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Session 1999-2000
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Standing Committee Debates
Finance Bill

Finance Bill

Standing Committee H

Tuesday 9 May 2000


[Mr. Frank Cook in the Chair]

Finance Bill

(Except clauses 1, 12, 30, 31, 59, 102 and 113)

10.30 am

The Chairman: It is my fervent hope that we do not become too heated this morning, so I have no hesitation in allowing those members of the Committee who wish to do so to divest themselves of their outer upper garment.

Clause 2

Rates of duty on cider

Question proposed, That the clause stand part of the Bill.

Mr. David Heathcoat-Amory (Wells): Thank you, and good morning, Mr. Cook.

Clause 2 deals with the rates of duty on cider. We debated beer duty on the Floor of the House and drew attention to the severe problem of smuggling. We also alluded to the strange fact that the indexation rate used by the Government for all such duties was more than 3.4 per cent. We want to concentrate on that figure this morning and find out the purpose behind it. The Chancellor said in his Budget speech that all such duties—not only cider duty but hydrocarbon duty—would increase by the rate of inflation. However, the Government have not claimed that inflation is generally running at a rate of 3.41 per cent., the percentage used to uprate the duties. A stealth tax is in operation, which caused The Daily Telegraph to run the headline ``Brown's `big fiddle' costs £750 million.''

It had calculated immediately after the Budget that the difference between the assumed inflation rate and that used by the Chancellor would net the Treasury an extra £750 million in the coming year. Large sums of money are involved and the matter certainly needs explaining.

I shall explain some of the history of excise duty on alcohol. The previous Government faced the problem of the smuggling of alcoholic products and, although we were running a budget deficit at the time and were short of money, we responded to that problem by freezing the duty on alcohol products in our last two Budgets and cutting it on spirits. When the Labour Government came to power, they ignored the warning signs. Although they talked a lot about harmonisation of taxes in the European Union and although they indisputably have discretion over excise duties, they increased the alcohol duties and had an extra Budget. The Conservative Government had autumn Budgets, but this Government slipped in an extra one, as a result of which alcohol duties have been increased again. The duty differential has continued to increase, which has made the smuggling situation worse. We shall be debating that problem in future sittings, but I shall concentrate now on how the Government have calculated the uprating figure.

The conventional inflation rate is not 3.4 per cent. Page 138 of the Red Book shows that personal allowances have been uprated not by the expected figure of 3.4 per cent., but by only 1.1 per cent. The Treasury uses a much lower actual inflation rate when that suits it. The working families tax credit has gone up by only 1.6 per cent.; I am not clear why it has gone up by slightly more than the personal allowance. Increases of 1.6 per cent. for that credit, the basic credit, the single persons credit and the lone parents credit look meagre aside the much bigger figure that the Treasury chooses when it suits it for uprating its own taxes. The treatment is clearly different, in accordance with the evolving formula whereby the Government pick an inflation rate simply to suit their revenue requirements.

The mystery deepens when we consider that inflation and its calculation are extensively dealt with in the Red Book. There are two pages of detail and forecast on the inflation rate, and three pages starting with page 173 are about performance inflation, its prospects and the link between inflation and the economic cycle. That section includes some independent forecasts as well. There is further information about inflation on page 186. Page 195 shows that the National Audit Office has audited many of the assumptions in the Budget, but the page does not include inflation. It is odd that the Government discuss inflation in great detail, but draw back from including it as an independently audited figure. Our suspicions are well and truly aroused.

It is odder still that the figure of 3.4 per cent does not appear once, despite the pages of analysis. Given the importance of the uprating figure, which includes hydrocarbons, alcohol duties and tobacoo—tobacco has gone up by more than inflation, but the Government have used the figure of 3.4 per cent. as their base indexation again— and given the significant revenue netted as a result, one might expect the figure of 3.4 per cent to appear in the inflation discussion.

There is clearly something to hide, and the Government now have the opportunity to explain fully how they reached that figure and why they changed their method of calculation. The previous Government used the actual inflation figure—a historic, precise figure. When the Labour Government came to power, not only did they have the extra Budget that I mentioned, which netted them extra revenue, but they changed the basis of calculation to a projected figure. That is why they expect a substantially higher inflation figure for the year ahead. An explanation is needed for that, given that the Government have put so much emphasis on achieving and sustaining low inflation.

