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Controls on prices, dividends and foreign exchange--so beloved of the Liberals--have all been abolished, and many other areas of legislation have been simplified. Since 1979 more than 2,000 Government forms have been abolished and Government statistical inquiries have been reduced by over 1 million. Every new proposal for regulation, originating in either Whitehall or in Brussels, is now carefully scrutinised for its likely impact on business costs. New opportunities have been created for small business in the contracting out of central and local government services and in the liberalisation of areas such as bus services and telecommunications. This has enabled large numbers of new and expanding small businesses in these areas, and in others, to give better service and to create new wealth and new jobs.Our policies for small business have not only set up the right economic framework within which small businesses can succeed ; they have also created an enterprise culture and stimulated a marked change in attitudes towards small businesses over the past few years. Not only are there many more small businesses, but they are being set up by entrepreneurs from increasingly different and diverse backgrounds. The number of women who are self-employed has more than doubled over the past 10 years. Indeed, the number of women taking advantage of the enterprise allowance scheme has increased from just 11 per cent. of all participants in 1983 to over 34 per cent. now. Furthermore, attitudes among young people towards business has changed to the extent that a recent MORI survey showed that 40 per cent. of young people were interested in running their own business and over a quarter--over 25 per cent.--fully expected to do so.
Mr. Matthew Taylor : Before the Minister moves on from the subject of women going into business, does he accept that, while large businesses can provide work place nurseries, that is not the case for small businesses? Does he agree that it would be appropriate to help women who want to go into business or who want to work by providing child care vouchers so that they can contribute towards the cost of looking after their children and so that we can make the position more equal between smaller businesses and larger businesses in terms of their ability to help people in that way?
Mr. Eggar : One option that is available to businesses of any size is to issue child care vouchers. Indeed, increasingly featuring in the enterprise allowance scheme are people who wish to start a business in helping and looking after children. I am sure that many more women will want to take part in creating businesses that set up creches. A number of options are therefore available to women, and businesses can take advantage of the scheme to which the hon. Gentleman has referred.
Mr. Taylor : The Minister has misunderstood me. I was suggesting that the Government should provide child care vouchers, not that that should fall on businesses because small businesses cannot become involved in the same way as large businesses. If the Minister is not prepared to accept that, does he at least accept that it cannot be right for such provisions to be taxed as they are at present?
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Mr. Eggar : As the hon. Gentleman knows, tax matters are the responsibility of my right hon. Friend the Chancellor. The hon. Gentleman's speech and his intervention have shown what is, I suppose, an expected lack of any understanding of government. He has put forward all sorts of ideas, but has totally failed to show how they will be paid for. It is not possible simply to provide Government with bits of paper without somehow funding the ideas on them. It is all very well for the hon. Gentleman liberally and democratically to hand out the goodies--but if he were to produce the research to support them, perhaps he would have a little more credibility.
Mr. James Paice (Cambridgeshire, South-East) : Will my hon. Friend give way?
Mr. Eggar : I would rather not, but I will.
Mr. Paice : Well, in that case I am even more grateful to my hon. Friend. While he was commenting on the various points raised by the hon. Member for Truro (Mr. Taylor), did he pick up the slightly throwaway line about the introduction of a land value tax? Will my hon. Friend discuss the devastating effect that that would have on many businesses including agriculture-- [Hon. Members :-- "No."]--and farming-- [Laughter.] Well, perhaps that answers the point if the Social and Liberal Democratic party has not thought the issue through. Every time a tax has been placed on land, such as the development land tax, it has caused inflation in the value of land.
Mr. Eggar : I am sure that my hon. Friend will wish to have fun exploring this point later in the debate, if he is lucky enough to catch your eye, Mr. Deputy Speaker. However, my hon. Friend the Under-Secretary has pleaded with me not to comment on that aspect of the speech made by the hon. Member for Truro, because he is looking forward to dealing with it himself. I hope my hon. Friend will forgive me if I do not go down that avenue.
The Government's success in fostering the remarkable increase in business formation cannot be disputed. Our policy now is to build on this success and focus attention on the many businesses that were started up in the last decade and that are now facing the problems and opportunities of growth. We are determined to encourage those businesses that have the potential and the desire to grow, without abandoning our commitment to business start- ups. We need to encourage small businesses to identify their needs and seek advice, and to encourage individuals who already have the necessary expertise to provide it when small businesses ask for it.
