HC Deb 25 February 1981 vol 999 cc896-903

GAS LEVY

4.26 pm
Mr. Edward Rowlands (Merthyr Tydfil)

I beg to move amendment No. 1, in page 1, line 12, leave out "1980–81" and insert "1981–82".

The Chairman

With this amendment it will be convenient to discuss amendment No. 3, in clause 2, page 2, line 28, leave out line 28.

Mr. Rowlands

These amendments are designed to remove, at least in part, some of the retroactive nature of this gas tax. The House has always expressed grave concern and doubt about any retrospective legislation, especially that which involves retroactive taxation. We are a fortnight away from the Budget and a month away from the end of the financial year, yet we are still trying to pass through the House a new major tax that will be backdated to April of last year.

That in itself would be a matter of considerable concern, but there is also the fact that the background to the introduction of the tax has led to many expressions of concern about the Government's handling of it—particularly on the question whether the Government did not take a fairly fundamental approach in arrangements and agreements reached between Ministers and British Gas at the beginning of last year.

On Second Reading, the Secretary of State chose to present to the House a very selective and partial historical account of how the Bill came into being. He started his account in May 1980, which was when he announced—incidentally by means of a written answer, yet another subterfuge frequently used by the Government—the introduction of this major new tax. In fact, the history of this tax should begin in January 1980, with the Secretary of State's major statement to the House about the financial provisions, structure and targets of British Gas.

It is small wonder that the right hon. Gentleman made little reference to the statement of 16 January 1980, because that was supposed to be the definitive forward planning statement about the finances of British Gas. It was supposed to be, as he called it himself, a fundamental statement. He said: It is a fundamental objective of this Government's policy towards the nationalised industries that they should be set a clear financial discipline. Those words have a certain poignancy this week, after one major statement already on the financial discipline of one nationalised industry and with another due in the next week or so, presumably, after today's talks.

The right hon. Gentleman went on to say: We therefore opened discussions with the gas and electricity industries on the medium-term financial targets for the period 1980–81 and 1982–83. The external financial limits for 1980–81 announced last November were set in the light of these discussions, which have now been satisfactorily concluded."—[Official Report, 16 January 1980; Vol. 976, c. 1644.] So on 16 January 1980 the Secretary of State made a definitive statement on the whole financial arrangements, the financial targets, the rate of return, and so on, which the Government expected of the British Gas Corporation.

This was heralded as an illustration of the new Whiz Kid approach to the financing and forward planning of the nationalised industries. Yet within four months of that statement the right hon. Gentleman ripped the whole thing up unilaterally. That is the allegation that is made against the Government about the way in which they introduced the Bill—a measure that will tax the British Gas Corporation even for the year 1980–81. On 8 May 1980, four months after their original announcement, the Government ripped up unilaterally the financial arrangements and agreements that they had made with British Gas and that they claimed had been satisfactorily concluded after discussions with the corporation.

Let us see how the Secretary of State, in his statement of 8 May, proposed to change the arrangements that he had announced originally in January 1980 First, he proposed to change the financial targets. Although he had made great play of the 9 per cent. target in January 1980, he reduced it to 3½ per cent. in order to substitute the money that he was going to get via the national loans fund by the gas levy that we are debating this afternoon. Secondly, he altered the whole of the financial arrangements for the financial year 1980–81 and, indeed, for the whole of 1982 and 1983, setting different targets and establishing a completely different principle for the handing over of the money to the Government by the British Gas Corporation. If this is supposed to be modern Tory forward planning, God help us. Within four months of announcing one set of arrangements for a major nationalised industry the right hon. Gentleman changed them all by introducing this gas levy.

What happened between January 1980 and May 1980 that led him to make the changes that are now the subject of the Bill through which he seeks to claim £130 million in gas levy for the financial year that has nearly ended—a levy that the House has not approved? In introducing the Bill on Second Reading the Secretary of State's sole justification was the windfall nature of British Gas profits. Suddenly it appears that the Government discovered that as a result of their original proposal there would be large windfall profits accruing to British Gas. The right hon. Gentleman said that they had to be creamed off, for the most curious and interesting of reasons. Until I re-read the Second Reading debate I did not notice one of the most curious reasons given. The right hon. Gentleman said: By removal of the unearned windfall, the corporation will be left in a more normal commercial situation. This will help to encourage it to maintain standards of efficiency which would otherwise have been at risk."—[Official Report, 15 February 1981; Vol. 999, c. 71.] Apparently, if an organisation makes a considerable profit, it has to be creamed off, because the organisation is in great danger of becoming inefficient. If that is the argument, do we assume that in order to maintain the efficiency of the banks and to make sure that their efficiency is not put at grave risk as a result of the windfall profits that have accrued to them because of the Government's interest rate policy, that novel new doctrine of Tory profitability will be applied to the banking system with the same vigour as, apparently, the Government are attempting to apply it to the British Gas Corporation?

