§ 3.4 p.m.
§ Lord COCKFIELD
My Lords, I beg to move that this Bill be now read a 615 adviser to a bank, as reported in the Press last week. He was quoted as saying:It is very difficult for small firms, indeed, any, to break into the North Sea right now. Only those who already have production under way stand a chance. People have to invest massive sums of money and only derive tax relief when the field comes onstream—maybe a period of six or seven years".That was from the Scotsman on 22nd January. PRT is the first charge on the profits from a field. Corporation tax comes second.
My Lords, I have three points to raise; and this is the first. I do not expect the Minister to do more than comment on anything he cares to at the end of this debate, bearing in mind, among other things, that there is a Budget due in less than two months' time. I have, as my first point, drawn attention to certain observations being made about the PRT system which the present Government have inherited. It is contended also that companies which have not already been engaged in the North Sea are finding it difficult to start in offshore operations and that those already producing oil have a tax advantage.
As I have mentioned, PRT is applied field by field but the corporation tax is limited within the United Kingdom continental shelf, sometimes known as the "ring fence". It is argued that companies who are already producing oil can, within the continental shelf theatre, offset expenses of developing later oil fields against the tax liability of an oil field which is already producing oil. In this connection, I should mention that the interest that I have declared is not involved, because I have been working with large companies and successful fields which are now onstream. I simply draw attention to an apparent disincentive related to a weakness which I pointed out in the debate in April 1975. No oil had started to flow at the time of that debate. The first trickle started later in that year, 1975.
I have been interested to see that the noble Lord, Lord Kearton, until recently the first chairman of the BNOC, has independently come to a similar view. Presenting the third annual resport of BNOC on 23rd April last year—less than a year ago—he was reported, again on the front page of the Scotsman, in these words: 616The companies operating the larger fields now in production were paying little in tax compared to income, yet the tax law applied harshly to companies who wanted to develop the smaller fields. Oil has been found in the smaller fields, but it was not economical at present to recover it.The tax law must be altered to reflect the complexities of the changing situation in the North Sea".That was said independently of my views, although I know the noble Lord and others have been following closely what he has been doing. His words were very similar to the ones that I had used in the debate exactly four years before (and they can be found at col. 194 of Hansard of 10th April, 1975) in giving a warning of what might arise if that PRT system was adopted in the form presented in the Oil Taxation Act. The noble Lord, Lord Kearton, was the head of a textile company at that time and the BNOC had not even been presented to us as a proposal in a Bill.
This brings me to my second point: depletion policy and rate of exploration. The tax system is a factor here, as will be seen from what I have said. I find that there is some confusion among interested observers. We can expect the Government in a year or two to start deliberately restricting output when we will have the capacity to produce more per year than self-sufficiency. At the same time, one hears criticism to the effect that more exploration should be happening now, and that it ought to be encouraged. My Lords, these are not two inconsistent policies, although I find them being thought to be. It is easy for misunderstandings to occur. Indeed, people think that the two propositions are being urged by opposing factions. That is not so; I certainly have been saying both.
What is the explanation? I suggest that it is this. We expect there to be a day, later this year, when the amount of oil produced in the British sector will be net self-sufficiency. We regard next year, 1981, as being the first full year when self-sufficiency is likely to occur. Fortuitously, this has worked out in the event very much as I guessed during that debate almost five years ago. I said then (at col. 195 of Hansard of 10th April, 1975):It must be a vital national interest for us to win all the oil which can practicably be extracted from our continental shelf in the next six years; thereafter we should be self-sufficient, and optimum depletion rates can be determined".617 It is widely accepted—and I think it was then in all parts of your Lordships' House—that a depletion policy would be necessary after self-sufficiency had been reached. My right honourable friend the Secretary of State for Energy, Mr. David Howell, appears to have been talking to the Press in these terms earlier this month explaining the continuation of this policy before Parliament reassembled.
