1973—is nearly two years ago. For distribution it is even worse. I am sure that the Under-Secretary is well aware that there are already anomalies in the very idea of having reference back to a year that ended on or before 30th April 1973, which could cover a wide variety of periods. We are looking back all the time, when we should be looking forward. Changing circumstances make that backward glance less and less appropriate to the current climate.

With regard to the relative movement of costs, my hon. Friend has already referred to the movement of wage costs, but they are not the only costs that are now changing rather differently as compared with the pattern of movement two years ago. Fuel costs are another example. It is a question not only of the relative movement of costs but of the rate of movement of costs. We are in a period in which, unhappily, costs are likely to increase at perhaps 2 per cent. a month, or even more in some areas. Managers need to respond quickly to the changing circumstances in which they find their production going on. That is the second point which can be raised against the whole Price Code. The first aspect is the inevitable way it must refer back to a previous period. The second is the frequency of price increases.

In a period such as this it is almost unacceptable to industry that price increases are not allowed except under very special circumstances, and not more frequently than every 13 weeks. It is very difficult for managers, who are trained to respond quickly to be prevented from responding quickly to changing circumstances. This is one of the unreasonable aspects left in the Price Code which the Secretary of State could quite easily have changed. I hope that the Secretary of State will give early consideration to such a change if, as I fear, we reach stage 5.

There is a third aspect of the operation of the Price Code which I find profoundly disturbing. I refer to the amount of management time inevitably involved in the endless negotiations and correspondence. Most of us complain about the inadequacies of management, which can be exaggerated. We agree that there is no abundant, over-supply of good management in British industry and commerce. Therefore we want to do our best to enable the management to be deployed as effectively as possible.

The Report of the Price Commission for the period 1st September to 30th November 1974 says that there were 696 staff employed in the Commission. I am sure that the Secretary of State will agree that many of them are able people. I do not know whether she agrees that they should be more effectively deployed in actual production, distribution and commerce. However, I would hazard a guess that there are many more people such as cost accountants and others with financial training, who are difficult to find, who are employed to deal with the Price Commission on all the fiddling little bits.

Appendix 3D on page 55 of the Price Commission Report states the exciting achievement of the Price Commission, which managed to reduce an application of Phillips Electrical Ltd. for an increase in the price of Ultraphil health lamps. Phillips Electrical Ltd. asked for a 7·70 per cent. increase. After doubtless long negotiations, involving many senior managers, that figure was reduced to 7·69 per cent.

However, the Commission did not rest there. F. A. Power Ltd. wanted to increase the price of bright steel products by 6·91 per cent. A slashing reduction to 6·88 per cent. resulted from the long, tedious negotiations. Then, to prove that the decimal point was floating on the calculators, we move down to Smedley-HP Foods Ltd., who wished to increase the price of canned meat pies and pasta products by 12·326 per cent. As a result of doubtless prolonged and interesting argument, the price rise was reduced to 12·029 per cent., which was again a triumph for the Price Commission. There must have been an appalling waste of management time and expertise in industry, commerce and the Price Commission. I do not think that we can regard that as a great achievement of the Price Code.

There are special problems in distribution. In view of the range of products stocked by the average store, obviously it would be impractical to try to control prices product by product in that store. Therefore, understandably and sensibly, the Price Code from the beginning has exercised control over distribution by controlling the margins of distributors.

Immediately we run into the problem to which my hon. Friend the Member for Aylesbury referred. The margins are checked by reference a long way back to the year ending on or before 30th April 1973, and the performance of the distributive company is checked against that annual margin. But is it necessary to wait a year? Has it to be done monthly, or quarterly? How is account to be taken of the very large seasonal variations and fluctuations found in all sections of the distributive trades?

It is obviously wrong to do it on a quarterly basis. The only reasonable basis would be annual, or a moving annual total. That in itself is a problem because of the long period required to get a reliable indicator of one year against another.

That is not the only problem which arises in the distributive trades. We have the gross margin and the net margin. It is curious in a way that the Price Code should need to refer in any way to the net margin of the distributive trades. After all, it is the consumer about whom we must be concerned. The consumer is interested only in the gross margin. It is the product cost plus the gross margin which represents the cost to the consumer. If we are trying to control the cost to the consumer, we are concerned with the gross margin. To some extent, the net margin is academic. Yet, inevitably, because the Price Code leads to complications, the net margin is also involved.