In addition, we have identified gaps in the market provision of services and in the advice available to small firms, and we have gone out of our way to fill those gaps. The loan guarantee scheme and the business expansion scheme are designed to meet the particular problems faced by small businesses when raising finance. The Training Agency offers a wide range of training for start-ups and growing businesses with a £50 million-plus commitment through business growth training. The small firms service and local enterprise agencies advise smaller businesses, while more specialised help is available through the DTI's enterprise initiative. Much of this help is delivered in partnership with the private sector.
The critical new factor in this process will be the setting up of the locally based and employer-led training and enterprise councils. I am surprised that the hon. Member
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for Truro, who has one of the first TECs in his region, did not comment on that or on the commitment by many leading business men in Devon and Cornwall to making a success of it. Perhaps he is not aware of what is going on.Mr. Matthew Taylor : The Minister is aware that I cut short my speech because of the shortness of the debate and my desire to let other hon. Members speak. There is a rather higher proportion of Social and Liberal Democrats here than of any other party. I would otherwise have dealt with TECs. Therefore, the Minister can now answer a couple of queries about them. First, would it not be possible to increase the role of small businesses in the TECs? Secondly, would it not be better to free them from the restraints of Government control? I have had feed-back from a number of people involved in TECs, and they feel that the TECs are far too directed centrally, and thus are unable to take as many of their own decisions as they would like.
Mr. Eggar : I am not sure how well the hon. Gentleman understands the position in his TEC. I think that he is aware that the distinguished chairman of it is also the chairman of a smallish company and I would have thought that that is an obvious sign of the importance that we attach to the TECs being assisted by small businesses. As to the flexibility that the TECs need, this matter has been discussed--I have done so myself on at least two occasions--with the chairman of his local TEC. The hon. Gentleman will find, if he inquires, that a number of concerns expressed by the chairman about flexibility have been met satisfactorily. We have responded to the points towards which the hon. Gentleman was edging, and he may be a little out of date.
The Government recognise that most small businesses face problems, either at key phases in their development or as a result of external factors. We recognise too that interest rates are causing problems to some small businesses, although it is important to remember that, at the same time, about half of all small businesses are in credit with the bank. Nobody wants high interest rates for a moment longer than is necessary. Hon. Members should be under no illusion that, in the longer term, a period of high inflation would do far more damage to the viability of small firms and their ability to plan than the level of interest rates.
My hon. Friend the Member for Pendle (Mr. Lee) referred to the absence of Labour Members. I am not at all surprised by this. That the Labour party appointed the hon. Member for Bradford, South (Mr. Cryer) as the Minister responsible for small business is a sign of the importance that it attaches to that sector. The hon. Member for Berwick-upon-Tweed (Mr. Beith) said that the greatest achievement of the Liberal party was the sacking from that post of the hon. Member for Bradford, South. That is an interesting gain for the country, delivered through the Lib-Lab pact. If my memory serves me right, the hon. Member for Bradford, South gave other reasons for his departure from the Government, but I shall leave that dispute to him and the hon. Member for Berwick-upon-Tweed.
Mr. Beith : The Minister is putting words into my mouth, albeit in a genial way. I did not claim that as our most significant achievement. We forced the Government to appoint as the Minister with responsibility for small
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businesses somebody who understood what making a profit is about--the Right Hon. Harold Lever, and a very good job he did.Mr. Eggar : I congratulate the hon. Gentleman on that achievement. I suppose that one can put that in the positive side of the balance. I am rather more concerned about the tremendous damage done to the country during the period of the Lib-Lab pact. That is what really matters, as it had a dramatically adverse effect on small firms.
Mr. Nicholas Winterton (Macclesfield) : My hon. Friend has spent two and a half minutes dealing with the hon. Member for Bradford, South but dealt with interest rates in less than 30 seconds. The problems facing businesses emanate primarily from high interest rates, and I hope that he will appreciate the great damage that these are doing to smaller businesses. I speak as someone who comes from a smaller business background, unlike half the hon. Members now present. High interest rates are crippling smaller businesses, adding to costs and making them less competitive against overseas manufacturers not only at home but in the export market.
Mr. Eggar : My hon. Friend's knowledge of, and expertise in, all matters that come before the House is well known.
Mr. Winterton : Too bloody sarcastic.
Mr. Eggar : I apologise to my hon. Friend if he misunderstood what I was trying to say. I said that we recognise that for some companies, although not for all, interest rates are a problem.
