| Previous Section | Index | Home Page |
4 pm
Mr. Geoffrey Robinson: The shadow Chancellor was kind enough to say that I had been clear with him. I apologise if I was not. I think that I was. It is the lowest sectoral price-to-earnings ratio, which was 9.2 for water. We have rounded that down to nine. Is the shadow Chancellor saying that we should take a higher
price-to-earnings ratio in calculating the windfall tax? Many sectors and companies had much higher price-to-earnings ratios in the relevant period.
Mr. Lilley: There are not many companies in Britain with which to make comparisons. Why does the Minister not compare more widely, say, with utility companies floated on the American stock exchange? From my recollection, which is hazy with the passage of time, the price-to earnings ratios of those utilities are more like six than nine. It seems odd to say that anything above the norm is an excess that should be taxed. There is in any marketplace a range around the norm, which reflects the different degrees of success of companies. It is odd not to allow for that fact.
Mr. Robinson: Will the right hon. Gentleman give way?
Mr. Lilley: In a second. While the Minister is about it, perhaps he could tell us why he chose four years after flotation rather than three, five, 10 or two.
Mr. Robinson: Four years broadly corresponds with the first period of price regulation, when regulation was lax. It seemed appropriate to encapsulate the profit that arose in part from the undervalue at sale and in part from the lax regulation in the first period of price regulation.
I fear that I still have not made it clear to the right hon. Gentleman why we have taken the factor of nine. The windfall gain is not that in excess of nine, but that measured between the funds realised by the sale of shares on flotation day and the application of nine--which is the lowest--to the profits. We could not be fairer on any account.
Mr. Lilley:
I am not sure that everyone will agree with that. Most people would regard as fairer a number that reflected what was excessive rather than what was just above the normal.
Essentially, the windfall tax boils down to a tax on success. Companies that failed to improve their profitability over the said period will pay much less or even no windfall tax. Some companies are complaining that other companies in the same industry that were conspicuous failures in modernising, improving and increasing their profitability and efficiency will pay little tax, while those that have done most to invest, reform their working practices and diversify into other businesses will pay most.
I understand that companies that have diversified into new ventures, even if outside the regulated activities, will pay windfall tax on the benefits of diversification. I stand open to correction by the Minister if that is not the case. As he does not correct me, I assume that I am correct and that the Government will impose a windfall tax on profits made in areas other than those in which the company was operating at the time of privatisation and other than in directly regulated areas. That is an indication that the Labour party has not changed. The Labour party still believes that profit is a dirty word. The more profits people make, the dirtier they are and the bigger the tax they should have to pay. That is the essence of the proposal before us.
The Government simply do not understand what privatisation was for or how the regulatory system was intended to pass on the benefits to customers. Theaim was to harness the profit motive, which was conspicuously lacking under nationalised ownership, to improve efficiency and reduce prices to the customer. Given the monopoly position of many of the industries involved, some regulatory system was essential to ensure that companies did not improve their profits simply by raising their prices.
We could have chosen a system of fixed profit margins. That has been tried in some countries, but it is grossly inefficient because it leads to cost-plus pricing: the more the company's costs increase, the higher its prices. It is automatically allowed to pass costs on by the regulator. We therefore did not choose that method. We could have gone for a rate-of-return system, which is often used in north America and elsewhere, but that, too, leads companies to wasteful, gold-plated investment. They automatically earn a higher return the more they invest, which leads to inefficient use of resources.
We initiated and developed--it has since been copied elsewhere--the so-called RPI minus X system, which requires companies to reduce their prices in real terms by fixing price increases at X points less than the rise in the retail prices index. That requires companies to reduce their prices. If a company cuts its costs even faster than it reduces its prices, it can improve its profits. However, after a fixed period--the Minister gave an average of four years--the RPI minus X system is revised in the light of performance, so that the benefit of past efficiency gains is passed on in lower prices in the next term.
There is a sharper spur for further gains in efficiency, as companies can make higher profits only by exceeding that even more demanding price reduction target. If the Government can convince the House that more than adequate profits are being earned by any of the industries concerned, they or the regulators should require at the next price review bigger reductions in prices, and faster falls in prices thereafter, to ensure that the benefits are passed on to the customer. It is the customer, not the tax man, who should benefit from the efficiency that privatisation has brought.