I need go no further in search of support for that than this most helpful report of the Price Commission. There, I find what results. There is a clear and, for once, unequivocal statement:
"The present safeguard is not easy to operate."
The right hon. Lady rightly and fairly described the inadequacies of safeguards She described them as "a licence to survive" for the good, the bad and the indifferent. I am not sure that I wish to produce licences to survive for the bad, and it is a dubious proposition to produce them for the indifferent. Surely we should be concerned about producing licences to thrive for the efficient, and I do not think that the present Price Code, with its safety nets and safeguards, does that.

The price to the consumer is not helped by controlling the net margin, and there is no doubt that the complication that has been introduced by controlling the net margin turns out to be a disincentive to the efficient. It is not a satisfactory state of affairs that we end up like that.

Then there is a further major criticism, made fairly by my hon. Friend the Member for Aylesbury, that it can be argued—and there is clear evidence for it in the report of the Price Commission—that competition is doing a far more effective job than the Price Code. It can be argued that the Price Code is a disincentive to investment. But, as my hon. Friend said, the truth lies in that both apply in different areas of industry and commerce. In some areas it is competition and in others it is the disincentive effect to investment which is introduced by the Price Code.

Again this report is clear on this point. It says, on page 5, paragraph 2.6:
"The price control has lopped the top off the current wave. Now that profits are on the downward slope, the price control inevitably pushes them down faster."
Surely there could not be a clearer statement of disincentive to invest which is representative of that sort of effect of the Price Code, direct and indirect in the sense that from management to industry to investor that must take away his incentive. We can have little doubt that in the distribution side one does not need the Price Code. Cost is doing the job. Table 6 on page 18 tells the whole story.

I would conclude by fearing that we may have a stage 5. The best stage 5 for industry and commerce would be one which tore up the whole thing. That would restore confidence and would be the best incentive to invest throughout industry which one could have at this time, but if we have to have a stage 5 not tearing up the whole thing, would it be possible to have one which was simpler, taking less management time, concerned only with the key areas, which leaves the natural forces of market place and competition to do the job in the other areas? If we had one like that it would meet the objective of all of us in giving greater encouragement to investment.

11.07 p.m.

As a novice, it is with trepidation that I enter the arena with all those who discuss the Price Code, and I do so only because of the charm and clarity of exposition of the Secretary of State.

I should like to join issue with the right hon. Lady on the question of the exclusion of road vehicles from the investment relief which is otherwise so much welcomed, and rightly welcomed, on this side of the House. We are grateful to her for that.

It is not clear to me what exact figure she had in mind when she said that it had not been found possible to offer relief for commercial vehicles on account of the pressure on their order books and their supply position.

I fear that it is possible, if the right hon. Lady could cast her mind back to the figures to which she was referring, that she might find that they were of rather earlier date than she had been led to suppose. Could the Under-Secretary offer some hope, when he replies, that the point will be re-examined, because on the industry's own forecast, this year there is to be a further decline in total production, although the industry is, of course, hoping to increase exports. In this connection, I should like to pay tribute to the magnificent export achievements of the motor industry during the past 12 months.

There is another small point. I noticed that the Secretary of State referred only to commercial vehicles, both on 2nd December and tonight, whereas the exclusion is in terms of all road vehicles, and it is in those terms that I hope that the position will be alleviated. I hope that the Under-Secretary will say that there is to be a re-examination.

The Secretary of State rather trailed her cape—and I hope I am not being a bull in a china shop, if I may mix my metaphors—when she suggested that the theology of planning agreements, whichever divine article it is, is to be reinforced or made operative by the relaxation of the Price Code for these adoptive agreements. This suggestion has been made before, and I have referred to it before in this House, but it has perhaps escaped the close attention of the right hon. Lady in her close reading of Hansard when she has not been able to be present.

Let us consider the motor industry as an example. Suppose the Ford Motor Company did not wish to comply with a planning agreement—as is conceivable—whereas BLMC might be willing to do so. If the latter were allowed to raise its prices, what would be likely to happen? The only result would be that the Ford Motor Company would prosper mightily by selling many more cars than BLMC. It would be selling at the prosperous end of its product, and the results would not be those which the right hon. Lady fondly imagines. That is one reasons why planning agreements cause so much concern.