Mr. Eggar : It is generally recognised that about half of small businesses are borrowers from the bank and about half are in credit with the bank. Therefore, it is logical to say that, roughly speaking, half of small businesses are not adversely affected by high interest rates.
Mr. Winterton : Try manufacturing.
Mr. Eggar : I do not want to get into a disagreement with my hon. Friend because I recognise, as I have said, that some small businesses are affected by high interest rates. However, allowing inflation to get out of control would be far worse for small businesses--be they manufacturing businesses or other small businesses. I am sure that my hon. Friend will make his own speech in his own way, and I shall listen with considerable care to the points--
Mr. Richard Shepherd (Aldridge-Brownhills) : Will my hon. Friend give way?
Mr. Eggar : If my hon. Friend insists.
Mr. Shepherd : I understand why my hon. Friend may want to slide over high interest rates, but the intention behind them is to dampen demand. A reduction in demand affects all businesses, and that is one of the ways in which small businesses are squeezed. So to state that 50 per cent. of them are not in debt understates the position. Perhaps my hon. Friend has not given sufficient weight to that.
Mr. Eggar : I know from conversations with my hon. Friend about his anxiety ; he has particular expertise in the retail sector. Many small businesses in that sector are
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affected by high interest rates, in terms of borrowing and of lesser demand. I accept my hon. Friends point, but I was not trying to skate over the problem. It is only right to put that problem in context and I hope that I did so in a balanced way.The Labour party's policy review shows that it is now even more hostile to small firms than ever before. Businesses would be required to pay a statutory national minimum wage--a recipe for destroying jobs and crippling fims as they are getting off the ground. All enterprises under the policy review, whatever their size, would have to contribute 0.5 per cent. of their pay rolls to a state training levy. Freedom to hire and manage staff would be effectively removed by a requirement to submit all personnel decisions to a joint union-employer body--
Mr. Henry McLeish (Fife, Central) : Rubbish.
Mr. Eggar : It is no good the hon. Gentleman laughing--that is what the policy review says.
Labour's policy would smother small firms and stifle individual enterprise. To consult Labour about small firms would be as useful and effective as seeking King Herod's advice on child care. The Government will continue to encourage the small business sector. We shall continue to tackle the barriers to enterprise creation and to growth, whether they be in the form of attitudes to enterprise or of a lack of business knowledge and skills, or practical barriers in the form of red tape or restrictions on access to markets at home and in Europe. Conservatives do not only say that they are in favour of small businesses ; we have proved by our actions and achievements that support for small businesses and enterprises is right at the centre of all our policies.
8.14 pm
Mr. Henry McLeish (Fife, Central) : We have heard a
characteristically complacent speech by the Minister of State. It was interesting to see the little tiff about interest rates. The hon. Member for Macclesfield (Mr. Winterton) was right : the Government may want to take credit for blowing away lots of paperwork and Government inefficiencies, but the key problem facing small businesses is the crippling level of interest rates.
How long does the Minister think this level of interest rates will continue ; and does he seriously maintain that only a small number of firms are affected by it? The small business sector, along with the wider business community, is facing a bill of an extra £3 billion if the rise from 7.5 per cent. to 15 per cent. continues for a year. In view of jibes aimed at the Opposition today, I must point out that collective wisdom about small businesses has been invested this evening in my hon. Friends the Members for Great Grimsby (Mr. Mitchell) and for Jarrow (Mr. Dixon) and myself. I may add in passing that this is the first time I have been able to imagine someone leading a Conservative march in my constituency, and to look over his shoulder.
The Opposition appreciate the contribution of the small business sector to growth and output and to employment. It was interesting that the Minister, who is usually courteous, would not allow me to intervene on a small
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difference of opinion between him and the hon. and learned Member for Montgomery (Mr. Carlile) about the Government's claimed jobs miracle since 1983.I have a small challenge for the Minister and his able advisers. From the figures provided by the Department of Employment, particularly in the labour force survey, it is clear that, between June 1979 and June 1989, the net increase in employment in this country was 978,000 ; but 440,000 were double jobbers, and 470,000 were people on training schemes. By my calculation that leaves a net increase of 68,000 in 10 years. What does the Minister think of that calculation? Will he at last assure the House that these figures will be examined and that we shall hear no more nonsense about a jobs miracle made up of an odd collection of training places, part- time and poor quality jobs, double jobs and other dubious statistics related to self-employment.
