INVESTMENT GRANTS

How not to help industry

JEREMY BRAY, MP

Dr Bray was Parliamentary Secretary, first at the Ministry of Power and then at the Ministry of Technology from 1966 until his resignation last year. From 1956 to 1962 he was a Technical Officer with ICI, working on economic planning and automatic control.

Investment grants are a £530 million gov- ernment handout to industry, much of it going to the richest and most powerful companies in the land, and indeed abroad. It is a political sitting duck of such portly splendour that even the most short sighted Opposition could hardly miss it. And in- deed the Opposition spokesmen have been blazing away merrily. Mr Macleod has spoken of the possibility of a very large saving of money. Sir Keith Joseph hints darkly that the vast bulk of trade and industry only needs to be left free without partnership or any special help. Even loyal supporters of the Government such as my- self have questioned whether the taxpayer is always getting value for money, and the Government is examining the question.

And poor old industry is acutely embar- rassed. Shell has said it will go ahead with its £225 million expansion in chemicals whatever happens to investment grants (after all, what is £40 million between friends?). And id, used to the plaudits of the crowds at each announcement of millions to be spent on necessary new plant extensions, has refused to state the capital value of new projects since industrial correspondents in the north learned how to calculate the sub- sidy per job created, which of course runs regularly at over £20,000 per job. The com- pany's expansion in plant but not employ- ment was beginning to look a very expensive golden calf in areas in need of many neces- sities, let alone the graces of life in the modern world. . .

Yet at the same time Britain's rate of manufacturing investment remains obstin- ately below that of our overseas competitors.

So the au and the Opposition argue that the sitting duck of investment grants should not so much be bagged for the pot, as in- vited decently to waddle out of the tax- payers sight in the guise of tax allowances. What the eye doesn't see . . which takes us- back almost to where we started in 1954.

The concern about the level of manu- facturing investment goes back to the early 'fifties. Not only was British investment low, but the tax incentives to invest were poor by comparison with other countries. So Mr Butler's Finance Act of 1954 introduced investment allowances which allowed com- panies to deduct over 100 per cent of their expenditure on plant from their taxable in- comes. With some vicissitudes this lasted through the 'fifties with hardly anyone but the accountants and the tax lawyers know- ing what all those mysterious changes in investment allowances, initial allowances, and annual allowances in the Budget really meant. And even they didn't know what they added up to because investment appraisal practices in industry were very poor. Cer- tainly, when I was busy proposing modest capital schemes in the 'fifties with my works manager just as busily turning them down, no one ever told us about these al- lowances, and we were not exactly in a backwater of British industry.

The point of course is that money today, or tax remitted this year, is worth more than the same money next year, and by the prevailing rate of interest the company has to pay. This point was taken in splendid style by Mr Maudling in his 1963 budget when, as a special incentive, he allowed companies, for tax purposes, to write off expenditure on plant in• development dis- tricts as quickly as they liked—a system which became known as 'free depreciation'. Tax men are as incapable of seeing their jargon in plain language as any other ex- perts, and the ring of slightly randy decad- ence about 'free depreciation' missed them. If it appealed to Mr Maudling and the cnt it had little immediate appeal to industry at large.

On the basis of an inquiry in May 1964 among an admittedly slender sample of 133 firms, mainly in engineering, who happened to have representatives attending a Produc- tion Engineering Research Association one day conference, Mr Robert Nield, then of the National Institute of Economic and Social Research, found that the great major-

ity of firms did not take tax into account at all in making calculations on investment in new plant. So apparently governments could give millions of pounds away in tax in- centives without increasing investment at all in most firms. This conclusion was prob- ably right at the time, and certainly no one produced any evidence showing it was wrong. But as a result of campaigns on investment appraisal, not least by the NEW, industrial practice was changing fast. Most people concerned could understand the logic of after-tax discounted cash flow calcula- tions when it came to the point.

But when Mr Nield became Economic Adviser to the Government he took with him the conviction that the main engine of growth was the introduction of new capital equipment incorporating technical progress. Investment grants were simpler and more direct than tax allowances, they could be paid promptly, and they could be paid to new and rapidly expanding firms which were not yet making profits against which to set off tax allowances. Certainly, when investment grants were duly intro- duced in 1966, before long every machine tool salesman was including the value of investment grants in his sales pitch.