I think the hon. Gentleman's apprehension arises from the fact that he regards the planning agreement as the theology, whereas it is the Price Code that is the theology. The planning agreement is simply good sense.

I had tried to show that the right hon. Lady's suggestion was far from sensible, whether or not it was theological, because it was not likely to achieve what she intended.

11.11 p.m.

I shall not make general comments on the code or the matter before us, because time is short. I shall not be tempted to discuss the desirability or otherwise of the Price Code, except to note some of the views which have been expressed by my hon. Friends that, in the present economic climate, there is no doubt but that some of industries' liquidity problems result from the restriction of the code as it effects them.

I want to deal briefly with one comparatively small but nevertheless important point. I welcome the investment relief which the code provides, but does this include investment in takeovers? The right hon. Lady will see what I mean as I develop my argument.

In one respect at least this mark 4 code appears to continue to work strongly against improvement in business efficiency. I need not argue how efficiency leads to lower costs and possibly smaller increases in prices, because that obviously commends itself to the right hon. Lady as it does to us all.

What I have in mind are takeovers or mergers which lead to the amalgamation of two separately-owned enterprises which are in the same line of business and with the same or similar type of product. The two broad instances of this are, first, the takeover of the inefficient firm which may be about to go out of business—and there is the important related point about redundancies which may be avoided, but that is not the main theme. Secondly, there is the takeover or merger by a business with one of comparable efficiency from which, amongst other things, the benefits of rationalisation and cost-saving flow.

As I understand it—and I hope there will be an opportunity for the Minister to comment on this tonight or to write to me; I am in correspondence with the Department on a particular issue concerning a company in my constituency—the code requires the aggregation of losses and profits of these two companies which are to be amalgamated, and the use of aggregated reference levels.

In the first case of the takeover of the inefficient firm, one will be putting together perhaps a high reference level from the company doing the taking over and a low reference level from the inefficient company, and the averaging out reduces the reference level which the amalgamated business has to use in future.

Equally, if two comparatively efficient firms are getting together the lower reference level of one of the companies must bring down the average, and this can have a serious effect on the intentions of the company—and therefore its investment—which is considering merging with or buying up the other company. In practice what can happen is that the merger does not go through.

As the right hon. Lady has said, there is the alternative of using the reference level of the inefficient company and of using the level of a 10 per cent. return on capital employed. The right hon. Lady referred to that alternative in the context of the nationalised industries. I think that most of us would be happy if all or most of the nationalised industries showed a return of 10 per cent. on capital. In the private sector—this applies even in times of low interest rates—that is usually an inadequate return. At present when borrowing is taking place from Finance for Industry at 16 per cent., for example, a 10 per cent. return on capital is nonsensical. There is no incentive in that alternative.

One argument might be to increase the reference levels. The ideal would be that the reference level used should be that of the efficient taking-over company. It might be argued that that would allow the company to raise its prices. If I understand matters correctly there would be a check on that through one of the provisions of the code. A price increase could not come about unless there was a cost increase if the standard criteria were used to justify it. I do not think that that argument stands whether we have a mark 5 code or whether, hopefully, we are able to get away from this business in the near future.

I ask the right Hon. Lady to use the provisions of Article 76, which is headed
"Modification of reference level"
in the sort of cases to which I am referring. The article gives three situations as examples and I think that what I have said fits into all or most of them. The first example is
"a substantial reconstruction of the enterprise"
That surely results from a merger or takeover of another company.

The second example is
"a substantial change in the character of the business;
I would submit if a business changes substantially in size that would be a
"substantial change in … character …"
Another point which involves investment and particularly if there has been investment which alters the size of the business, is contained in the third example—namely:
a substantial change in the ratio between the value of net fixed assets … and the value of sales … to achieve substantial savings in labour costs per unit of output;"
Again, I would submit that this concerns the takeover of the inefficient company. If one or all of those conditions are met by the circumstances that I have described the commission may permit some departure from the reference level.

I can only ask the Minister to look favourably on this point in general, and particularly in respect of the case about which we are corresponding.

11.19 p.m.

I express my support for what the right hon. Lady said about the necessity to retain some form of price control. I think that the American experience is a lesson that we must bear in mind for the future. I am glad that she has noted it.