The small business sector employs about 6 million people, or one quarter of the work force. It is obviously a fairly powerful section of employment creation. The Government have argued, using labour force survey figures, that within this sector 3 million people are self-employed. Our research reveals that of the 1.2 million people who entered the self-employed sector between 1979 and 1989, to make up the total of 3 million, 900,000 pay no national insurance contributions. I challenge the Government to provide another set of statistics to verify that.
Mr. Eggar : I shall be delighted to respond to the hon. Gentleman at length in due course. One of the reasons why his figures are wrong is that he used figures for the wrong year. It is some time since I looked at assertions that the hon. Gentleman published just before Christmas, but I think I am right in saying that he related figures applying to 1987-88 to 1989. I shall be delighted to set the hon. Gentleman right with the other reasons in due course.
Mr. McLeish : I am delighted that the Minister acknowledges that our document, which was the focus of such merriment among Conservative Members the other day, has been read by his advisers. But he will not get off the hook by suggesting that extrapolating the figures for 1988 to 1989 makes up for the enormous difference between the Government's assertions about job creation and the true figures. I hope that the question of the self- employed and the doubts now surrounding the figures will be looked into. I am willing to accept that, as a result of the enterprise allowance scheme and other schemes, there are in self-employment a number of people who do not register in any of the Government's statistics and are only picked up from the labour force survey, on which figures the Government base their figure of 3 million.
In the past, the small business sector has certainly been the focus of a political knockabout in this Chamber. There are certain reasons for that. When one takes into account the fact that one quarter of the work force are now engaged in small business development and that those people contribute about 20 per cent.--an enormous amount--to the gross domestic product, one realises that it is incumbent on all parties in this House not only to take very seriously the achievements in that sector but also to look at the potential there for further employment growth.
Before looking at some of the concerns of the small business community at present, I want to refer to the hype
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and rhetoric of the Minister of State. This is an area in which the Department of Employment too is becoming expert. It is intimidating to other hon. Members to have Ministers, in some respects, exploiting the small business community, using it to try to highlight what the deregulated market economy has produced.But the Government's argument about small businesses falls apart when hon. Members such as the hon. Member for Macclesfield intervene to raise the question of interest rates. The hon. Member for Truro (Mr. Taylor) also mentioned the uniform business rate. This is a saga of two halves. The Government have been shuffling papers for a decade. They have seen a rise in the number of self-employed people and an increase in the small business sector. But we must see a new relationship developing. This Government and any future Government must take the small business sector far more seriously than has been suggested by some of the comments that we have heard tonight. The new relationship between Government and the small business sector must revolve around the issues that actually matter.
We have talked about crippling interest rates, but there are a number of other matters. It used to be the case that in any forum the Government could call upon the National Federation of Self Employed and Small Businesses to talk about issues and to reflect and support what the Government were attempting to do. In recent months, there has been a change in the attitude of those bodies. In my view, they now know that they were partly used by Lord Young during his sojourn in the corridors of power and by the Department of Employment, whose projection of what it is actually doing to improve the environment in which small businesses operate borders, at times, on the slightly dishonest.
Speaking at a seminar on corporate finance in the City on 24 May 1989, the Chancellor of the Exchequer outlined clearly what businesses need. He said that businesses needed three things from Government--first, a consistent framework ; secondly, minimal interference ; and thirdly, limited practical help.
Let us take the second issue first. Certainly we have now arrived at a situation of minimal interference, though I have to say that, when one speaks to people in small businesses about VAT and income tax, they put a different complexion on the situation. In March 1985, we had "Burdens on Business" ; in July 1985, "Lifting the Burden" ; in 1986, "Building Businesses--Not Barriers" ; in 1987, "Encouraging Enterprise" ; in 1988, "Releasing Enterprise" ; and in 1989, "A New Tack on Red Tape". It is an annual event.
Mr. Tim Smith (Beaconsfield) : It needs to be.
Mr. McLeish : The hon. Member says that it needs to be. In the early days of the development of the small business sector, there were real problems about the amount of red tape involved. What we now see is a ritualistic attempt to engage the small business sector, to create the impression that the problems that it faces are related to much of that, without actually addressing the crucial issues that have been raised in this House by hon. Members on both sides of the House.
Clearly, the first of these issues is the question of interest rates. The irony of crippling interest rates is that they actually hit the companies that are growing fastest.