That could not have been the reason why we had amajor change between January and May 1980, because the corporation warned the Government, as did hon. Members on both sides of the House, that if they pursued a financial target of 9 per cent. and produced a crazy combination of massive gas price increases and a 9 per cent. financial target it would lead to embarrassingly large profits for British Gas. Those profits were known and acknowledged by the Government in January. It was not something that they suddenly discovered after the statement of 16 January.

So what is the reason why we are to have a gas levy retroactive to April 1980, which will raise £130 million in this financial year, which is nearly finished? Why did we have the change? Why was the gas levy introduced after the arrangements that were made with the corporation had been announced formally to the House on 16 January? I should like to put a number of questions to the Minister. First, when the corporation was concluding satisfactorily its discussions on the three-year financial structure, did the Secretary of State indicate or even suggest to it that the Government intended within four months to introduce a new major tax levy on the corporation? In January 1980, when the corporation thought that it had concluded satisfactorily an agreement, was it advised, or was it even suggested to it, that within four months there would be a completely new tax levy on the corporation, backdated to April 1980? These are the questions to which I would very much like to have a clear "Yea" or "Nay" when the Minister replies.

Why have we a retrospective gas levy on the corporation, backdated to April 1980 and not yet approved by Parliament in February 1981? There is only one reason that makes any sense why the Secretary of State should suddenly rip up well-defined and clearly understood financial arrangements and agreements made with the corporation and announced in the House in January 1980. That was the howl of protest that arose over the whole of the gas price policy of the Government. We heard many reports of this. Many hon. Members on the Government side of the Committee told us in informal conversations that in the constituencies they had never felt such strength of feeling amongst the women's sections and amongst their traditional supporters after the announcement made by the Secretary of State about the crazy policy to raise gas prices by 27½ per cent. in 1980 and to serve on the gas consumers another 25 per cent. increase in this financial year. It was the justifiable reaction and outrage that was felt not only by consumers of whichever party but particularly of the Conservative Party that led the Government to throw the bone to the howling dogs behind them in the form of this gas levy.

That is why the Government are now trying to impose on British Gas a levy of £130 million, backdated to April 1980. We await an adequate explanation for the change in policy between January and May 1980. Above all, when the Minister replies to the debate we would like him to state whether he can refute all the evidence that stares us in the face that the Government fundamentally breached a clearly defined financial arrangement, made in good faith with the British Gas Corporation and announced in the House only four months earlier.

The Under-Secretary of State for Energy (Mr. Norman Lamont)

The effect of the two amendments together, as the hon. Member for Merthyr Tydfil (Mr. Rowlands) has said, would be that the gas levy would start on 1 April 1981. It would be postponed for a year. As the hon. Member said, the effect of this would be that the British Gas Corporation would be left with profits of £130 million more.

The Government's proposals for the rate of levy inevitably involve a degree of judgment. The whole purpose and aim of the levy Bill has been to remove from the BGC the unearned windfall resulting from the increasing value of gas purchased under the old low-price contracts, the contracts that are exempt from petroleum revenue tax. It is because of the special nature of those very longstanding low-price contracts that there is this windfall gain to the BGC. That is what the Bill is about—taking that away from the BGC.

The hon. Gentleman's proposal would have the effect of making the profits of the BGC considerably higher. It would, therefore, also raise the return on assets being earned by the corporation. It would mean that there would be more money retained by the corporation— money that it does not need. Looking at the corporation's investment plans and at its financial requirements, it is the Government's judgment that the levy should be pitched at a rate of 1p a therm in 1980–81, 3p a therm in 1981–82, and 5p a therm in 1982–83.

The hon. Member referred to the adjustment in the financial target. I ought to point out that the adjustment from 9 per cent. to 3½ per cent. does not require any change on the part of the BGC, its policies, or what it is going to do. It is simply the same financial target expressed in post-levy terms. It is simply the same plans, investment programme and marketing policy. It is simply that that financial target has been adjusted arithmetically to account for the levy. There is no change required in the BGC's policy. There is no change in policy marked by the adjustment of the financial target. It is a purely arithmetical adjustment.

It seemed to us that the level of the levy in the Bill was appropriate having regard to the returns being made by industry elsewhere in our economy. Also, it was appropriate because we believe that the BGC will be perfectly able to finance its investment programme. It will be spending some £4 billion on strengthening the transmission system, bringing more gas to British industry and to domestic consumers who so urgently want it. That money will come from not just the profits of the corporation, which will be about £300 million in each year.r j 1–5 even after this levy, but the corporation will have its profits, plus its depreciation, plus the money that it has on deposit with the National Loans Fund. So there is plenty of money available for the corporation's investment programme.