I have a couple of points to make which relate to matters upon which the right hon. Lady did not touch in what was otherwise a full explanatory introduction of the new code. Inadvertently she did not refer to a number of changes which have taken place from Article 7 onwards relating to the application of food, farm and forestry products. I notice that compared with the 1973 order Article 7 leaves out the control of sugar. Article 8 (2) reads:
"The price for the sale of raw beet sugar for further refining is not controlled."
That I accept, but I wonder, why the Government have left out any form of control on sugar prices since this was included in the original article in the 1973 order which has now expired.

The other point which I wish to raise in relation to this part of the order dealing with food, farming and forestry products relates to Article 10 which appears to place a good deal of responsibility on the Milk Marketing Board. I wonder whether the right hon. Lady can tell me whether the board has not only been consulted but has expressed its agreement to what appears to be a rather complicated mechanism.

The right hon. Lady referred to that part of the code which deals with the nationalised industries, from Article 97 onwards. This article contains a list of nationalised concerns. Can the right hon. Lady tell me where the BBC fits into this? It is not in the list of nationalised concerns and it is not included in Article 6 which deals with application and says:
"The following are not controlled:"
I assume that the BBC is subject to control. If it is, can the right hon. Lady say how this document will prevent the increase in the colour television licence by 50 per cent. from £12 to £18?

11.22 p.m.

In any debate on the Price Code hon. Members are torn between the need to obtain clarification on matters of detail, because these are matters of detail with which industry has to live from day to day, and the equally important need to debate the premises on which the code mechanism is based. As the right hon. Lady has emphasised, it is a vitally important tool in the Government's economic policy to fight inflation. Tonight's debate is no exception.

Hon. Members have raised a number of specific points of detail, such as that raised by my hon. Friend the Member for Bosworth (Mr. Butler) about mergers and take overs. There has also been the need to examine some of the premises, of efficiency and competition, to which my hon. Friend the Member for Hove (Mr. Sainsbury) referred.

The draft code was debated as recently as 2nd December and the code became operative from 20th December, albeit embodying too few amendments in our view, but nevertheless amendments which we welcomed. The code is in action and there is little more we can easily do about it. The more profitable course is to concentrate on the principles embodied in it and to judge their effects and effectiveness in the present economic climate.

It may come as a shock to hon. Members to be reminded that in the introduction to the Consultative Document there is written, in paragraph 7 on page 2:
"At the same time, the Government recognise that greater efficiency in the use of resources, higher exports and job opportunities, all depend on industry's capacity and willingness to invest and innovate, and in the competitive vigour with which it responds to market opportunities. The Price Code must be adapted to meet these requirements."
These splendid sentiments flowed no doubt more easily from a capitalist quill than from a bureaucratic ball point. That rapture, frankly, has been rather short-lived. I quote from the general principles published in the existing code in Article 3:
"The general principles relating to prices are:
  • (i) to limit the extent to which prices may be increased on account of increased costs, and to secure reductions as a result of reduced costs;
  • (ii) to reinforce the control of prices by a control on profit margins while safeguarding investment;
  • (iii) to reinforce the effects of competition, and to secure its full benefits in the general level of prices."
  • So much for the results of the wide-ranging consultations, or was it perhaps that the poet in the Department had left—Ichabod, Ichabod, perhaps the Tory had departed.

    It is relevant to point out that the Government see the code as essentially restrictive—restrictive of profits and restrictive of prices. Yet, at the same time, the Government claim that they are expansionist in terms of their desire to encourage competition. My contention is that this is a flaw, because it is a fundamental divergence of objective. I do not see how the code can remotely affect competition. My hon. Friend the Member for Hove made that plain in demonstrating that the competition of price in the market place was the surest way of ensuring consumer benefit and proper pricing. It establishes rules which all who compete in any individual market must observe.

    The productivity deduction penalises the efficient, whose room to reduce cost particularly after a series of threshold payments is marginal, whereas it favours the less efficient who can more easily absorb non-allowable costs. Prices today in consequence are being determined less and less by competition and more by the maximum price permissible under the code.

    I fully recognise that the pressures of competition brought about by inflation are increasing day by day. That corresponds with what my hon. Friend the Member for Aylesbury (Mr. Raison) pointed out, that the rôle of the code should be gradually reduced and the rôle of true competition should gradually take over. I doubt whether the objective of reinforcing competition can be held to be met by the practice of this code.