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The Minister has made the point that the number of companies affected is small. In reality, however, the gearing ratio of a fast-growing small business is much more significant, and outgoings are much more significant.If such a business is asked by this Government to participate by paying its share of the £3 billion increase in debt, surely that will have an impact on the business's growth potential and its ability to introduce new technology and to create employment--clearly something that is valuable for all of us.
But it is not only my opinion that high interest rates are hitting hard. I have here a press release from the National Federation of Self Employed and Small Businesses. Issued on 10 October, and headed "High Interest Rates Hitting Hard, Say Small Businesses", it says : "Mr. Bill Knox, Chairman of the National Federation of Self Employed, said Every percentage increase costs small firms £200 million. The real cost of money is at least 18 per cent. (15 per cent. plus 3 per cent. over base). This is how much businesses are having to pay to finance past expansion, to create new jobs, or even to survive. Small businesses are viewing the future with real concern.' "
Does the Minister view the future with the concern that the National Federation of Self Employed and Small Businesses seems to have? I will give the Minister an opportunity to talk about interest rates, to answer the question that was posed by the hon. Member for Macclesfield : how long will small businesses have to endure this crippling burden? Is no hon. Member on the Government side willing to intervene and give me, with my limited knowledge, a lecture about when interest rates will come down? [Interruption.] I have given hon. Members opposite a chance to intervene, but all that I have heard is murmurs, and all that I see is grim faces.
Mrs. Currie : Is the hon. Gentleman suggesting that we should return to the situation that prevailed not so long ago, under a Labour Government, in which the rate of inflation was regularly over 20 per cent? One has only to look at the results. Far more firms were going out of business entirely than were coming into existence. These days, despite all the problems and the pressures that the hon. Gentleman has described, far more businesses are being created week by week.
Mr. McLeish : It is amazing that a party that has no future always wants to dwell on the past.
My concern-- [Interruption.] Let me explain the point that has been made by other hon. Members about inflation rates. In no country of the developed world--and certainly not among our European competitors--would the Finance Minister, the equivalent of the Chancellor, use one heavy blunt instrument to attack financial and trading difficulties. That is the crucial test for this Government. There is another measure. Despite what Ministers have said, the number of receiverships jumped by over 40 per cent. last year as the squeeze hit. As a postscript to that, let me quote from an article in The Times of 12 January :
"The survey also shows that three accountancy firms established a clear lead over all others in the receiving and managing sector. Cork Gully, the specialist division of Coopers and Lybrand, was appointed to 150 firms, Grant Thornton to 110, and Peat Marwick to 107"-- another set of statistics that the Government should be duly proud off.
The uniform business rate has been mentioned. I think that the hon. Member for Truro gave it sufficient airing and that therefore I need not to into great detail. While, in a very simplistic sense, the north will benefit signficantly
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and the south will have an extra burden imposed on it, it is quite clear, again from the National Federation of Self Employed and Small Businesses, that the impact of the transitional payments will disappear. Their phasing in is an illusion in terms of the impact that they will ultimately have on small businesses.I again ask whether the Government are truly the friends of the small business community. The business rate will start in April and it appears that people in small businesses will have to go to the local authority to determine the current position about rateable value. Discussions should be taking place with the small business community. Day in and day out, the Government lecture us and say that they are the true friends of the small business and that any other party, Liberal or Labour, that speaks or even hints at an interest in the small business sector is frowned upon. Things are changing, and it is easy to see why.
The Minister talked about training and technology. The key issues for the future of small businesses are not only output and employment growth but whether the nation and the Government can link together to ensure that product development and innovation and training can be properly applied. Many small businesses do not have the resources to carry out those important tasks.
Training and enterprise councils were mentioned. The Government say that, as friends of the small business, they welcome small businesses to TECs. Why is it that the National Federation of Self Employed and Small Businesses put out a press release on 23 September which was headed :
"Small firms to lose out in Government training plans"?
The press release said :
" We are concerned with the direction of training in Britain. Norman Fowler states that Training and Enterprise Councils (TEC's) will be big business. Our fear is that they will be for big business only', says Lyn Hadfield, Chairman of the NFSE's Training and Education Committee. The composition of the boards of TECs could well lead to specialised training for large companies at the expense of smaller firms.' "
It is interesting to note that the small business sector is lauded by the Government but never invited to the top table. It is crippled by interest rates and by the uniform business rate. It is supposed to be involved in training, but it will be excluded from virtually every TEC in England and Wales, and the situation is similar in Scotland.