The powers are available to the Government. The two Acts which I mentioned earlier provide them. I should mention one other factor, and that is the need, which I am sure we all subscribe to, to reduce to the minimum flaring—that is, the burning off of associated gas; otherwise, we are wasting gas which could be used for energy. This is a matter for careful judgment because the gas is so associated with oil that it means that until there are proper facilities available for reinjection or otherwise disposing of the associated gas, one has to delay the production of oil in those cases.
Then, on the question of exploration it is asked: Why should more be required now and in the near future? Why do various pundits urge the Government to lose no time in issuing further licences for blocks to be explored? I accept that it takes at least a year or more for the preparation and arrangements to be made for a licensing round. Is not the answer that more discoveries are needed in the next few years in order to keep up optimum flows in the 1990s and beyond? Even though control is required through a depletion policy in the 1980s, reduction in availability of our offshore supplies must be expected thereafter from the present known sources. I suggest that there is no conflict between depletion control early in the 1980s and, at the same time, the exploration rate being stepped up.
I come to my third point: the present position and the Government's attitude. There is no argument about the decrease in drilling which took place in 1978. The facts are in the last Brown book prepared under the late Government and called the Development of the Oil and Gas Resources of the United Kingdom 1979. In appendix 6 figures and comparisons are shown. On page 18 it is stated:Total expenditure on exploration in 1978 amounted to £257 million, which represents a 618 decrease of £118 million from the 1977 level. This reflects the decrease in drilling activity".So there was a decrease between 1977 and 1978 of nearly half the drilling that had been taking place. I am glad to say that a change seems to have occurred now. It appears that an increase in exploration drilling is going ahead. Drilling rigs which have been standing idle are now in demand. My noble friend may wish to confirm or comment upon this; but I am sure that this is welcome for oil supplies in the 1990s.
The Government have a complicated and difficult task to work out a depletion policy, and no doubt this is being worked on industriously at the moment. In the use of relevant powers in the legislation which we amended and passed in 1975 and 1976, one aim was to be able to give the companies and others working in the oilfields reasonable notice when they had to reduce the amounts that were being produced. Otherwise, it would seriously disrupt their programmes and the profiles of their oilfields. In encouraging further effort in exploration and development, this unique tax system, which is the subject of this Bill, can play an important part.
§ 3.28 p.m.
§ Lord BALOGH
My Lords, I apologise to the House for joining this debate without having announced previously my intention to do so. I did not want to come into the debate thinking that this Bill was after all only the result of the fetish-ridden Government's bow to the so-called PSBR and the money supply. From an economic point of view, it is obviously of no importance whatsoever. It is a cosmetic affair which does not merit any great attention. However, the noble Lord, Lord Campbell of Croy, used this occasion, to discuss the tax itself, and more especially the burden of the tax.
I have been accustomed in my years here, both on the Front Bench and on the Back-Benches, to noble Lords on the opposite side always complaining that we are paying too little to the Americans because, by way of taxation, we reduce their profits. Moreover, they usually prefer profits accruing—mainly 60 per cent.—to the American firms rather than seeing what we get out of it. Indeed, the latest statistics show that the net revenue from the North Sea is very much less than 623 in Ireland, 48 per cent.; in Denmark, 47 per cent.; in France, 46 per cent.; in Germany, 45.5 per cent.; in Italy, 45 per cent. and in the United Kingdom, 42 per cent. Those figures are from EEC sources, and if the noble Lord requires more ready references than the somewhat elusive documents from the Commission, he can find them in the Economist for 10th January. If necessary, I will point out the page to him. So much for the folklore about public expenditure and the public sector borrowing requirement.