    I was interested in what the right hon. Lady said about investment. We welcome the inclusion of the new provisions in the Price Code, and the fact that it might be possible—although the right hon. Lady would not wish to be committed to this—to look at pricing and investment intention in tandem so that one might allow increased flexibility to the other. That I welcome as an important possible change for the future.

    Hon. Members may think that since we last debated the Price Code in early December the climate of investment has changed, and the right hon. Lady suggested that that was so. True, there has been a welcome if somewhat belated recovery in the stock market which has brought the prospect of raising capital from that source a little nearer. Welcome, too, is the modest reduction in interest rates, which will certainly benefit industrial cash flow. But let us be clear. There has been no significant improvement in the long-term outlook, which influences the way in which investment decisions are made.

    This morning The Times refers to a recent Government survey of industry's investment intentions. It suggests that there is a projected fall of 10 per cent. in the capital spending programmes for this year compared with a year ago, and forecasts a further fall in 1976. No wonder the Director General of the National Economic Development Council is on record as having claimed that there must be additional incentives to encourage investment, although I do not share the right hon. Lady's optimism that the climate of investment provided by the code is such that it will be readily taken tip because funds will be readily available. The 17½ per cent. investment allowance will clearly not be enough, and it may well be a case of too little, too late.

    There is neither the cash nor the confidence to enable the investment provisions to work effectively. Conditions for investment will return only when the Government acknowledge that increased and retained profits are the only—and the only effective—spur to sound investment.

    With the code's determination to control profit margins, and with the Government's determination to continue to talk about controls or interventions of one kind or another, whether by nationalisation or through the National Enterprise Board, it is no wonder that industrialists and investors lack confidence to take the decision now which have such an important bearing on the future. Only a change of Government can restore confidence on that issue.

    These investment allowances will not be taken up, and the question arises—it is an important one—whether industry will benefit from the £800 million which the Chancellor of the Exchequer has released for re-investment in industry by the provisions of the code. Taking the code as a whole, what evidence have we that industry and industrial liquidity will benefit by that amount? Discussing this point in December, the Under-Secretary of State said:
    "A better comparison would start not from the present Price Code but from the state of company profits as they stand today.
    "It is on this basis that my right hon. Friend the Chancellor of the Exchequer has judged that it will be necessary to restore £800 million to company profits through changes in the Price Code. The various changes we propose are calculated to produce this result."—[Official Report, 2nd December 1974; Vol. 882, c. 1195.1
    This suggests to me that calculations have clearly been done.

    Is the hon. Gentleman able to supply a breakdown as to how this £800 million has been arrived at as between the various relaxations embodied in the code? Can he break it down as between reduction in productivity deduction, investment allowances and the widening of the definition of allowable costs, and so on? It may take a little time to answer, and it may be necessary for Caithness to speak to Sutherland. We are entitled to know how this much-needed and much-vaunted improvement in industrial investment is to be achieved.

    We welcome the further changes in the code which increase its flexibility. I welcome, on behalf of the wool textile industry, so important to some of my constituents, the exclusion of wool tops from control and the retention of the enterprise as well as product or range of products as a cost centre. But I am informed that, under Article 39, the profit margin safeguard proposed for a product at 30 per cent. does not equate precisely with the safeguard offered under the gross margin level for the enterprise as a whole, and if it is to be offered as a direct alternative figure, it should perhaps be 25 per cent. and not 30 per cent.

    I echo the point raised by my hon. Friend the Member for Bromsgrove and Redditch (Mr. Miller) concerning the disappointment that the motor industry must feel that commercial vehicles have not been included within the investment allowances. Whilst we respect the right hon. Lady's assurance that this might be re-examined, I hope that it will be done quickly. The motor industry would wish to see it done. It will have an important effect on industries, such as the food industry, which have large vehicle fleets delivering quantities of perishable commodities with great frequency.

    I declare my interest in a company in the food industry and refer to the question raised by my hon. Friend the Member for Harborough (Mr. Farr) about sugar. I thought it was a fair point. I cannot help mentioning that many firms in the manufacturing section of the food industry which use sugar want to know what they have to demonstrate to the right hon. Lady in terms of cash flow or profit which would lead them to obtain the same concessions as the apparently impoverished sugar refiners are able to obtain.

    Taking the Price Code as a whole, and setting it in its current inflationary context, these provisions are still intensely restricting on British industry's capacity to fight its way through the difficulties with which it is beset.

