INVESTMENT GRANTS

State intervention, Tory style

KEITH JOSEPH, MP

Last week the former Labour minister Dr Jeremy Bray attacked in these columns both the present investment grant system and the Conservatives' alternative policies. This week Sir Keith Joseph, chief opposition spokesman on technology and trade, replies to Dr Bray.

Dr Jeremy Bray, in his article last week, and the Conservative Opposition are in open agreement that the present system of in- vestment grants as applied to the develop- ment areas is certainly wasteful and almost certainly counter-productive. The Govern- ment probably agrees too, but it is naturally reticent about its expensive folly. Presumably the system will be quietly changed under the smokescreen of the Budget or within some other package with plenty of distraction in it.

The present position is that investment grants are costing the taxpayer nearly £600 million gross a year. The net cost is less because the grants are not allowed as a charge for depreciation purposes. The grants are available to manufacturing, extractive, and construction industries for investment in plant and machinery, and to purchasers of ships, computers and hovercraft at a rate of 20 per cent generally and 40 per cent in the development areas. The basic 20 per cent throughout the country accounts for about £350 million out of the £600 million gross annual cost, and the extra 20 per cent in the development areas for about £100 million —with ships and the rest accounting for the remainder. There are additional grants available in the development areas under the Local Employment Acts dependent on the number of jobs provided, which this year cost a further £69 million.

There are three main issues for the Op- position to consider. Should investment incentives remain at their present level and distribution? Should any incentive be by way of grant or tax allowance? And is the present package the best way of helping the development areas?

No convincing evidence has been published that investment incentives actually increase the quantity of investment. in- vestment in the service industries—which at- tracts no grant—has in fact been buoyant at times when investment in manufacturing in-

dustries—which does attract grant—has not. But though there is no demonstrable- link

between investment incentives and the quan- tity of investment, it is clear that some in- vestment does tend to be shifted in time and location to catch the most favourable in- centives available. Some maintain, further, that investment incentives have the distorting effect on investment decisions of making marginal projects appear viable and hence lowering the real return on our aggregate new investment.

There can be little doubt that the prime influences on the quantity of investment are the hope or protection of profit, the ex- pectation of growth, and the combination of cash flow and credit on reasonable terms. If they are auspicious there will be, many of us think, investment, whether there are in- centives or not. If they are not auspicious, there will not be investment, however generous—within reason—the incentives may be. It might well be that the climate would be more encouraging to in- vestment—not only to manufacturing in- vestment—if some or all of the money now going on the basic investment grant were to be used for tax reform.

There is therefore a case for reviewing the basic investment incentive.

Should any incentive be by way of grant? Conservatives would prefer that any basic incentive that is kept should, on the contrarY, be by way of tax allowance, because (a) the

benefit then only goes to firms making a profit and therefore prima facie viable, and lb) at least 1,000 civil servants—and the equivalent of probably an equal number of people in industry—could be released from the complicated paper work involved in the administration of grants.

There is no window-dressing in our think- ing. Investment allowances and investment grants at similar levels cost the taxpayer in themselves much the same—though the allowances involve less administration cost all round. We are certainly not pretending that a mere shift from grant to allowance would save money. That would only be the case if the net incentive were reduced in favour of tax cuts.

The third question is the best package for the development areas. We have firmly decided to keep an investment incentive dif- ferential in favour of the development areas —and of special cases like ships. But we are not enamoured of the automatic nature for general purposes of the present incentive. The very large grant-40 per cent—now available in development areas has some curious effects. First, projects that would anyway have been located there get a huge windfall from the taxpayer. Second, highly capital-intensive projects with small man- power requirements are tempted into the development areas. Dr Bray refers to the ex- traordinarily high subsidy-job ratio, some- times exceeding, he says, £100,000 per job created, and typically £20.000 in the northern region. These projects may enrich the region, attracting secondary and other investment. But they may have no such beneficial repercussions—or certainly not enough to justify this particular use of the taxpayers' money. Finally, a premium is put on the installation of the most capital-intensive machinery—generally made outside the development areas—with the result of ac- tually putting out of work individuals inside the development areas.

We prefer therefore a differential of a less automatic kind. A suitable instrument would be the Local Employment Acts initiated by the Conservatives in 1960. Under these Acts grants and loans may be made at discretion. Under this legislation we could provide special investment incentives within the development areas without being forced, as

• - 'There's no such thing As a genuine cut. in taxes, ,,When they lower thosoccage they raise,the.scutage; the present Government is, to give a standard percentage of the cost of a wide range of capital expenditure, regardless of whether or not it would have gone ahead anyway and regardless of the consequences in job crea- tion. In this way we shall be able to en- courage an appropriate mix of capital-in- tensive, advanced and less advanced in- dustries. We shall also be able to negotiate with international companies, offered in- centives in many lands. Much though we dislike ministerial discretion, we dislike even more the waste resulting from the present arrangements.

Part of the savings we shall make, including the savings from phasing out the Regional Employment Premium, we shall spend in accelerating the improvement of communications and infrastructure and the provision of training. Our belief is that these, plus national confidence and growth. are the prime requirements of the development areas. Better communications and infra- structure and a wider spread of skills will make the areas more inherently attractive and confidence and growth will create the expanding investment.

Finally, I must emphasise that any changes we do make in the basic and the differential incentives will not, of course, be retrospective.