HI ENRICH a 4y, covw
Investment Largesse
By NICHOLAS DAVENPORT
rTHERE must have been a terrific wrangle be- 1 hind the scenes before Messrs. Brown, Callaghan and Jay shook hands on the White Paper on Investment Incentives. Who would have dreamed that a Labour government .would be driven to hand out cash grants to private enter- prise for selected industrial investment-20 per cent of the cost of plant and machinery in approved manufacturing and extractive indus- tries or 40 per cent in widely extended develop- ment areas? 'It's all your fault, George!' I can hear Douglas saying. 'You didn't stop the rise in wages and yet you wouldn't let these wretched industrialists put their prices up. How could you expect them to carry on investing in new plants and machinery when you denied them profits?, Without profits there were no tax incentives.' 'Oh, shut up!' replies George. 'Haven't you heard of profitless prosperity? It's all the rage today.' 'Wait a minute,' says Jim. 'How can you ex- pect me to collect the revenue to pay for the grants if there are no industrial profits? What's it all going to cost?' Hoots a laughter! 'Ask your crimson economists,' says George, 'if you have got any left after Barbara's new set-up.' 'Don't you worry about the cost, Jim,' remarks Douglas. 'You will save £300 million a year on the old investment allowances and you don't really suppose that many businessmen will even be paid to invest when they can see no profit in growth.'
Whatever the official wrangle, it could not have been more acrimonious than the perpetual debate among the economists about investment and growth. No two economists will ever agree upon the exact relationship between the two. Because we have devoted a smaller ratio of our national income to investment than other Euro- pean nations (which apply 20 per cent or more), it is generally supposed that this explains why we come at the bottom of the growth league competition. But there are so many national differ- ences in the supply, mobility and responsiveness of labour and in the division of resources be- tween agriculture, manufacturing and service trades on the one hand and between social and commercial investment on the other that it is almost impossible to compare like with like in the international 'growth' tables.
What stands out of these very complicated statistics is that our ratio of investment to the national income has, in fact, been rising quite rapidly since the 1950s—from 12.8 per cent to 17f per cent in the 1960s—and that we have had precious little to show for it in the growth of labour productivity. Mr. Angus Maddison, an economist at the OECD, writing in the January Lloyds Bank Review on 'How Fast Can Britain Grow?,' declares that British industrial produc- tivity is now below that of all West European countries north of the Alps. Making allowance for `disgalised unemployment' in agriculture, he gives a table of the annual growth (compound) of output per man between 1955 and 1964. We Come at the bottom with 2f per cent against 3.7 per cent for Germany, 3.8 per cent for Italy and 3.9 per cent for France (7.6 per cent fspr Japan). He believes that the 3.4 per cent annual growth in productivity postulated in the National Plan is a feasible long-term possibility if the investment ratio is raised further, but, he adds, the main 'depressant' of British investment has been the `stop-go' policies which have not only upset the growth of output, but `filled entre- preneurs with gloom about British growth pros- pects' in general. Incidentally, he rightly adds that the `stop-go' policies must be attributed to the fact that the UK has had to operate sterling as a reserve currency with too low a 'liquidity ratio.'
For better or worse, the Government has swallowed the argument of those economists who claim that a better rate of growth depends on better investment—or the sort which will 'acceler- ate the process of modernisation.' (It could, of course, equally depend on our working harder and longer or on working less hours and invent- ing new machines to do the work more cheaply.) This better investment clearly needs better incen- tives. It is curious that in the 1955-64 period which Mr. Maddison was reviewing the tax treatment of investment in the UK was not any less favourable than that of continental coun- tries. This encourages me to believe that the Government is probably right to change the basis of subsidy from indiscriminate investment allow- ances to discriminatory investment grants. My contention has always been that the investment allowances have been used more for the tax saving they brought than for the 'modernisation' they were expected to bring; in other words, more for the extension of existing plant capacity than for the introduction of new industrial techniques which could improve the productivity of labour. The allowances worked by reducing a company's tax bill-30 per cent for any sort of plant and machinery and 15 per cent for any sort of in- dustrial building. So by investing £1 million in perhaps out-of-date machinery the company could cut by £300,000 the profits on which tax was charged. It is estimated that in 1964 British companies saved about £300 million of tax in this way. But the introduction of corporation tax —say, at 40 per cent instead of the income tax and profits tax of 561 per cent—was going to reduce this tax relief from £300 million to about £200 million. Clearly, the Government could not cut investment incentives by a third during a profit squeeze without running the risk of bringing industrial investment to a halt. It had to do something to restore investment incen- tives and I think that the abolition of indis- criminate investment allowances and the sub- stitution of cash grants for approved new plant and machinery is probably the right way in theory to improve our competitive position abroad.
But this revolution will not be popular. It enhances the pOwer of the bureaucracy and diminishes the choice of free enterprise. It leaves it to Whitehall to decide what manufacturing industries should be eligible. It is right, in my opinion, to exclude vehicles and building and the manufacture of office machinery, loose tools, furniture, canteen equipment, radio and TV sets and other short-lived service goods: and it is obviously right to include computers and ships and plant and machinery used for scientific re- search. In the extractive industries it is also correct to include North Sea gas along with quarrying, mining and gravel-digging. But there will be borderline cases and industry has to rely on the Board of Trade promise to consult. The excluded industries will have their initial allow- ances retained and increased from 10 per cent to 30 per cent (except buildings, which will get 15 per cent instead of investment allowances of 15 per cent and initial allowances of 5 per cent). The lucky industries will have to wait eighteen months before getting the first cash.
Two points fill me with some misgiving. First, the grants are made to the inefficient as well as to the efficient. The test of profitability does not enter. The gift of government cash for spending, however laudable the purpose, will surely en- courage reckless and wasteful spending. Second, doubling the grants for the development areas, which have been widely extended, will inevitably lead to some investment expenditure which is designed primarily to grab the money and make use of 'cheap' labour and not necessarily to im- prove our competitive position abroad by de- veloping new industrial techniques. As the Government does not intend to increase the amount of its subsidisation of investment, but only to redistribute it more meaningfully, I sus- pect that the net effect upon our national growth will hardly be discernible in these complicated statistics.
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