Mr. Rowlands

The Minister said that it was an arithmetical adjustment to turn a loan from the Government into a straightforward hand-over of a very large sum of money. Is that just mere arithmetic?

Mr. Lamont

What I said was a mere arithmetical adjustment was expressing a financial target of 9 per cent., before the levy was introduced, adjusted to 3½ per cent. after the levy was introduced. That is simply a mathematical adjustment. It makes no difference to what is happening in the real world, or to what the BGC is doing or has to do.

Having made the point—as I hope I have—that we believe that the BGC has plenty of money for its investment programme, the point I make to the hon. Gentleman is that the BGC does not need this extra £130 million that the effect of the amendment would hand over to it.

4.45 pm

The hon. Gentleman challenged the idea, but we do not believe that giving the BGC money that is surplus to its investment plans and to its working requirements is conducive to the efficiency of the organisation. The hon. Gentleman poured great scorn on this idea. He said that we had always believed that, if companies make high profits, that reflects efficiency. He must be well aware, however, that often in the private sector there are circumstances in which companies that have no need of money for investment decide to make a repayment to their shareholders out of their share capital. That happens from time to time. The argument that surplus cash is likely to lower the incentive to efficiency is not a new or strange argument. It is one that applies in the private sector as well as in the public sector.

As I have said, the proposed amendment would mean a loss of proceeds of levy for the current financial year. That would increase the return on capital of the BGC, and it would also have the effect of increasing the deposits that the BGC makes with the NLF. We think that that is inappropriate and unnecessary. It goes against the whole purpose of the Bill, which is, as I have said, to remove the windfall profit and the amount of windfall gain that normally would have been paid in PRT. But in this situation PRT is not payable. For that reason, therefore, the hon. Gentleman's argument goes against the whole purpose of the Bill.

I come to the hon. Gentleman's specific arguments. First, he objected because the Bill was retroactive. The effect of the Bill is to go back to April of the current financial year. Of course, the hon. Gentleman has a point. The Bill is technically retroactive as to the period between April and May of last year. The levy was announced in May, whereas the levy goes back to April.

It is a quite common situation, even with income taxes, that the date of collection and of liability for income tax runs from the date of the passing of the statute through Parliament. However, the hon. Gentleman has a point as regards the gap between April and May. Although he has a point, I do not think that that amounts to a great threat to the liberty of the subject. This is a tax that is being levied on the BGC, on one nationalised industry alone.

The second point that the hon. Gentleman developed at some length was that there was a contradiction between what the Government announced in January and the announcement that we made about this levy later in the year, in May. The announcement that my right hon. Friend the Secretary of State made in January was of three-year financial targets for the industry—something that had been talked about for a long time and had been considered by the previous Government. The nationalised industries have wanted for a long time to have a three-year financial target. It was important to make that announcement in January, because it had implications for pricing. If it had not been announced in January, consultations between the British Gas Corporation and the consultative councils could not have taken place in February. In addition, the corporation's pricing proposals could not have been implemented in April. That is why the announcement was made in January.

In addition, the announcement had to be made then because there were implications for prices—both industrial and domestic. Without that time scale, decisions about prices could not have been taken. However, when the announcement was made, the Government understood that it would have a considerable effect on the corporation's profits. Contrary to the hon. Gentleman's implication, this did not come as a great surprise to the Government. Actually, we can add up. We could see that it would have an effect on the corporation's profits.

Two routes were open to the Government. First, we could have continued the mechanism whereby the corporation deposits money with the NLF. Secondly, we could have introduced the levy. The Government wished to consider those two options. A financial target had to be set, because of the implications for pricing. However, the Government also wished to consider whether the arrangements whereby the corporation deposits surplus cash with the NLF should continue or whether the windfall gain should be removed from the corporation permanently and irretrievably through the levy. Ultimately, that is what the Government decided to do. That is the reason for the timing. The hon. Member for Merthyr Tydfil was not right to say that an understanding with the corporation had been ripped up. The corporation's marketing and financial objectives are the same as those agreed on. The Government set the corporation a financial discipline—which they knew had certain implications for pricing—and that remains.

Mr. Robert C. Brown (Newcastle upon Tyne, West)

The Minister seems to be equating the option of whether the money should go into the NLF or whether it should be collected once and for all in the form of a levy, with the corporation's pricing policy. That is the most spurious argument I have heard. The Minister knows that the levy or tax has nothing to do with the corporation's pricing policy. That has been dictated by the Secretary of State, who has said that there must be an increase every year that equals the rate of inflation plus 10 per cent. Why is the Minister pursuing such a spurious argument?