"But", the noble Lord says—whether in echo or as an originator—"we must control the extent of the public sector borrowing requirement because we have to control the total money supply". If I may presume to give the noble Lord a little economic instruction—and I do so with some diffidence—he will know, as I do, that by controlling the public sector borrowing requirement you do not control the total money supply, and that, in fact, four-fifths of the money supply is completely outside the control of Her Majesty's Government. If he denies that, which he may be tempted to do, I should perhaps warn him that I have a suitable passage from his right honourable friend Mr. Lawson in another place which will verify the observation that I have made. Suffice it for me to say at this stage that the joint stock banks, on the basis of the very considerable deposits that have been made as a result of raising the interest rates, can use, and are now using, those funds as a credit base and there is nothing that the noble Lord or the Government can do about it. So to pretend that by having control of the public sector borrowing requirement—and this is somewhat elusive—you can control the total money supply is a lot of nonsense.
I pause here to say that the noble Lord is, of course, an expert on this matter. He was adviser to the Government of 1970–73 and, no doubt because of the economic ability with which he has acquainted us this afternoon, his advice was heeded. So it is remarkable that during that period of time the money supply in the United Kingdom went up by 28¼ per cent. in one year—the highest increase ever in money supply in the United Kingdom—and that that lay at the 624 root of the subsequent inflation. If the noble Lord cares to look back at his figures, he will be able to verify that. I venture to suggest that when he has verified it he will possibly not offer to give economic education to my noble friend Lord Murray of Gravesend. It so happens that the high level to which the Government have now raised minimum lending rate has, while attracting money from abroad which has enabled the joint stock banks and their subsidiaries to increase their credit base, also increased the money supply. At the same time, it has made it very difficult for small businesses in this country to obtain the funds that they need.
If the noble Lord wants a further figure to add to the battery of facts which the Conservative Party ought to possess, since they received £675,000 of taxpayers money while in Opposition to aid them with their researches, he need only look up the latest EEC figures as to projected investment in the United Kingdom during the forthcoming year to see that they predict a decline of 8.7 per cent. in industrial investment in this country—this after the glorious tax bonanza which was supposed to increase initiative, enterprise and drive and encourage industry to invest. The fact of the matter is that Her Majesty's Government do not have the remotest clue about what they are doing. They are in a panic, and there is a very good reason why they are in a panic.
Even after taking into account the amount of loans that they are going compulsorily to obtain, under questionable legal authority, from the gas industry, the Government apprehend that they will still be short of money. Why? We can only surmise, but I shall be glad if the noble Lord will inform us if I am wrong. First, the very strident and promising words of the Prime Minister about recovering £1,000 million of our money from abroad—a bold statement which was made in terms which were much more strident than those which were accorded to Mr. John Silkin—have now become a muted whisper. All that is now hoped for, according to the Prime Minister's Answer last week to a parliamentary Question in the other place, is a substantial contribution towards it. So the Government are legislating, in part, against not paying out as much. The £1,000 million which, on the basis of Government 625 utterances, this country had every right to expect were going to be obtained back from Europe have quite clearly degenerated into a mere mirage, though any contribution that can be obtained by persuasion or otherwise will be welcomed by the Opposition—just as much as I hope it will be welcomed by the Government.
My other point is that the Government know in their own minds what they are going to put into the next Budget. The Government know that in order to honour their commitment to relieve taxes on capital—yes, taxes on capital that they now have it in mind to relieve: reliefs of capital gains tax and reliefs of capital transfer tax—they cannot honour this commitment unless they make further cuts, by their own doctrine, in Government expenditure. These, therefore, are the real reasons that lie behind this very queer little Bill—"this trivial little Bill", as my noble friend Lord Balogh referred to it. The Government want to grab as much money as they can in pursuit of a ridiculous dogma, but above all in order to save face.
For our part, it is very interesting to those of us who have watched history over the last few years to see how economic dipsomaniacs can very quickly become economic teetotallers. What we want is a real Government to govern in the interests of the people as a whole.
§ 3.54 p.m.