Mr. Wallace : The hon. Gentleman has said that small firms have never been consulted. Will he comment on the fact that, as the poll tax comes into operation in England and Wales, employers will have to be involved in attaching the wages of employees? That unhappy burden has been placed on small business by the Government without the small business sector being consulted.
Mr. McLeish : The hon. Gentleman makes another valid point to add to our attack on the Government. The Government's attitude smacks of hypocrisy ; we experienced a great deal of that in the Minister's characteristically complacent speech.
The Public Accounts Committee's eighth report on assistance to small firms said that the Government have machinery to do much more about training in small businesses. The training for enterprise concept is interesting, but the Public Accounts Committee criticised
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it because it was badly focused. There was no real idea of the return on the investment in terms of the impact that the scheme had on participants. If the Government value the contribution of small businesses, they should bring them into TECs and also discuss with them the extension of existing machinery in the Department of Employment to encourage small firms to expand their output and make a greater contribution not only to their employees, but to national welfare.The nation requires a great deal of consensus on how we move forward in industry and on employment and economic performance. The National Federation of Self Employed and Small Businesses expects the Government to put forward policies that will help the NFSE. The firm statement to the Government is that crippling interest rates must be lowered. If they are not, the number of firms going into receivership will increase. Small businesses provide 6 million jobs--a quarter of Britain's work force. It also contributes one quarter of our gross national product. If the Government believe in small businesses, they must show that they want them to become involved by adjusting the TEC provision and making sure that they are allowed to speak to Government.
8.34 pm
Mr. Michael Grylls (Surrey, North-West) : The hon. Member for Fife, Central (Mr. McLeish) and the hon. Member for Truro (Mr. Taylor), who has just left the Chamber--briefly, I am sure--were scraping the barrel when they tried to attack the Government's policy on small firms. Clearly that is their job, but I listened carefully to their speeches and I sensed that they were finding it somewhat difficult to mount the case that the Government have failed to encourage small firms and foster their interests. Any disinterested observer would see that mounting such a case is impossible.
My hon. Friend the Minister was right to say that the climate has been totally transformed. Of course there are problems, and I shall come to them shortly. Entrepreneurs would not start businesses if they were not prepared to deal with problems. That is what sets such people apart from a corporate man or someone in the public sector who has a rather comfortable life. The entrepreneur recognises that life is tough and that he has to solve problems. I am sure that my hon. Friends will agree that the Minister mounted a most convincing case to show that the small firms sector has been transformed. The climate is totally different. There has been a great deal of deregulation, but there is still a long way to go. Much good has been done and the number of complications faced by small firms has been greatly reduced. That should encourage us to go further.
Taxes have been changed. The hon. Member for Fife, Central made much of interest rates. I shall deal with that before my hon. Friend the Member for Macclesfield (Mr. Winterton) leaves the Chamber. I see that he has slipped back into his seat. I remind the hon. Member for Fife, Central that in 1979 the rate of corporation tax for small firms was 42 per cent. The hon. Gentleman may have forgotten that. It is now down to 25 per cent. and we have every expectation that it will come down again in succeeding Conservative Budgets.
The rate of taxation for the sole trader, the self-employed person, went up to a maximum of 83 per cent. and it is now down to 40 per cent. Many capital taxes
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have been reduced, and that is important from the point of view of leaving money in a business so that it can expand. This is a serious subject and perhaps it was a little irresponsible of the hon. Member for Fife, Central to have political fun at the expense of the Government on the subject of interest rates.There was a forest fire involving some of my hon. Friends a short time ago and my hon. Friend the Member for Macclesfield threw in a match to ensure that it was burning properly. However, he is quite right to say that interest rates are a problem for many small firms. My hon. Friend the Minister accepts that and does not need to speak for a quarter of an hour repeating that that is a problem for small firms. However, it is not a problem for all of them because we have to add to the equation the question of demand. Of course it is true that the high interest rates from which we are suffering will reduce demand. However, we must remember that we have had eight years of record growth and demand in the small firms sector. When that is coupled to the reductions in taxation and deregulation, it will be seen that it has contributed to a huge growth in the sector. We have run into the problem of inflation.
