Finance (No. 3) Bill
Debate between Kerry McCarthy and Stewart Hosie(13 years ago)
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Kerry McCarthy
My right hon. Friend is quite right that the Government are looking for a derogation in some rural areas, but only a very limited number. When the House last discussed the proposal, considerable representations were made by Government Members who argued that if there was to be a derogation, other areas should also benefit from it and that it was unfair that just a few remote islands should see the benefit.
Stewart Hosie (Dundee East) (SNP)
The argument that a derogation in remote and rural areas is somehow an increase elsewhere is an interesting one. Should we take it from that that the hon. Lady is opposed to the road equivalent tariff being implemented in the Western Isles as well?
Kerry McCarthy
The point that my right hon. Friend the Member for Warley (Mr Spellar) was making was that if taxes are to be cut for some people somewhere, but the same amount of revenue has to be raised, that means that someone else is subsidising it. That is a fairly simple point to take on board.
As I was saying, it is not just rising fuel prices that are hitting people. Rises in fuel prices feed through to higher food prices and higher energy prices for household bills. Despite a recent up-tick, the OECD estimates that food prices in the first quarter of this year were nearly 6% higher than they were last year, and energy prices more than 9% higher. As real incomes fall, spending on basic items, such as food—[Interruption.]
Kerry McCarthy
Again, that is a very good intervention by my hon. Friend. The industry needs stability and long-term investment, because we cannot dig an oil well or develop an oilfield overnight, yet the Government are creating uncertainty that will send investors off to other countries where the tax regime is more stable.
The Government have also completely damaged the trust between themselves and the industry, and that is why we have tabled our amendment. We simply call on the Government to do what they said they would do before making major tax changes: carry out a proper assessment of the impact, so that we can scrutinise it and have transparency. The Government were right to look towards North sea oil and gas to ensure that the burden of taxation was fairly spread, but without stability tens of thousands of jobs could be at risk. For the Opposition, that is not a price worth paying for short-term political gain.
Stewart Hosie
The right hon. Member for Gordon (Malcolm Bruce) said in his opening remarks that the Government wanted the UK to be seen to be open for business. That is a very good objective, but the problem is that an 81% marginal rate of tax on anything, and the instability caused by a shock 60% increase, puts at risk their stated aim of promoting the UK in that way.
The right hon. Gentleman made the point about investment, and investment levels are unchanged generally, but there is now less focus on frontier developments than on investment in the mature North sea, and that is a huge concern. The 60% rise in the supplementary charge that was created, it is told, by the Chief Secretary to the Treasury—whom I see leaving the Chamber barely at the start of the debate—was the most damaging thing that the Government did in the Budget.
The Government will take £2 billion a year extra in tax from the sector, on top of the £4 billion windfall that they got last year, to which the right hon. Member for Gordon referred, and on top of the windfall that they will get this year—2011-12—over the 2010 forecast. All that runs counter to the Chancellor’s stated objectives of tax stability, delivering a growth agenda and production here in lieu of imports.
Let us remember that when that bombshell was announced, leading industry members reportedly met in a state of disbelief about the Government’s plans. There were immediate reports about the threat to some 40,000 jobs. Statoil immediately announced the suspension of the Mariner and, possibly, Bressay investments, and it was argued that a slowdown in North sea activity would increase the UK’s reliance on imported oil and gas, with the consequence of an even higher balance of payments deficit and the corresponding impact of a suppression of GDP growth.
On tax receipts, Alan Booth, the chief executive of EnCore Oil, rightly said:
“Undeveloped and undiscovered oil and gas pays no taxes,”
and it got worse, of course, because Valiant immediately announced that it was not going to invest in its £100 million project, saying that it was
“no longer viable because of the surprise Budget move.”
Chevron warned that there would be “unintended consequences”, and let us remember that Oil & Gas UK was very clear when it said that the measure had
“shaken investor confidence to the core.”
The right hon. Member for Gordon said at one stage that Ministers had robustly defended their position. I do not believe that they have. When these fears and concerns were put to the Chancellor, a Treasury spokeswoman said:
“Mr Osborne did not expect investment to be damaged.”
That is not a robust defence of a position; it is intransigence and a failure to understand the consequences of the actions that the Government had undertaken.
There are other consequences. Jim Hannon from Hannon Westwood, the drilling analysts, said that 30,000 people could lose their jobs if exploration activity dropped by merely 15%. The detailed work by Professor Alex Kemp—I will not go through it in detail but it is well worth everybody in the House reading it—has warned that up to 2 billion barrels of oil and the equivalent amount of gas could be left in the North sea, untaxed and unused. Derek Leith from Ernst and Young has warned of projects being delayed and cancelled, saying that the Statoil decision was
“only the tip of the iceberg…There are a lot of companies that will not pursue projects but will not go public about it.”