§ Lord COCKFIELD
My Lords, may I start first with the serious contribution to our debate which was made by my noble friend Lord Campbell of Croy. I shall deal afterwards with the contribution made by the noble Lord, Lord Bruce of Donington. My noble friend Lord Campbell of Croy raised a number of points of real importance. He referred in particular to the impact of petroleum revenue tax on smaller fields. We do of course recognise the importance, from the point of view of the future development of the North Sea, of obtaining the maximum yield from the smaller fields, which tend to be the less profitable ones. The Department of Energy, in conjunction with the oil industry, the Treasury and the Inland Revenue, are currently reviewing the effect of the whole range of Government policies on the less profitable 626 fields, and we will certainly draw their attention to the remarks that my noble friend has made.
My noble friend also referred to the fact that petroleum revenue tax was based upon individual fields while corporation tax looked at the North Sea as a whole. He suggested that this was a deterrent to people wishing to come into North Sea exploration for the first time and that it gave a competitive edge to larger companies already established in the North Sea. In fact, I suggest to him that the opposite is the position. If petroleum revenue tax were based on the total of North Sea operations, it would enable the large existing company with a number of fields to finance exploration and development in a new field out of the revenue from its existing fields. This therefore would tend to be to the disadvantage of the smaller company and not to its advantage.
My noble friend also raised a number of points about depletion policy and about issues affecting the rate of extraction. These are matters which essentially go outside the scope of the present Bill, but I assure my noble friend that what he says will be looked at with great care. He referred also to the fact that there had been a big fall in development and exploration in 1978 and that this fall was now in the course of being reversed. As my noble friend said, I think that the major factor which contributes to this reversal is the rise in the price of oil. This made exploration and development, particularly in marginal fields, more profitable than it otherwise would have been. The present Government have also taken a more liberal attitude towards the taxation of oil profits made in the North Sea, and I have no doubt that this has also facilitated exploration and development.
May I turn from what my noble friend said first to what the noble Lord, Lord Balogh, and secondly to what the noble Lord, Lord Bruce of Donington, had to say. We are all very fully aware of the views held by the noble Lord, Lord Balogh, on the public sector borrowing requirement, which he described as "a cosmetic affair". On this we take a diametrically opposite view to that which he takes, and I do not think that this is the right occasion——
§ Lord BALOGH
My Lords, if the noble Lord would allow me to say so, I did not say that the public sector borrowing requirement was a cosmetic affair. I said that the transfer of payment from next year to this year is a cosmetic affair.
§ Lord COCKFIELD
No, my Lords, it is not a cosmetic affair. What the Government have to do is to finance the public sector borrowing requirement which emerges in this year. They also have to finance in due course next year's public sector borrowing requirement; and the revenue will not be lower next year as a result of the Bill. While the Bill accelerates the payment of petroleum revenue tax this year, it correspondingly accelerates the payment next year. So next year we shall still get two full instalments, plus some £300 million left over from the accelerated instalment, plus a further advantage as the totality of North Sea revenue rises. There is no question of this Bill merely transferring revenue from one year to another. It improves the level of Government revenue for many years to come. From that point of view, therefore, it is an effective not a cosmetic measure.
I now turn to the noble Lord, Lord Bruce of Donington. I never expected to stand in this House and find the noble Lord, Lord Bruce of Donington, denouncing a Bill imposing additional taxation on companies operating in the North Sea and putting forward for our consideration a whole list of alternative proposals where he thought that other people were in a better position to pay the additional tax than were the oil companies. If this is his view, I seriously suggest that he ought to consult with his noble friend Lord Balogh to make up their minds between them—if they are capable of so doing—whether they wish to raise more or less revenue this year from oil companies operating in the North Sea. We took the view that the oil companies have the broadest backs and that they could well afford to pay this additional revenue in the current year; but if the noble Lord dissents from that I imagine that he will soon become the patron saint of the oil companies.
The noble Lord then went on to ask whether the shortfall in the Government's cash flow this year would not be made good by the end of the year. As my right 628 honourable friend the Chancellor of the Exchequer explained in detail on 15th November in the Statement to which I referred in my opening address, the shortfall is due both to the telephone bills and also to slower payment of VAT. While obviously a good deal of the shortfall will be made good by the end of the year, the shortfall at its peak exceeded £1 billion. As my right honourable friend said at the time, the Government's best judgment—and I see no reason at all to vary on this—was that at the time when he was speaking the public sector borrowing requirement was likely to reach £9 billion as against the estimate that he made at the time of his Budget, which was £8.3 billion, and the £700 million which it is sought to raise by the present measure will bridge that gap.