My hon. Friend the Member for Derbyshire, South (Mrs. Currie) was right to say that inflation is the real killer. It is the worst of the two problems. I note that my hon. Friend the Member for Macclesfield is nodding. He is a wise man who nods only when he agrees. He was nodding when the Minister spoke about inflation. Had we allowed inflation to continue at 20 per cent. for five years, that would have removed all the capital from businesses. It is not a very difficult or complicated mathematical equation ; even I can work it out. Inflation is the worst evil. It is worth dealing with it in the short term because it must not get a real grip on the economy. I doubt that anything divides my hon. Friend and I on that point.
Mr. Nicholas Winterton : I believe high interest rates to be a major contributory factor to inflation. There should be a more selective weapon to deal with inflation than high interest rates, which kill the goose that lays the golden egg--which is manufacturing industry and industry in general.
Mr. Grylls : That is my hon. Friend's view. In 1980 inflation was running at 20 per cent. If we had not tackled it, it would have been the worst conceivable evil. We dealt with it again when it rose by a small degree in 1985. It has risen again in 1989-90, and I believe that the Government's policies that succeeded in 1980 and 1985 will succeed now. Of course, it would be dishonest to pretend that that cannot be achieved without a great deal of pain.
I want to contrast Britain with West Germany. During the past eight years Britain has had a higher rate of growth, but West Germany has had lower interest rates, especially now. It is a question of balance. Some aspects are better in West Germany but some are better in Britain. Like other hon. Members, I travel around the country and meet many small business men. They all say, "We must not have inflation because that will kill us."
We shall have the Budget in a few weeks, and there is room for the Government to make further changes in taxation that will help the cash position of businesses. Although corporation tax for small firms has fallen from 42 per cent. to 25 per cent., for a new and growing business it still means that a quarter of its profit is lost in taxation.
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That is too much. There should be a lower starting rate, at least for the newer businesses in their most fragile years--perhaps the first three years. Perhaps there should be a new rate band from nil to £25,000 or £30,000 of profit. That would give small companies the opportunity to move on to the next stage of development so that they could expand their premises and take on more employees.If too much is taken out of profit--and I believe that 25 per cent. is too much--how can a company grow? The only way that it can grow--and this comes back to interest rates--is to borrow, which in itself creates a problem. It would make much more sense if the Chancellor left more money in the businesses so that they could grow from their internal cash generation. I hope that that will happen.
Another longer-term measure would be to cut even further the inheritance tax rates for businesses. If we sincerely believe, as we do, in the enterprise culture--in the encouragement of people to take risks and invest their money in firms--firms should be passed on from one generation to another. Most firms do not reach their optimum size in only one generation. Inheritance tax has been reduced to 20 per cent., which is better than it was--it was awful--but if a firm with an asset value of £1 million, which is not a great deal in current terms, is to be passed on to the next generation, some £200,000 in cash must be produced.
I sometimes think that the Treasury believes that small firms have pots of cash in drawers just waiting to be handed over when the firm is passed on to the next generation. That does not happen. A well-run business uses its cash to develop and to advance. We must make the Treasury understand that. Some may say that firms can take all sorts of fancy measures, such as consulting accountants and lawyers, avoiding tax, transferring assets outside the seven-year rule and so on--but that is not the point. The one thing that most entrepreneurs cannot decide is when they will die. That is something that even the Treasury cannot get round. Of course, I am not referring to private money--that is a different argument--but businesses should be passed on without an inheritance tax liability.
Another area in which the climate has been transformed is the provision of general finance, especially through venture capital, the highly successful loan guarantee scheme and the enterprise allowance scheme for very small new businesses. However, there is still a gap and we would be wise to consider the practice in West Germany, where small businesses have loans totalling the equivalent of £4.5 billion at interest rates below the going rate, which is very low anyway. West Germany has prudently looked after the Marshall plan money, which is still allowing small businesses to borrow at special rates of interest. Of course, we do not have Marshall plan money in Britain, but it is an aspect that should be considered.
Multinational companies can borrow in the Euro dollar market at quite low rates, even with the high interest rates in Britain, but small firms have to pay the maximum rates. That is rather like telling young children to stand on their own feet, but when they grow up putting them in a nursery. We should consider ways to give growing businesses a leg up with special interest rates. We could also offer subsidies and so on, but they are complicated.
In 1988 about £1.5 billion of venture capital was loaned to about 2,000 firms, so it has been a successful innovation. The hon. Member for Fife, Central was not in the House in 1979, but the venture capital market was almost
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