    While the code's effect on the retail price index may be only short-lived and overtaken by events, its longer-term effects on the time, energy, involvement and sheer powers of management are deeply damaging. Withtout an effective pay code, the Price Code is still something of a dagger in industry's back. By relaxing some of the provisions in the code, the Government has pulled the dagger partially out, but I fear the patient is still bleeding to death.

    11.35 p.m.

    The Under-Secretary of State for Prices and Consumer Protection
    (Mr. Robert Maclennan)

    I should like first to congratulate the hon. Member for Pudsey (Mr. Shaw) on his first appearance on the Opposition Front Bench. [HON. MEMBERS: "Hear, hear".] We have listened to him with great interest in earlier debates on this subject and we are well aware of his expertise. We are happy to see him in his present position.

    I should like to begin by mentioning the speech of the hon. Member for Aylesbury (Mr. Raison). I am glad that he gave the changes an overall welcome and recognised that they constituted a useful improvement on the stage 3 code. He welcomed the investment incentive, as did a number of other hon. Members, and also the concessions made during the period of consultation following the publication of the White Paper.

    The hon. Gentleman rightly speculated on the effectiveness of the code as a means of dealing with inflation at this time and drew attention to two possible lines of objection which could be made against it. On the one hand, his view was that it could screw down industry too hard, and also that as profit levels slipped it might be seen to be increasingly irrelevant. These thoughts were not far from our minds, and we sought to make the code more relevant to the problems of controlling inflation. At the same time we seek by reason of the changes, to stimulate investment.

    The hon. Gentleman asked me to say say something about the possible use of the productivity deduction as a penalty for excessive wage settlements. I merely repeat what my right hon. Friend the Secretary of State has said on a number of occasions, namely, that it would be possible to introduce the proposal only if both sides accepted it—and from the first the CBI made it plain that this was not acceptable.

    The hon. Gentleman, on the subject of the consultative document, asked whether we would seek to take account of inflation accounting procedures in any further amendments we might make to the Price Code. I think that it would have been improper in the Price Code review to attempt to forestall the report of the Sandilands Committee, although we shall be considering carefully and with great interest the recommendations which the committee brings forward and doubtless, in the evolution of price control policy, we shall have to take account of the recommendations they make.

    The hon. Gentleman also asked my right hon. Friend to consider putting profit checks on an annual rather than on a quarterly basis, and the hon. Member for Hove (Mr. Sainsbury) made the same point. The present position is that the Price Commission gets quarterly reports, but an excess over profit margins in a single quarter is not necessarily penalised.

    The Price Commission is required to take account of "seasonal and other distorting factors" under paragraph 66 of the code. I know that there are complaints about this system, but it seems to be working reasonably well and better now than at first. If the commission had always to wait for a whole year's results, it might have to stand idly by while enormous excesses built up.

    The hon. Member for Hove (Mr. Sainsbury), who spoke in terms fundamentally critical of the concept of control of inflation by the Price Code, expressed depression at the fact that we had reached stage 4, and a hope that we should not find ourselves with a stage 5. I assure the hon. Gentleman and others who have raised the same matter that the Government have no intention of embarking upon another fundamental review of the code in the immediate future. It is known that the counter-inflation legislation expires in the spring of next year. Plainly, we shall have to consider what is to take the place of the present arrangements. My right hon. Friend, in her opening remarks, gave some indication of the way that her mind was moving in this respect. I hope that will give the hon. Gentleman and industry the reassurance that the Government do not intend to seek to chop and change provisions which are inevitably somewhat complicated and, as he and others have said, result in the expenditure of considerable effort in coming to terms with them.

    I hope that the Minister is not ruling out further modifications if they prove essential in the light of experience.

    I am not ruling out changes in our approach to specific rules. We are not about to embark upon a major change of the code. If small amendments became desirable, we should have to give careful consideration to them, but certainty, so far as it is possible, is important in a document of this kind.

    The hon. Member for Hove in his wide ranging attack on the whole notion of control through the Price Code, complained about 696 employees of the Price Commission devoting their time to the work of which he sought to make a certain amount of fun. The quarterly report makes plain the substantial savings in price increases which have been achieved which have been estimated at £116 million per annum.

    I do not think that I ought to give way again, because I have many points to answer and we are limited for time. I think that for such a small number of men and women this is a substantially beneficial output of work.