The noble Lord then suggested that we were being deliberately lax in the collection of VAT. The phrase that he used was that the Government are "politically committed to be lax on collection of VAT". That is completely and totally untrue. The statement that he read out from my right honourable friend's Budget Statement was a pure statement of fact as to the increase in the amount of VAT in traders' hands which would occur as a result of the increase in the rate of VAT. It was in no sense a suggestion that the Government would deliberately slow down—or to use his phrase, "be lax"—in the collection of VAT. The Government are not lax in the collection of any tax. We are of course much concerned about the slowness in the payment of VAT, and this is a matter which is receiving a very considerable degree of consideration. But to accuse a Government of being lax in the collection of tax when they come along to Parliament and ask for the payment of tax to be accelerated, is really a contradiction in argument.
The noble Lord then turned from this somewhat invalid argument to the question of the public sector borrowing requirement, and he maintained that this was a fetish so far as the present Government are concerned. There is no question of any fetish here at all. The size of the public sector borrowing requirement is crucial to the whole management of our economy, and it is crucial because the public sector borrowing requirement is one of the major factors in determining the level of the money supply. It is not the only factor; nobody on these Benches has ever pre- 629 tended that it is. But it is certainly a factor of considerable importance and it is one which lies within the direct control of the Government. Therefore, it would be quite wrong for the Government, if I may use the noble Lord's own phrase, to be lax in the management of their own affairs and to expect other people to be strict in the management of theirs. Therefore, the control over the public sector borrowing requirement is an essential step in the fight against inflation which we place at the centre of our policy.
The noble Lord repeated the charges which are so often made, that the money supply in 1973 was allowed to increase excessively and this led to the inflation in subsequent years. He really must make up his mind that he cannot, in one and the same breath, maintain that control of the money supply today is irrelevant and then go on to accuse the Government in 1973 of having allowed the forces of inflation to take over by undue laxity in the control of the level of money supply in those days.
Lord BRUCE of DONINGTON
My Lords, I am obliged to the noble Lord for giving way. I did not say—and Hansard will be able to verify it—that control over the total money supply was not necessary, and if the noble Lord can produce for me tomorrow evidence of where I said that, I shall be greatly obliged. I have never said anything of the kind. What I have said, and what I still say, is that the public sector borrowing requirement remains a fetish of the party opposite and at the best a matter of an estimate with very large degrees of tolerance.
§ Lord COCKFIELD
My Lords, I am most grateful to the noble Lord for making his views no less unclear than they were before. The public sector borrowing requirement is one of the vital components which go into the level of the money supply and we cannot effectively control the one unless we control the other. There is indeed a very great deal that the Government can do about these matters and they are determined to do it.
The record of the Labour Administration in the field of economic management was absolutely appalling and the results it produced were dreadful in every conceivable way. In a period of five years 630 they created the highest level of inflation that we have ever seen; they produced an immense rise in the level of unemployment; they produced an immense rise in the level of taxation and they succeeded in virtually destroying every vestige of growth in this country. Most of the problems from which we suffer today are problems which were caused by economic mismanagement during the period of office of the Labour Government. We are struggling to overcome those difficulties and we are determined to go on struggling to overcome them. These are matters which of course go right outside the very limited scope of the present Bill. I am of course most grateful to the noble Lord, and I would not want him to think otherwise, for the notice that he gave me that he was going to widen the scope of this debate, and I hope that I have answered the points which he raised. I come back, however, to the very simple issue raised in this Bill; namely, that its objective is to produce another £700 million of revenue this year by accelerating the payment of PRT, and on that basis I commend the Bill to your Lordships.
§ On Question, Bill read 2a and committed to a Commitee of the Whole House.