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Mr. Willetts: That is a very interesting point. However, in his initial remarks, the right hon. Gentleman seemed to accept that, on his argument, although a 25 per cent. rate sometimes was too low, on other occasions it might be too high. I hope that I may interpret his remarks as a guarded welcome for the proposal to reduce the rate from 25 to 6 per cent., although I accept that he believes that there are arguments for increasing the 25 per cent. rate.

Mr. Sheldon: I must apologise, as I did not get my point across. I believe that there should be an investment incentive on certain types of plant and machinery, and that the tax depreciation should be greater than the actual depreciation.

Mr. Willetts: The right hon. Gentleman and I will have to agree to differ on that point, because I think the 1984 corporation tax reforms, which attempted to introduce a set of capital allowances in corporation tax that were closer to normal accounting conventions, made a lot of

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sense. The old regime of providing very generous allowances and then a very high rate of corporation tax was much inferior to our current regime of a lower rate of corporation tax and more sensible allowances.

The proposal to move down to 6 per cent. for long-life assets makes a lot of sense, and will ensure that some of the utilities that benefited in the past from a distortion in the corporation tax regime will in future pay more corporation tax. That approach to taxation of the utilities is in striking contrast to the Labour party's proposals for a windfall tax, which lacks any such logic.

I should briefly review some of the arguments that Labour has made in favour of a windfall tax and contrast them with the proposals in our Finance Bill. One of the arguments made in favour of the tax is that, whatever problems there may be with retrospective legislation, Conservative Members must still take responsibility for the retrospective measures in the 1981 Budget--the so-called "bank tax". I served in the Treasury in 1981 when that tax was formulated and was involved in many of the fraught meetings with representatives of the banking industry, who came along vigorously to complain about that tax. I still have scars on the back which were inflicted at some of those meetings, when those representatives vehemently expressed their opposition to our proposals in that Budget.

The 1981 bank tax is very different from the Labour party's proposals for a windfall tax. The first difference is that we were clear on the basis on which a tax should be levied. It was a tax on the non-interest-bearing sterling deposits held by all banks in the United Kingdom, and there was no attempt to discriminate between banks on the basis of their status--whether they were foreign or domestic--their circumstances, or their history. The measure was based on agreed and published banking statistics showing the non-interest-bearing deposits held by the banks.

There was a genuine windfall element in that tax because interest rates had risen so high--at one point, they reached 17 per cent. Banks were taking in deposits on which they were paying no interest and were earning interest, sometimes of more than 20 per cent., on the loans that those deposits financed. We formulated a clear, simple measure specifying that the tax on banks should collect 2.5 per cent. of the value of those sterling deposits. The measure was clear and precise, it was introduced at the same time as the banks were making excess profits, and it was based on agreed statistics that had long been prepared and published before by the Bank of England.

I can do no better than quote from the Institute for Fiscal Studies, which has examined the possible analogies between our bank tax and Labour's proposed windfall tax. It states:

"The special tax on bank deposits had the merits of being applied to a well-defined set of firms and of being charged on a tax base that was coherently related to the reasons given for introducing the tax. It also had the advantage of being introduced at around the same time as the banks were earning these windfall profits, and not several years later.


In contrast, it is not at all clear which privatised firm will be liable to the windfall levy, or what basis would be used to decide how much each firm would be charged."

There is a clear difference between the approach in our 1981 Budget, although many Conservative Members regretted the element of retrospection, and Labour's extraordinary proposals, many years after the event, for a windfall tax on the utilities.

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Labour needs to answer some pertinent and essential questions about the tax, such as how much it is supposed to raise. Will it be £3 billion, £5 billion or £10 billion? Which companies will pay it? Will it be, as the Leader of the Opposition said, "privatised monopoly utilities"? That is what Alastair Campbell--who is presumably the most authoritative spokesman available on Labour policy on these matters--said in his notorious letter to The Independent. Or will it be, as the shadow Chancellor said, "privatised utilities"--deleting the "monopoly" word? British Telecom, BAA or the electricity generators would find themselves taxed under the proposals that the shadow Chancellor wants to introduce, but apparently would not be taxed under the proposals supported by Labour's chief spin doctor and the leader of the Opposition.