    The hon. Member for Hove also spoke of the disincentive to investment which the Price Code constituted. The liquidity problems facing industry have given rise to the relaxations which have occurred, but British industry did not invest as the Conservative Government would have liked it to do in 1970, 1971, or 1972, when there was no price control. Investment picked up, however, in 1973, and held up well in 1974, despite price controls. Price controls have not inhibited investment in France or Belgium. Our reliefs for investment are, we think, very generous, and provide a positive incentive.

    A number of hon. Members have raised the matter of the exclusion of commercial vehicles from the investment incentive. The Government are prepared to consider evidence which industry brings forward of the case for this, but I must make it clear that we do so within the context of the take-up of the investment relief generally, as we made clear in the December debate on the consultative document. My right hon. Friend deliberately spoke of commercial vehicles, because it was to that subject that her remarks referred, and they were not intended to be construed more widely.

    The hon. Member for Bosworth (Mr. Butler), in an important speech, asked me a number of questions, some of which were very detailed, and I think that I would have difficulty in answering them tonight. They related to the profit margin reference levels if there were a merger or takeover. I know that his interest is in respect of a particular firm; perhaps he will forgive me if I write to him rather than answer his questions tonight.

    The hon. Member for Harborough (Mr. Fell) spoke of the removal of sugar from the Price Code. We have powers, under Section 2 of the Prices Act, to set maximum prices for sugar. Obviously we shall consider using these if it seems appropriate to do so. He also asked whether the Milk Marketing Board had been consulted on the new rules and whether it had agreed. It was consulted and it accepted that the changes went some way towards giving the additional flexibility it sought. It would have preferred milk sold for manufacture to be totally outside the controls, but accepted that that would not have been altogether realistic. As for the BBC, it is controlled by ministerial decisions about licensing.

    The hon. Member for Pudsey asked the most fundamental questions—about the extent to which the revised Price Code would influence investment. He may have been exaggerating the claims for the effectiveness of what we have done. What is clear is that the investment relief from the Price Code is bound at the margin to have encouraged some investment which would not otherwise have occurred and, through the multiplier effect in the economy, the importance of such marginal changes in terms of jobs particularly is important. If the Government had not acted, companies would have had graver doubts about their cash flow and liquidity, and the volume of investment expected this year would have fallen even more—with adverse effects on our provision for the future and on employment this year.

    There is no doubt that manufacturers' investment decisions—and therefore decisions about the number of people in employment—are affected by the prospects for growth, the availability of profit to finance the investment and their view of other risks, including the risk of fast inflation. There is no doubt, therefore, that measures directed towards the control of inflation and the building of real profits, on which much investment depends, are in the interest of everybody in this country. They make useful employment now and provision for growth in the future.

    In conclusion, I make only one point. I have the impression that many people in industry are far from dissatisfied with the way in which the stage 4 code has come out. We are all glad that the investment relief has been widely welcomed. I do not share the view of the hon. Member for Pudsey that it will not be taken up. There has already been a lively interest expressed in this. It now rests with industry to familiarise itself with the new provisions and make the best use of them. I understand that there are still many category I and II firms which have not given notice to the Price Commission of their intention to invoke the investment relief. There is nothing to lose and much to gain from lodging these claims at the earliest date. I hope, therefore, that some of those who have been quick to complain that the new code does not go far enough will now study the new code and see exactly how far it does go.

    Will the hon. Gentleman answer the question about the £800 million? Will the investment relief really provide £800 million of improved liquidity and, if so, how does it break down?

    That is a difficult question to answer in the minute which I believe I have left. It was not advisedly that I failed to answer that point. I am bound to say that the calculations are not easy to make. I have no doubt that they could be challenged. But our best estimate of the effect of what we have done—in particular the reduction of the productivity deduction, the investment relief and the extra reliefs announced by my right hon. Friend following the consultative document—is that it will amount to £800 million, plus £200 million, which comes to a total of £1,000 million—although I cannot obviously stand here tonight and argue every item of how this was achieved.

    Question put and agreed to.


    That the Counter-Inflation (Price Code) Order 1974 (S.I., 1974, No. 2113), a copy of which was laid before this House on 18th December, be approved.—[Mrs. Shirley Williams.]


    That the Counter-Inflation (Price Code) (Amendment) Order 1974 (S.I., 1974, No. 2158), a copy of which was laid before this House on 19th December, be approved.—[Mrs. Shirley Williams.]