However much the Opposition may now question the extravagances of investment grants, when they were introduced in 1966 the Tories were convinced that industry was being diddled. Mr Patrick Jenkins assured the House that for most industries and most projects the value of the cash grants was very substantially less than the value of the tax allowances which they replaced. The Conservatives are now trying to decide whether they would like a system of tax allowances roughly matching the present system of grants, or whether they would prefer lower standard rates of taxation. In this close season before the Budget the Chancellor of the Exchequer is positively garrulous by comparison with the Opposi- tion when it comes .to saying what they would really like to do about taxation.

The considerations are these: should in- vestment have special incentives beyond those to other types of economic activity? If so should the incentives be given for investment only by certain people (manu- facturers) in certain things (plant and mach- inery)? Should the incentives be at a flat rate, or, as at present, at different rates favouring development areas? And should the incentives take the form of tax allow- ances or grants?

Although the requirements for growth are more elusive than investment incentives, and stem rather from the quality of deci- sion in industry and government as a whole. it is difficult to argue that there should not be some independent influence upon invest- ment, just as there are independent Govern- ment influences upon consumer spending, exports, imports and so on. And while in- vestment remains as low as it is the in- fluence should be positive. Again, giving investment incentives solely to manu- facturers is justifiable if the balance of pay- ments is the main constraint on economic growth and manufactured goods the princi- pal export. But if the constraint ceases to be solely the balance of payments, then other kinds of investment may equally save labour or increase efficiency in other ways. So in- vestment incentives should be widened be- yond manufacturers and their plant and machinery.

Development area policy presents a special problem. The simplist argument, bunched by Mr Maudling as Chancellor and Mr Heath as Secretary of State for In- dustry, Trade and Regional Development in their 'free depreciation' scheme in 1963, and continued in the investment grant scheme, is that since development areas need new employment they need new industry and hence new investment; so they should have higher rates of investment incentives. De- velopment area investment gets a 40 per cent investment grant, compared with 20 per cent elsewhere. It is argued that unless special investment incentives are given in develop- ment areas these areas will attract only fly-by-night firms exploiting cheap labour making dolls eyes, while what are needed are well based, modern, technically-advanced industries.

This argument shows simple ignorance of modern industry, since it fails to distinguish between capital intensity and advanced technology. A narrow range of modern science-based manufacturing industries are also extremely intensive in their use of plant and machinery, typically using plant costing over £100,000 per man employed. These are the process industries—mainly chemicals, oil and steel. But most technologically ad- vanced industries—electronics, computers, instruments, jet engines, pharmaceuticals, and so on—while they may employ plant worth £10,000 per man employed, consider-i ably more than the average manufacturer, are not extremely intensive in their use of capital plant. They do have very heavy re- search and development costs and are capi- tal intensive in this sense, but no develop- ment area incentives are given specifically for development costs—although they should be.

Furthermore, within the process industries the building of new plant generally puts more men out of work within the area than it employs, and the indiscriminate develop- ment area investment incentive is in fact a selective means of putting as many men out of work as possible. It was a peculiar idea for Mr Heath and Mr Maudling to foist on the taxpayer and the development areas. At the time, in 1963, when I criticised it, Mr Heath could do no better than say that my constituents on Teesside would not be very pleased with me. Now, however, the Conservatives have seen that they were wrong and have said they would like to make development area incentives select- ively dependent on the employment they create—and no doubt the Government will shortly do just this. But there are no net savings in public expenditure to be had here: it is a case of the same money need- ing to be spent more effectively in the de- velopment areas and in job creation.

Since investment grants have to be taken into account in tax settlements anyway, there are obvious attractions in handling all general investment incentives by tax relief. But the Inland Revenue has not seen as its job the monitoring of the economic and industrial consequences of particular tax and grant provision. Its task has been to collect the revenue. Either the Inland Revenue would have to be given this moni- toring job, or someone else would, with the consequent closer integration of the Inland Revenue with other government depart- ments. Furthermore, despite better invest- ment appraisal, many managets in industry are still not able to judge the tax effects of their decisions. The Opposition's motives in wishing to return to a system Of tax allow-i ances seem as much dogmatic as -practical, and tax allowances will offer no net savings. So another of those marvellous tax cuts the Opposition dangles before us would be no more than a paper transaction which would leave the personal taxpayer no better off than he is now