VAT (Fuel) (Hansard, 15 December 1994)

§ 1. Mr. Jack Thompson
To ask the Chancellor of the Exchequer what criteria he used to determine the level of value added tax on fuel; and if he will make a statement.

§ The Chancellor of the Exchequer (Mr. Kenneth Clarke)
Following last week's vote, the level of value added tax on domestic fuel and power will remain at 8 per bent.

§ Mr. Thompson
Given the huge embarrassment experienced by the Chancellor last week on the 7.5 per cent. increase in VAT on domestic fuel, is he aware that the introduction of 8 per cent. VAT on domestic fuel was equally unpopular? Is he further aware that, despite the criterion set down for the annual mean temperature over the country as a whole, the temperature in the north of England and Scotland is well below that of the south, which makes the tax very unfair? As nothing can be done about the 8 per cent., will he reconsider the criteria that trigger the cold weather payments, in view of the difference in temperature between the north and Scotland and the south. And—

§ Madam Speaker
Order.

§ Mr. Thompson
Well, finally, is the proposed increase to 17.5 per cent. still the Chancellor's primary concern?

§ Mr. Clarke
I cannot congratulate the hon. Gentleman on the topicality of his question, but I appreciate that the problem is caused by our procedures, which govern when he had to table it. The financial embarrassment caused by the defeat has been closed by the revenue that I announced last week. No doubt people will be able to make some objections about some of what we did last week, but the Budget judgment remains intact and we remain on course for recovery.
I am not an expert on climate so I cannot comment in detail on the differences between north and south, but it is not the case that every part of the north of England is colder than every part of the south of England. I come from the midlands so I am fairly neutral, but I believe that, although costs vary across the country, the burden of taxation is pretty fair. As the hon. Gentleman 1052 acknowledged, the answer is the cold weather payment scheme, which was invented by this Government and had no precedent before we came into office. We acknowledge that there are periods of severe weather when some form of compensation is called for. In two Budgets I have raised that compensation from £6 a week two years ago to £8.5 a week from now on.

§ Mr. Kynoch
I welcome the fact that my right hon. and learned Friend left intact the increase in cold weather payments, which is of great benefit to the elderly and those on low incomes, and that he has left intact the £30 million for the home energy efficiency scheme. Will he ensure that the Opposition, who seem intent on scaremongering and frightening the most vulnerable in society, are made aware of the free phone number that such people can call for information and help?

§ Mr. Clarke
I am grateful to my hon. Friend. To close this episode, let me say that, as a result of our package, the average pensioner will be fully compensated for the average VAT bill in forthcoming years. Pensioners were not being borne down on by our proposal and a small majority of pensioner households will now be overcompensated for the 8 per cent. that will remain. In fact, by its vote, the House has relieved the rest of the population of the feared burden of VAT on fuel. I appreciate my hon. Friend taking up the positive point about the home energy efficiency scheme. We doubled it last year and have now added a further £30 million. It has been a huge success and, as well as reduced fuel bills, brings to many elderly people the added comfort of having a properly insulated home. I trust that it will be backed enthusiastically by all parties.

§ Mr. Gordon Brown
Given the differential impact of VAT on living standards, not least those of British Gas showroom workers, who now stand to earn less in a year than their' chief executive earns in a week, will the Chancellor of the Exchequer take the chance that I gave him before to condemn the 75 per cent. pay rise for the chief executive of British Gas and even, belatedly, to outline what action he proposes to deal with excesses that are both irresponsible and unfair, and an affront to decent standards in British industry?

§ Mr. Clarke
I do not want to talk about the affairs of individuals across the Floor of the House, but I have no doubt that Mr. Brown lives in a house whose fuel bills make him a major beneficiary of the effect of last week's vote on VAT. I should think that he was one of the big gainers from the hon. Gentleman's brave gesture when he voted on the Budget. Secondly, the hon. Gentleman shows ever-increasing enthusiasm for expressing views and striking attitudes towards the running of private-sector companies, especially in the energy sector. 'The background to all this is that British Gas has been a huge success since privatisation, and customers are benefiting from improved services and lower tariffs. It would be a regression to go back to the state of affairs that existed when Governments both of his party and—for a time, unfortunately—of mine, thought that somehow they could take over the supervision of the delivery of major public services such as gas.

§ Mr. John Greenway
Does my right hon. and learned Friend agree that the Government have done more than any other to help the elderly and low-income groups with 1053 energy bills, not only through the cold weather payments, which have already been mentioned, but because, under privatisation, the real cost of gas and electricity has fallen? Will he continue that trend by resisting any imposition of a carbon tax?

§ Mr. Clarke
It is certainly true that the effect of sticking at 8 per cent. VAT is that gas and electricity prices have fallen by 1 per cent., even allowing for VAT, compared with the rate of inflation over the past two years. It is clear that the regulation imposed on the utilities will ensure continued falls in the price of gas and electricity. We must resist the attempt by the Labour party to take the affairs of such industries back into Government hands. A carbon energy tax—an alternative favoured by the Liberal party usually and the Labour party often—would impose not only a tax on domestic fuel but extremely heavy costs on British industry, and would disadvantage us in world markets. I am glad to say that at the Essen summit President Delors acknowledged as much, saying that the Commission would continue to design the outlines of a carbon energy tax, but would accept that it was for individual member states to decide whether they wanted such a tax. We shall rescue this country from such a tax, whether the idea comes from Europe, the British Liberal party or the British Labour party.

§ 2. Mr. Battle
To ask the Chancellor of the Exchequer if he will make a statement on how VAT on domestic fuel will impact on households at differing income levels.

