Examination of Witnesses (Questions 1323
- 1339)
THURSDAY 27 JANUARY 2000
MR STEPHEN
TIMMS, MR
SIMON VIRLEY
AND MISS
HEATHER MASSIE
Chairman
1323. Can I welcome you to the Committee. Please
introduce yourself and your team for the record?
(Mr Timms) I am Stephen Timms, I am the Financial
Secretary to the Treasury. I am very pleased to be making my first
appearance before this Committee. On my left is Simon Virley,
who is the Head of the Environmental Tax Team at the Treasury.
On my right is Heather Massie, who is the Head of the Excise Policy
Group at Customs & Excise.
1324. Do you want us to go straight to questions
or do you want to make a brief introduction?
(Mr Timms) I am very happy to go straight to questions.
Mr O'Brien
1325. Minister, there have been criticisms about
the introduction of this levy, and people saying it is badly thought
out, it limits environmental benefits and we now have the question
of negotiated agreements, average tax levels allowances. How do
you respond to these criticisms?
(Mr Timms) I believe the levy is going
to be a very effective element of the Government's overall climate
change programme. I must say I think the whole process that we
have been through is a very good example of how economic instruments
of this kind should be developed, starting with the work commissioned
by the Chancellor from Lord Marshall, working with his task force,
that leading on to a recommendation to the Chancellor in November
1998 and then the proposals in the March Budget and extensive
consultations following that, further proposals in the Pre-Budget
Report last November which were very, very widely welcomed. I
think it is increasingly recognised that we have succeeded in
designing an instrument which will have very substantial environmental
benefits and will also not undermine the competitiveness of United
Kingdom firms. Those were our twin objectives at the outset and,
I think, that is what we are going to deliver.
1326. On the negotiated agreements, obviously
they are not made public and people are not aware of what they
do contain, there has been criticism of them from people involved,
the chemical industry, and so the points that you make concerning
the advantages of the levy have been questioned by some of the
industries. Today we have heard the National Farmers Union say
that some of their members could lose their businesses and jobs
because of this. This is the kind of criticism we are receiving
and will be in the Report. Do you consider there has to be some
question raised in the Department to meet some of this concern
and the anxiety that has been expressed to us?
(Mr Timms) We have been working very hard to address
all of the concerns that have been raised. When I arrived at the
Treasury at the end of July there were a lot of letters coming
across my desk from people expressing concern. There are now fewer,
reflecting, I think, the wide welcome for the changes and the
developments the Chancellor announced in November. On the negotiated
agreements he made a specific point of concern about that. Of
course, those agreements are not yet finalised but they will be
made public when they are. I do not think that those agreements
either will give rise, once they are concluded and made public,
to the concerns that you are referring to.
1327. Many companies have spent a lot of money
in energy efficiency units and reaching the targets, well in excess
of the targets but, yes, they are still being penalised, why is
that?
(Mr Timms) The view that we have taken following from
Lord Marshall's work is that there should be greater incentives
for all firms to reduce energy usage and so to reduce emissions.
That is the basis on which we have gone forward as we have. There
will not be complete exemptions for firms or sectors of firms
in order that those additional incentives can be provided. Of
course this levying is going to be revenue neutral. All of the
money that is raised through the levying will be recycled to the
business, mainly through the reduction in employers' national
insurance contributions. There is no extra tax revenue raised
as a result of it. Many, many firms will be better off as a result
of the package. I do not accept the premise for the criticism
that you are advancing.
Miss McIntosh
1328. If I can return, for a moment, to the
negotiated agreements? Are you saying that the Treasury is still
open to a possible negotiation of agreements with the agricultural
industry, bearing in mind that many of their units are particularly
small?
(Mr Timms) There is a number of points there, first
of all the basis for the negotiated agreements is that the negotiations
are covered by the EU IPPC Directive, which includes a number
of agricultural sites. There are those discussions going on currently,
leading, I hope, to a negotiated agreement. You make a particular
point about small sites and that is an issue that we have addressed.