Mr. Lamont

The hon. Gentleman is right to to say that the gas levy will not have any impact on prices. The hon. Member for Merthyr Tydfil, who is sitting on the Front Bench, says the opposite. Later in the debate, I hope that the hon. Gentleman will be reminded of what he said: the levy will not have any impact on pricing. However, it is right to say that the financial target—the return on assets—that has been set for the corporation has implications for pricing. That would be true for any Administration that set a financial target for any public sector industry. Inevitably, it would have consequences for the industry's pricing policy. However, it is up to the industry to work it out in detail.

Mr. Brown

The Minister is saying that any transfer to the NLF—which would involve many millions of pounds that would still belong to the BGC—would have serious implications for future pricing policy. The BGC might find itself without the necessary funds for the investment that it will badly need within the next two or three years.

Mr. Lamont

The hon. Gentleman is wrong. The decision to have a levy instead of deposits with the NLF will not have any effect on pricing. Mention has already been made of what will probably happen to domestic prices in the next three years. Even if the Bill were withdrawn it would make no difference. The price of gas will not increase faster as a result of this Bill. If the Bill were withdrawn, it would make no difference to the price of gas.

Mr. T. H. H. Skeet (Bedford)

A moment ago, the Minister said that, if the BGC had been a private company, it would have made a return to the shareholders. In this case, the nation is the shareholder. The banks have made very large profits, which they have shared with their shareholders, institutions and others. Given that this is a State corporation, how will the shareholders fare? If the money is returned to the Treasury it will go into the Consolidated Fund and people will not benefit.

Mr. Lamont

I sought to answer a point raised by the hon. Member for Newcastle upon Tyne, West (Mr. Brown), namely, whether the BGC needs the surplus cash? The hon. Gentleman put the proposition that it was curious to argue that the surplus cash was not conducive to efficiency. However, we do not think that it is. Having scrutinised the corporation's investment plans, we know that it does not need the amount of profit that will be generated without the levy. As a result of profits, depreciation and deposits with the NLF, the BGC has ample money to finance all its investment. Of course, it will need a substantial investment programme if it is to meet the rising demand for gas. At peak times, there is excess demand for gas. Therefore, more investment is needed.

The purpose of the Bill is to remove the windfall element that arises from the old, low-priced contracts, which are exempt from petroleum revenue tax. It seems equitable that the corporation should be put on the same footing as companies that pay PRT. Therefore, this is a commonsense measure. As the amendment conflicts with the Bill's main purpose, I advise my right hon. and hon. Friends to vote against it.

Mr. Rowlands

We shall pursue a number of the points that the Minister has raised about prices, the levy's effect on the corporation's investment policy and industrial gas prices in our discussion of the next group of amendments. Therefore, I shall not pursue them now.

However, when the Minister reads Hansard tomorrow and reconsiders terms such as "adjusted arithmetically", and when he reads of his contention that that is all that the Bill involves—£1.3 billion of taxation—he will realise that he has made one of the quotes of the week.

Mr. Norman Lamont rose—

Mr. Rowlands

Within a few sentences of the Minister speaking about arithmetic adjustment, he said that the purpose of the clause and of the rate of levy was to remove permanently a large sum of money from the BGC. If the Minister does not believe that that has considerable significance for the financial organisation and structure of the corporation, I can only imagine that he has not recently spoken to the chairman of the BGC or to its employees. They passionately believe that it does have significance.

The hon. Gentleman used another phrase that will be resented by those in the gas industry. He said that the Government were giving the corporation money. The Government have not given the corporation money. The money belongs to the corporation. It is earned by those who work in the corporation and by the large-scale distribution and sale of its products. In no way did the Government give the British Gas Corporation money.

The Minister rested the whole of his case for the windfall tax on the fact that the British Gas Corporation has benefited enormously from some early contracts that, incidentally, were negotiated by it with great skill and professionalism before 1975. He said that the Government were simply creaming off the windfall gain derived from those contracts. But that is not the only cause for the very large windfall profit. One of the main causes is the incredible and zany pricing policy that the Government have followed for the last 12 months. It has embarrassed the British Gas Corporation and caused great consternation between the corporation and its domestic and industrial consumers.

5 pm

Although we do not intend to press the amendment to a Division, the Minister must not believe that we are letting his arguments go by default. As I indicated, we shall have the opportunity later to take up several of the issues that were raised in his reply to this group of amendments.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause I ordered to stand part of the Bill.

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