§ 8. Mr. Jim Cunningham
To ask the Chancellor of the Exchequer if he will make a statement on how VAT on domestic fuel will impact on households at differing income levels.

§ Mr. Kenneth Clarke
Taking account of the generous compensation that they will be receiving, benefit recipients will be paying much less than those with higher incomes. For the majority of pensioners that compensation will more than match the VAT that they will be paying.

§ Mr. Battle
Is it not a fact that the poorest households spend 13 per cent. of their income on fuel, whereas richer households spend only 3 per cent. of theirs? Does the Chancellor know that the Institute of Fiscal Studies has estimated that, as a result of VAT at 8 per cent., the poorest fifth of the population will reduce their fuel consumption by 9 per cent., compared with an average of 6 per cent? The compensation package shortchanges the people who need it most, such as the elderly and the infirm. People on disability living allowance will get nothing. Those who pay the highest price can do the arithmetic; they will go cold this winter because of VAT on fuel, even at 8 per cent.

§ Mr. Clarke
The hon. Gentleman is misusing a statistic that makes the obvious point that people on lower incomes tend to spend a higher proportion of their income on fuel, just as they do on food. Many of them also tend to spend a higher proportion of their income on tobacco and alcohol than other people do. [HON. MEMBERS: "Oh!"] That just happens to be the case.[Interruption.] Of course it does.
The Opposition are obscuring the fact that, in cash terms, we introduced VAT in order to give cash compensation to the poorest. As I have already said, and 1054 as I restated in my reply, for the majority of pensioner households, the amount added to their pension will be greater than the amount that VAT adds to their bills. With the greatest respect—this is becoming an old campaign and I have accepted the vote of the House—I still become roused by this absurd claim that people were somehow going to die from cold and all the rest of it, when they were going to be compensated in respect of their bills. The people in the big houses will save the VAT.

§ Mr. Cunningham
Does the Chancellor not realise that, in the light of the statement that he has just made to my hon. Friend the Member for Leeds, West (Mr. Battle), he does not really understand the plight of old-age pensioners, the poorer families and the sick in relation to VAT? In addition, the Chancellor has been responsible for cuts in benefits.

§ Mr. Clarke
If VAT costs the average pensioner a certain amount, and if the compensation that we offer is equal to that amount, I cannot see how I can be accused of neglecting the interests of pensioners. The hon. Gentleman says that this is part of the fall in living standards, but fortunately I am very glad to say that the living standards of retired people have risen well ahead of inflation since the Government took office. Living standards have risen about 40 per cent. ahead of inflation in the 15 years that the Conservatives have been in power.

§ Mr. Allason
Does my right hon. and learned Friend recognise that pensioners in particular study his Budget statements with great care and they do not take a great deal of notice of the Opposition parties' scare stories? However, is he also aware that there is some anxiety about the position of VAT on fuel in 1996, when it is believed that the European Union will require an end to all zero rating? Can my right hon. and learned Friend put at rest the minds of pensioners, who are concerned about future VAT rates on fuel?

§ Mr. Clarke
I am grateful to my hon. Friend because I am aware that there are fears of that kind and I can put them at rest. Until we have a new VAT regime agreed in Europe, the present regime continues. We have always safeguarded our right to determine which goods remain zero rated. That remains the case. As we enter discussions in Europe about a possible further regime for VAT, we will ensure that we retain the right to set zero rates according to our judgment. That is one of our main negotiating aims.
With regard to pensioners in general, I agree with my hon. Friend the Member for Torbay (Mr. Allason). They follow these issues with care. I am sure that many of them noticed that, when I was able to go back to indexing the tax allowances for the general population against inflation, I over-indexed the aged person's allowance for income tax. Therefore, the tax bill of pensioners who pay income tax was relieved by my Budget. The overall effect of the Budget is slightly to reduce the burden that we impose on pensioners for revenue purposes.

§ Mr. David Nicholson
Will my right hon. and learned Friend continue to resist the scare claims of Opposition Members which, as usual, are designed to frighten the most vulnerable in our society? Will he also continue to 1055 give attention to providing funds and incentives for home insulation and energy conservation despite past and expected future falls in the price of gas and electricity?

§ Mr. Clarke
I undertake to do so. The good thing about the home energy efficiency scheme, to which we have already alluded, is that we have expanded it very rapidly indeed. We doubled it last year and the people responsible for the scheme have responded and have proved capable of spending that money. Sometimes one can move so fast that it becomes difficult for the administration to keep up speed and deliver the money in terms of homes insulated. One million homes have been insulated and the level at which we are now running the scheme will produce a significant difference to the comfort and fuel bills of many elderly and poor people.

§ Ms Armstrong
Given that many low-income families will receive no compensation for the increase in VAT on fuel, and given that we know that the gap between the rich and the poor is getting wider, why will not the Chancellor condemn the 75 per cent. pay increase for the head of British Gas? The Prime Minister condemned it; why will the Chancellor not do that?

§ Mr. Clarke
Carrying on about the pay of individuals does no earthly good to pensioners. It merely distracts public attention from the fact that the Opposition have no positive proposals to put forward on taxation or on public spending, or the relationship between the two. I have repeatedly made it clear that I deeply deplore, in any major company, pay increases that are not justified by performance. Shareholders should take an interest in remuneration when there is any reason to doubt that it is matched by performance. I strongly reject the idea that it is the business of Government to go back to the business of setting salaries in major companies, something that was a hallmark of an extremely unsuccessful period in running many businesses, including the public utilities.