Fuel Costs
Debate between Kerry McCarthy and Stewart Hosie(13 years, 2 months ago)
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Kerry McCarthy (Bristol East) (Lab)
I congratulate the hon. Member for Dundee East (Stewart Hosie) on making a powerful case on behalf of his constituents—along with the interventions from his colleagues—about the impact that people living in remote rural areas can feel as fuel prices go up. He did make a very powerful case on behalf of his constituents, and Labour Members do understand the impact that motorists are feeling as fuel prices go up. I might represent an urban seat, but as a Member of Parliament in the south-west I am very much aware of the issues that are faced.
Stewart Hosie
I thank the hon. Lady for saying that I made a powerful case, but Dundee East is very much an urban seat. It has a rural hinterland of course, but my constituency is half the city. I know where Bristol is; a wee bit of geography would be great.
Kerry McCarthy
The hon. Gentleman makes a valid point. He was speaking on behalf of his colleagues in the more remote parts of Scotland, obviously, rather than on behalf of his own constituents. I thought that perhaps his constituency stretched a little further than the city boundaries.
For Governments, when considering fuel duties there is always a difficult balance to be struck among the needs to raise revenue and balance the public finances; to address environmental concerns about increasing road traffic and emissions, to which there has not been much reference in this debate; and to ensure that the motorist and especially people who have to rely on their cars—people who do not have a choice because of where they live and the environment in which they live—are not disproportionately penalised. The previous Labour Government endeavoured to strike that balance, despite the points that the Economic Secretary to the Treasury made. That was why, for example, in years when fuel prices rose, Labour chose to put the fuel duty escalator on hold—to help motorists meet those rising costs. It is a tricky balance to strike, however, as today’s debate demonstrates, and there are no easy answers.
Kerry McCarthy
If I can adopt the mantra that the hon. Member for Dundee East first used and the Minister then picked up on, I should say that that is a matter for us to discuss when we get round to the Budget negotiations. Today, we are here to discuss the two main proposals to ameliorate the impact of rising fuel prices, particularly on rural areas. We are talking about rural areas, rather than about fuel duty prices across the board.
The dog that has not barked during this debate—the thing that was most noticeably missing from the Minister’s speech—is the fact that motorists are being hit hard by the increase in VAT to 20%, which has helped push petrol prices up to their current record levels.
Stewart Hosie
It suddenly strikes me that, when the Labour Government had their fiscal stimulus policy, they cut VAT by 2.5 percentage points and increased fuel duty by 2.5 percentage points to compensate, but that, when VAT went back to 17.5%, the fuel duty rise was maintained. Does Labour now regret not reducing fuel duty in line with the increase in VAT?
Kerry McCarthy
Those matters were also affected by fuel prices at the time, but it is not my position to apologise for, or to express an opinion on, what my predecessors did.
The VAT rise now is the important thing. VAT went up at the beginning of the year from 17.5% to 20%. According to the Library, the VAT rise increases the cost of a litre of petrol by about 2.6p, assuming that it is passed on in full. That compares with the fuel duty increase in January of 0.76p per litre, so the VAT rise to 20% is hitting the motorist harder and people in rural areas, who rely on their cars most and have to travel longer distances, particularly hard.
Kerry McCarthy
As I said, I am coming on to the derogation, but it is not my place to express such opinions.
In principle, on paper, the fuel duty stabiliser sounds like a fairly simple, reasonable proposition—as oil prices go up, fuel duty goes down, and as oil prices drop, fuel duty goes up, so the motorist pays more or less the same for fuel and the Exchequer gets more or less the same in revenue. However, economics are not that simple.
The idea of the regulator has been floated for some time. During the debate on the 2008 Finance Bill, the Scottish National party spokesman, the hon. Member for Dundee East, suggested that a statutory instrument should implement an automatic mechanism so that as additional income from VAT receipts came in, it could be used to offset fuel duty in direct proportion. However, the regulator was based on rises in oil prices, not on rises in VAT receipts. It was assumed that one would flow from other—the hon. Gentleman reiterated that assumption today—but that is not necessarily the case, as the Office for Budget Responsibility has said.
Kerry McCarthy
I would like to make some progress.
There are other concerns about the stabiliser. The then Liberal Democrat spokesman, who is now Secretary of State for Business, Innovation and Skills, said at the time of the 2008 Finance Bill debates that the idea of a fuel duty regulator was “unbelievably complicated and unpredictable”. He said that the Exchequer would have to predict the net windfall, and then:
“May I suggest that there might not be any net windfall at all?”—[Official Report, 16 July 2008; Vol. 479, c. 339.]
The OBR has now confirmed that.
Labour’s then Chief Secretary to the Treasury said:
“In the face of a world slowdown, to take any one tax in isolation and claim that there is a windfall available to spend is economically illiterate, irresponsible or just disingenuous.”—[Official Report, 16 July 2008; Vol. 479, c. 331.]