Lorna Fitzsimons (Rochdale):
The shadow Chancellor should be aware that the water regulator, Ian Byatt, has pledged that his current pricing review will mean direct reductions in prices for customers, taking account of the windfall tax, in the next five-year retail prices index calculation.
Mr. Lilley:
Exactly. The hon. Lady has hit it on both buttons. First, the regulator will automatically pass on efficiency gains, and, secondly, he will take the windfall tax into account. The reduction will be less than it would have been had it not been for the windfall tax. She has made for me my very next point. Because the Government are imposing an extra cost on these industries, the reduction in prices will not be as great, or will not occur at all.
We should not underestimate how effective privatisation has been in reducing costs to consumers, both domestic and industrial. Since privatisation, telecoms prices have fallen by 40 per cent. in real terms. As a result, calls are cheaper than in France, Germany or Italy. Gas
prices have gone down 20 per cent. for domestic consumers and, for domestic consumers, are below those of Germany, France, Italy, the Netherlands and Belgium. The price of gas for industrial users has fallen by 48 per cent. There has been a reduction of 9 per cent. in the price of electricity for domestic consumers, and one of 10.5 per cent. for businesses. Generators have doubled their productivity since privatisation. That is an indictment of the failures of nationalisation and a recommendation of the success of privatisation since we introduced the policy.
The Government simply pretend that a tax can be levied on companies without any impact on the customers and users of their services. In last year's Budget debate, the then shadow Chancellor said that the windfall tax would not be paid by ordinary families. It is nonsense to pretend that there is any tax that is not ultimately paid by ordinary people. It is not just I who say that, but John Kay, the guru who advises the Chancellor and the Prime Minister. He made it clear in the definitive work on British taxation that there is no tax that is not ultimately paid by individuals.
If the £5 billion that is being levied on those industries by the tax is ultimately fed through to individuals, the average cost per household will be between £250 and £300.
Mr. Campbell-Savours:
That is a total exaggeration.
Mr. Lilley:
The hon. Gentleman may think that it is an exaggeration when I divide £5.2 billion by 19 million households and get the answer of £270, but that is in accord with the normal laws of arithmetic that have applied in the House for some while.
The Government tried to change the actuarial rules in order to lessen the impact of the advance corporation tax charge on pension funds; now they want to change the ordinary rules of arithmetic, to pretend that a tax on those industries will not affect household bills. It will affect them to the tune of £270 on average, and pensioners will lose most because they spend disproportionately more of their incomes on household bills and typically have lower than average incomes.
Mr. Geraint Davies (Croydon, Central):
On simple arithmetic, does the right hon. Gentleman accept that the £5.2 billion will not simply be put in a hole in a ground or burnt, but will be invested in jobs in our welfare-to-work scheme? Therefore, that money will come back to those same ordinary people through lower tax bills. The right hon. Gentleman's prediction about the future net effect is quite wrong. In the longer term, the whole point of the investment announced in the Budget is that people will pay less in bills and taxes.
Mr. Lilley:
All taxes are spent and therefore go back into the economy. On that basis, no tax costs anything and we could have 100 per cent. tax and be no worse off. Most people will see that there is a flaw in that argument somewhere, even if they cannot instantly tell where.
The burden of the tax will fall particularly on pensioner households, who will receive no special protection of the type introduced when the change in VAT rates on fuel
was announced. We shall seek to introduce such protection as the Bill progresses in Committee. Why is no compensation to be offered? If the extra costs imposed on household bills exceed the impact of the 27p a week reduction in VAT on fuel, which the Chancellor will introduce in September, such compensation should be offered.
If the regulators prevent those companies from passing on the cost in higher household bills--the hon. Member for Rochdale (Lorna Fitzsimons) thought that the regulators would do so--by definition, the impact must fall on the value of the shares.
It is worth noting that approaching two thirds of those shares are held by and on behalf of pension funds. Therefore, instead of about 28 per cent. of the burden of the tax falling on pensioners, more than 60 per cent. of it will fall on present and future pensioners. That is in addition to the major, on-going attack on pension funds through the ACT charge which has been introduced in clause 19 and which we will attack with the greatest possible vigour in Committee.
Ultimately, the cost has to fall somewhere, and it will fall disproportionately on pensioners.
| Next Section
| Index | Home Page |