For reasons that I do not entirely know there is an exclusion
from the IPPC Directive for small pig farms, for example. We made
it clear that where a site is excluded solely on the basis of
its size then that site will be eligible for the benefits of a
negotiated agreement. The size point that you raised we have dealt
with.
1329. It was my distinct impression that the
NFU had not grasped that this morning. The other point I would
like to move on to is, would it not have been the preferred option,
rather than acting unilaterally and possibly damaging our own
industry in anti-competitive terms with competitors in the rest
of Europe and the world, for Britain to put pressure on our European
partners to wait for a European energy tax?
(Mr Timms) That is an interesting proposition. I think
anyone waiting for a European energy tax would have waited a very
long time indeed. It is the case that all of us in the EU have
signed up to the Kyoto objectives. All of the Member States are
taking action that they see as necessary to achieve those targets.
Most of the Member States, I think eight is the number so far,
have either introduced or are working-up proposals for an energy
tax of some sort. I think we have been able to design in the United
Kingdom a Climate Change Levy that does not benefit United Kingdom
firms as compared with EU firms. I think realistically the prospect
of everybody agreeing with a Europe-wide tax would be pretty remote,
given the history of the much more modest Energy Products Directive.
1330. If I can put it in a slightly different
way, I have a brick factory in the Vale of York and we have had
a written submission from the brick industry in the United Kingdom,
and this one proposal on its own could possibly shut down the
whole of the brick producing industry in this country. Would it
not have been a more novel procedure, rather than clobber those
in a way that is, perhaps, not tax efficient and indeed environmentally
friendly, which this piece of legislation is seeking to do, to
actually have gone down the path of encouraging people to use
other alternative energies and to give tax incentives? I heard
of one this morning, that I was not aware of, energy schemes of
alternative energy that could give them some sort of tax incentive.
(Mr Timms) We will be doing that within the Climate
Change Levy. The Climate Change Levy will be very effective environmentally,
it is not going to damage the competitiveness of United Kingdom
firms. My understanding is that brick producers are going to be
covered by one of the negotiated agreements, which will bring
an 80 per cent reduction in the amount of levy that is charged
to them. I certainly do not expect problems of the kind you describe
for brick firms. Amongst the proposals that the Chancellor announced
in November was an exemption from the levy for energy generated
from new, renewable sources, precisely what you just advocated,
and, indeed, increasing the incentives for people to use renewable
energy. I agree with you, that is a very worthwhile change in
the package and it is one of the matters that has considerably
enhanced the environmental effectiveness of the levy compared
with the proposals that were announced initially.
Mr Donohoe
1331. When you say, Minister, this is tax neutral,
how much are you going to charge for all of the bureaucracy?
(Mr Timms) It is revenue neutral in the sense that
all of the money—
1332. How much is the Treasury going to keep
for all of the bureaucracy this levy is going to create? What
percentage are you going to the keep within Treasury?
(Mr Timms) As far as I know we have not yet produced
figures for the administrative costs associated with the levy.
What I would say, though, is that one of the benefits of our proposals
is that it is very much less complex to administer than some of
the measures that are being introduced elsewhere in the EU, some
of which involve very large numbers of inspectors going round
and doing all sorts of things, which is not going to be happening
as a result of our proposal. Given that we do have a very important
objective, which all of us signed up to, the need to reduce emissions
to achieve the Kyoto targets, the way that the levy has been designed
does have the advantage of administrative simplicity compared
with alternative approaches being taken elsewhere.
1333. Do you now concede that the original proposals
would have harmed industry to the point of costing a number of
jobs?