She was basically saying—this was echoed by the hon. Member for Taunton Deane (Mr Browne), who was the junior Liberal Democrat spokesman at the time—that we cannot consider these revenues in a silo. Yes, oil revenues might go up, which might provide a boost to the nation’s finances—although I stress the word “might”, because it does not necessarily follow that increased revenues come from increased oil prices—but other things might happen that affect revenue flows, and it is irresponsible not to look at everything in the round. Hypothecation can box us into a corner and hamper our choices, and that is a real problem in the case of the stabiliser.
Kerry McCarthy
I thank the hon. Gentleman for that intervention, but I am talking about the fuel duty stabiliser. I appreciate his confusion, because that has not been discussed much in this debate. The rural derogation is a separate issue. I am talking about how a stabiliser would be enforced.
Despite the concerns about a fuel duty stabiliser that were raised during the 2008 Finance Bill debates and afterwards, and the obvious difficulties in implementing one, the Conservatives could not resist dangling the prospect of reduced petrol prices before motorists’ eyes. They published a consultation document in July 2008, which proposed the stabiliser:
“when fuel prices go up, fuel duty would fall. And when fuel prices go down, fuel duty would rise”.
That continued to be Conservative party policy until polling day. A week before polling day, the Prime Minister told voters on a visit to a Coca-Cola plant that
“we’d be helping with the cost of living by trying to give you a flatter and more constant rate for filling up your car”.
It was suggested by Conservative politicians in the media that it would be included in the new Government’s first Budget.
Before the election, this Government made all the right noises about tackling high petrol prices. They led the public to believe that they would take action to slash fuel duty and bring down the price of petrol at the pumps. Since then, they have done nothing. Actually, that is not quite true. They have done nothing to implement the fuel duty stabiliser, which they made such a song and dance about before the election, but they have hit the motorist by whacking up VAT to 20%. They have increased petrol prices, not cut them.
Even the Office for Budget Responsibility, set up by this Government to give independent, impartial advice, has said that the fuel duty stabiliser would not work. The underlying economics of the stabiliser contain a simple, basic assumption that when oil prices rise, the Government receive an unexpected windfall from taxes on North sea oil production. The OBR said that that is not the case, at least not in the long term. In “Assessment of the Effect of Oil Price Fluctuations on the Public Finances”, which was published on 14 September last year, the OBR reported that a temporary rise in the oil price would have a negligible effect on the UK public finances, and that a permanent rise would create a loss. The OBR said that it would be difficult for the Government to introduce a fair fuel stabiliser without a significant cost to the Exchequer:
“There is no improvement in the public finances to be used for stabilising the pump price in the case of a permanent shock.”
In fact, a permanent increase in fuel prices would have a negative impact on the public finances after a year, given the effects on demand, inflationary pressures, household income and consumer spending.
Stewart Hosie
The hon. Lady seems to be labouring under a misapprehension. The fuel duty regulator would temper spikes. If there is a structural change in the oil price, the baseline figure against which a trigger is measured has to be reset. We have all seen the OBR figures, but the OBR does not say that we should not have a short-term stabiliser to stop spikes; it says that there is no benefit in the long run, as she said. The regulator is designed to smooth out short-term spikes, not to stop structural changes in the oil price.
Kerry McCarthy
What I am saying is that a correlation between oil price movements and revenue has not been established by the OBR. In fact, it has said that that is not the case and that in the short term a temporary rise in the oil price would have a negligible impact on revenue. Therefore, the question is what money would be used to offset the stabiliser or regulatory mechanism that the hon. Gentleman’s party wants. If it does not come from the revenue, where does it come from?
Stewart Hosie
I remind the hon. Lady that the OBR’s press notice was clear that the temporary £10 rise would deliver an overall effect in year 1 of £100 million. That is not insignificant.
Kerry McCarthy
The new head of the OBR, Robert Chote, said in an interview about a week ago that its analysis
“suggested that a fair fuel stabiliser would be likely to make the public finances less stable rather than more stable”.
If a £10 increase in oil prices was passed through, the assumption is that it would add 7.4p per litre at the pump. To offset that would cost £3.7 billion, which is £1.3 billion more than the consequential rise in oil and gas revenues. It might have been a good idea for the Conservative party to carry out that sort of analysis before making promises that it could not keep. All the Economic Secretary has to say today is that the Government will consider the OBR’s report.
I also ask the Economic Secretary what conversations she has had with people in the industry about the impact of fuel prices. I have been contacted by the Retail Motor Industry Federation, which tells me that it has written to the Chancellor and Prime Minister four times about the matter recently, with no response at all. It has stated that the Government have
“made no attempt to engage with industry”
and that it wants the policy of a stabiliser to be dropped, because it would be
“costly and a huge administrative burden”.—[Interruption.]
Sorry, is the Economic Secretary saying that the RMI has not written to the Chancellor or the Prime Minister?