Mr. MacShane: I am grateful to the hon. Gentleman for giving way once again. He is making incredibly heavy weather of this matter. I have no doubt that when, in a few weeks or months, my hon. Friends are sitting on the Government Benches, they will provide answers to the detailed questions he has asked. May I ask him whether he is against the principle of a windfall tax?

Mr. Willetts: I am certainly against the principle of a windfall tax on the utilities, and I have explained why that case is very different from the windfall tax on banks which we introduced in 1981.

Those are important questions to which leading firms in our country are entitled to know the answers, and they are questions that any serious political party about to put its prospectus before the electorate should be expected to answer. The windfall tax is the core of Labour's tax strategy, and it is the pot of gold that Labour says will enable it to finance all the public expenditure pledges that it has made to the electorate. Will corporation tax be taken into account in calculating liability for the windfall tax on the utilities? When we introduced the bank tax, we deliberately decided to set it completely independently of corporation tax. No corporation tax payments were relevant to the liability for bank tax. Will the same apply with this tax? That question is particularly relevant to British Telecom.

How would Labour handle the question of state aid? What about those firms in the same business that were never nationalised--

Mr. Andrew Miller (Ellesmere Port and Neston) rose--

Mr. Willetts: I am sorry; I shall make a bit more progress.

What about those firms that were nationalised and, therefore, never privatised, such as some private water companies, for example, which presumably would not pay the tax? Under agreed European Commission rules, they would be regarded as beneficiaries of a negative state aid. A discretionary tax would be borne by some of their competitors in their industry but not by them. What has Labour done about the response to that problem from the European Commission? We know that, because French companies own some of those utilities, the French Government are extremely unhappy about the proposal.

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We have been told how close the Labour party is to President Clinton's Democrats. When talking to its friends in President Clinton's Administration, does Labour just swap notes on what its focus groups say or does its friends raise the worries about the proposal felt by American businesses that have bought into the British utilities? We know that in America they are particularly unhappy with anything to do with retrospectivity. There are rumours that the first thing that would happen in the event of a trade war, which the tax would unleash, is that the American authorities would block the British Telecom merger with MCI to form the new firm, Concert. Does the Labour party believe that that would happen? How would it be handled?

We have heard from the leader of the Labour party that it believes that it is important for all of us to do our homework. If that is so important, will Labour's Treasury team do its homework on this proposal? We are all entitled to know the answers to those practical questions.

Mr. Miller: If the hon. Gentleman wants to make so much about Labour's tax on the utilities and is drawing a comparison with the 1981 tax on the banks, perhaps he would be kind enough to tell the House where a reference to that tax appears in the 1979 Conservative manifesto--which clause and which paragraph?

Mr. Willetts: Although there was no reference in the 1979 manifesto, there was a clear reference in the 1980 Budget. The then Chancellor, now Lord Howe, made it clear in his 1980 Budget that he was considering the possibility before it was introduced in 1981; so the possibility of a bank tax was publicly ventilated and the pros and cons were set out in the 1980 Budget speech.

We know what the Labour party says when pressed on these practical questions about tax. I have the Labour party's briefing document, which says:

"We have made no public comment on the nature of the levy, its expected yield or the distribution of the levy and have no plans to do so until we have consulted the regulators in government."

The Labour party's defence is that these are difficult issues which have to be discussed with the regulators. If that is the Labour party's line, how can it explain what appears on the following page of that same briefing document? When confronting the question about legal obstacles to the tax in the European Court of Justice and the European Court of Human Rights, the document says:

"Our investigations have confirmed that there are no financial, technical or legal obstacles to the introduction of the tax."

How can the Labour party know so much about the tax that it can assure us that it will not encounter any legal obstacles, yet, at the same time, know so little that it needs to consult the regulators and will not answer any of our questions until then?

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