(Mr Timms) I think it is important to see all of this
as a process, that is right from the start when the Chancellor
asked Lord Marshall to carry out his study and he set up a task
force to work with him, the proposals in the Budget in March and
the further proposals in November. All the way through we have
been extremely careful to take very full account of all the points
of view being expressed by businesses and others about how to
take this measure forward. As I said earlier, I think it has been
a very effective process partly for that reason, because we have
been careful to listen to what everybody has said to us at each
stage. There is no doubt at all that there were lots of concerns
expressed following the Budget in March. We have taken very careful
note of those and the proposals have been amended as a result.
1334. As an ex-trade union official you have
employed the oldest tactic in the book, which is to put a claim
out and then bring it way down so that everybody breaths a sigh
of relief initially, but what the Treasury are renowned for, is
it not, if we look at the car tax, if we look at the airport tax,
is the salami tactics it will be using over the next ten to 15
years. You will not be able to give this Committee any assurance
that suggests anything different to the normal practice within
the Treasury.
(Mr Timms) That is true. I expect the normal practice
in the Treasury under this Government to continue.
1335. So you are conceding that it is possible
that in ten years' time when industry re-visits this they will
see a very much different situation as a percentage of their business
than perhaps they are facing as a consequence of the Autumn Statement?
(Mr Timms) Let me go back to some of the points you
were making earlier. I want to defend very robustly the process
that we have been through because I think it has been an excellent
process. Lots of people have commented on it and had the opportunity
to do that. Those comments have been very well taken on board
by the Treasury.
Mrs Dunwoody
1336. We did not get the impression the horticultural
industry loved you this morning, but perhaps that was a misconception.
(Mr Timms) I made the point earlier than when I arrived
at the Treasury in July my desk was awash with letters from people
expressing concern.
Mr Donohoe
1337. It bought off the strongest, that is the
point.
(Mr Timms) It is not any more and that is because
we have carefully taken on board the points that have been raised
with us through this process. Nobody is suggesting that this is
an easy process. It is a difficult process. It is very big issues
at stake for Britain, for the world and for individual firms.
It is a complex process and I think it has been managed extremely
well and I think it provides a good model for how these things
should be done in the future. On your other point about where
we go from here. We have said that we would anticipate these duty
rates will be treated exactly like other sorts of duty rates and
go up in line with inflation, but of course that is a matter for
the Chancellor to decide at each Budget in turn and I imagine,
looking into the long-term future, that is going to depend on
what happens with our climate change programme generally and how
effective we are in meeting the targets that all of us want to
see delivered.
Mr Donohoe: There are an awful lot of qualifications
in there.
Mr Olner
1338. Given that over the last decade electricity
and gas prices to businesses have fallen by 22 per cent and 44
per cent respectively, why did you offer so many concessions to
different energy users?
(Mr Timms) It has been a commitment from the outset
to introduce the levy in a way that does not undermine the competitiveness
of UK firms. We recognised very early on that that did mean looking
carefully at what happened to energy intensive users, that is
why we have facilitated the process of negotiated agreements and
it is now proposed that those who are signed up to one of those
agreements will have a reduction of 80 per cent in their levy
liability. It has been convincingly argued to me and no doubt
to this Committee as well that without a significant reduction
in the levy liability for very heavily energy intensive firms
there would have been a serious threat to their competitive position.
We wanted to avoid that and the process that we have been through
I think will succeed in delivering that objective.
1339. I appreciate that you and I have had discussions
about this with me wearing another hat. I have got my environmental
hat on today. The Electricity Association have said that the reform
of the electricity trading arrangements which the DTI has predicted
will lead to a ten per cent reduction in wholesale electricity
prices. Has that been factored in to the concessions that were
given or into any part of the levy when it was being designed?
(Mr Timms) Yes, it has been factored into our calculations
about what the savings in emissions will be through the period
that we are talking about. I do not think there is any inconsistency
at all between wanting to see a high degree of competition in
the energy market and at the same time introducing the levy in
accordance with the polluter pays principle to ensure that there
is a cost that reflects more fully the environmental consequences
of energy usage and that is what the levy will do.
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