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International Socialism, March 1977



The Profitability of British Industry


From International Socialism (1st series), No.96, March 1977, pp.15-16.
Transcribed & marked up by Einde O’Callaghan for ETOL.


HOW profitable is British industry? The question is important to us, because it crucially affects the government’s room for manoeuvre in negotiating phase three of the Social Contract, the balance of its economic policy, and the climate we will be working in.

There can be no doubt that the profitability of private companies has fallen since the 60s.

Profits as a proportion
of gross domestic income









Source: Bank of England
Dec. 1976

By the end of 1974, private companies had a deficit of £2.600 million—their short term debt (like bank overdrafts) exceeded their current assets (like cash in hand, or money in the bank) by £2,600 million. The Labour government, faced with massive bankruptcies took drastic steps to salvage the situation.

They reduced corporation tax, and allowed companies to revalue their stocks of goods and declare the increase in their value as part of their profits, without having to pay extra tax. These tax concessions were worth no less than £3 billion between 1974 and 1977. At the same time wage increases were being limited by the Social Contract.

As a result, by August 1976 the financial deficit of companies had fallen to £60 million. This recovery was of course paid for by the working class. As the tax burden on companies was reduced, the public sector deficit rose, and cuts were made in welfare spending to cover the gap. The tax concesions of £3 billion just about equal the amount of cuts so far scheduled by Denis Healey.

The professed aim of the government was to restore the profitability of British industry, generate increased investment and so cure the long term decline in Britain’s competitiveness. How far are these longer term aims being fulfilled?

Certainly profits appear to be rising. According to the Financial Times, trading profits had risen 27 per cent over the year before by mid-1976. Consumer non-durables (food, drink, etc.) were doing particularly well. In September 1976 the Bank of England said ‘company profits continued to recover in the first quarter of 1976, rising by 12 per cent’, and between the last three months of 1975, and the first three months of 1976, profits rose by as much as 24 per cent. But as a proportion of gross domestic income, profits in the first quarter of 1976 were only 4.7 per cent, nearly 2 per cent lower than in 1974.

The question remains: is British industry becoming more profitable? Certainly declared profits have risen, and companies debt position improved. But profitability must be measured in terms of capital employed. The Department of Industry produced figures that show that the rate of return on capital has fallen from 18.8 per cent in 1960 to 15.7 per cent in 1975. The Financial Times survey of 729 companies in October 1976 gives a return on capital of 16.1 per cent for capital goods (machinery etc), and 17.9 per cent for consumer non-durables (food etc.). But there is a serious qualification to make to all these figures.

Conventional accounting practice takes the value of capital stock—plant and machinery—at its original cost, and assumes its value to be written off over a set number of years. But rates of return based on valuing capital at its original cost are a poor guide to current competitiveness, since replacing old machinery, or buying new, will take place at much higher prices because of inflation. So rates of profit are being overestimated, because the capital base is being measured at its original cost—not the much higher cost of replacing it today.

The alternative accounting method, proposed by the Sandilands committee, is to revalue a company’s assets every year by its replacement cost. This would mean a massive increase in depreciation charges—the amount of money put aside out of profits to replace plant and machinery as it wears out.

How would this more realistic method of measuring profits affect results? It has been estimated that profits for 1976 would be 45 per cent less than previously stated if current cost accounting were used. Sectors of the economy with a small amount of fixed capital, or who replace their capital frequently, would fare better than average—so that banking and insurance, building materials and office equipment companies would see their apparent profits reduced by 20 to 40 per cent. But heavy engineering, paper and packaging, shipbuilding and textiles would face a reduction in declared profits of 60 to 80 per cent, and the textile industry as a whole would be running at a loss.

Phillips and Drew, the stockbrokers who drew up these figures concluded that much of the profits paid out in dividends over the past few years have in fact been distributed capital.

Management Today took a different approach, and measured profitability as the after tax return on shareholders investment. Given the stress on increasing investment, this should be a useful indicator. Rates of return . had fallen slightly—from 10.8 per cent in 1967 to 9.1 per cent in 1976—but these figures do not reveal near stability, they merely hide the extent of the drop. Interest rates are vastly higher now than they were ten years ago—for example you can get about 14 per cent by lending to the government. And with inflation running at 15 per cent, companies giving a return of 9.1 per cent are not even protecting their investors against inflation.

The top ten companies in the table of profitability contain five retail chains, a specialised ‘leisure industry’ company, a military equipment manufacturer and a drug company. Not one metal manufacture company, on which economic activity turns, appears on the list. For example, Lucas, with a rate of return of 7.5 per cent and Associated Products, at 6.1 per cent, are showing a rate of return on share capital which is very low indeed. Taking current cost accounting into consideration, the absence of ‘core industrial’ companies from the high-return lists would be even more marked, and the results would look even poorer.

Industry Minister Varley said in answer to a parliamentary question that the latest available estimate of the rate of return at replacement cost earned by industrial and commercial companies is for 1975, and was about 4 per cent. Information on the first three quarters of 1976 suggests a slightly lower rate of return in that period.

Currently then, the profits being declared by British companies are obscuring the true seriousness of the profitability crisis. They are a product of massive tax concessions granted by the government, and the success of the social contract in holding down wages. In terms of the government’s overall strategy, they do not in any way reflect industry’s ability to maintain (let alone expand) its capital base. Even to maintain the existing level of potential output of British industry requires an expenditure of £2,130 million up to 1978—and this figure is at 1970 prices. By now the true cost must have doubled.

Bankruptcies of
private companies









What are the consequences of this very low level of profitability?

  1. The government’s room for manoeuvre over the total increase in the wage bill for phase three is very small.
  2. The government will have to continue its support to profits by shifting resources from the welfare state as well as our pockets. The changes to the Price Code in July 1976 were worth £900 million to corporate profits in 12 months,
  3. There will have to be a renewed and more intense attack on productivity levels. This will mean increased pressure for productivity deals, flexibility, an end to unofficial action etc.
  4. When accounting procedures are changed (as it seems certain they soon will be) to current replacement cost accounting, there will be huge decline in declared profits. It will no longer be adequate to press for pay rises on the basis of increasing profits,
  5. Given the true return on capital, reinvestment is unlikely to take place in the near future. This will mean an increasingly vulnerable British economy when faced with a world crisis, and the effects of the next crisis will be far worse than the current one.

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