In this important stand part debate, we want a full and open explanation of why the Government changed the basis of calculation, why they are so secretive about the figure used, and how it is constituted.

Mr. Edward Davey (Kingston and Surbiton): Like the right hon. Gentleman, I welcome you to the Chair, Mr. Cook. I support the thrust of his questions to the Financial Secretary. In previous debates on Finance Bills, Opposition Members have spent some time discussing the issue of cider, and in particular the duties relating to low-strength sparkling cider. We thought that it would be annoying for those who served on the Committee in the past two years to go through that debate again. Therefore, Mr. Cook, you and the Committee are to be spared that process, although we remain concerned about the issue.

The right hon. Member for Wells (Mr. Heathcoat-Amory) is right to mention the index by which duties on different types of cider and other excise duties are uprated. That is the key political issue in relation to the taxes that we are discussing. The Government have a duty to Parliament and to the country to be transparent in the way in which they change taxes and spend money. Transparency is one of the core principles in the code for fiscal stability. However, as the right hon. Gentleman said, they are uprating various duties this year in a most untransparent manner.

There are many ways to measure inflation. There are the different measures of the retail prices index, the standard RPI and the underlying RPI, which is often referred to, when the inflation figures are released, as RPIX. There is the GDP deflator. There are many other measures of price changes because there are many prices in which to measure trends. The Government receive a lot of advice from various groups on which index they should use as a measure but for annual changes such as these, they should have a convention that they stick to. They should not chop and change, because that makes it difficult to understand what is happening.

My understanding is that the Government have changed the convention. Which index has been used in every previous year over the past 20 years? By which index were excise duties uprated in 1978–79, the previous Labour Government's last year of office? Was it the RPI, a GDP deflator, or some other kind of index? To be able to say that there has been a straight indexation of the duties, and not an over- or under-indexation, there must be some consistency in the measures used. I agree with the right hon. Gentleman—as I agree with most of his arguments on the clause—that Ministers have not been clear with the Committee on that subject.

In other areas, such as international treaties and in legislation passed by this Parliament, the Government have been clear about which index of inflation they wish to use. In the Bank of England Act 1998, they set out the measure for the Bank in precise terms. In the Maastricht treaty, which the right hon. Gentleman did not mention, the inflation index is specified clearly. There ought to be—probably in legislation—a main index that we all agree to use. The various indices will diverge at particular points, so there should be an appropriate index to which we can refer each year for each uprating.

As the right hon. Member for Wells said, one set of taxes is uprated and indexed by one measure of inflation and another is uprated by an entirely different index. That cannot be right. It has made me think about the way in which the Government deal with inflation and control the measures of inflation. We have debated elsewhere the changes that the Government are making to the collation and publication of statistics. They are setting up the statistics commission, but one major statistic that Ministers will not give up and which will remain in the Chancellor's control is the measure of inflation.

When the Government appear to be acting like control freaks, our suspicions are aroused and our suspicions were rightly aroused about this clause. The Government are trying to keep hold of this measure because they want to play with it for their own purposes. That cannot be right. It is certainly not transparent and I hope that the Minister can answer our questions. We will no doubt be supporting the Conservatives against the clause.

10.45 am

Mr. Oliver Letwin (West Dorset): I want to be helpful to the Financial Secretary, as he so often is to the Opposition. It may also be helpful to the Committee—I promise not to spend 45 minutes on the subject—if I rather painfully go through what we take to be the explanation and implication of the 3.4 per cent. rate. May I correct an inadvertent error made by the hon. Gentleman in responding to my hon. Friend the Member for Arundel and South Downs (Mr. Flight) in the Committee of the whole House? There is a history to the index and to its use. In the November 1996 Budget, the previous Government used the actual inflation rate measured on the RPI all-„prices index to September 1996 as the basis for operating these and similar duties—looking backwards. That happened to be 2.1 per cent. The new Government came to office and, in the July 1997 Budget, switched from a backward-looking measure of the RPI all-prices index to a forward-looking forecast. That has created an oddity, which is that, unlike under the Rooker-Wise amendments, under which forecasts needed to be corrected, there is no statutory obligation on the Government to correct, ex post, the effects of an uprating based on the forecast in relation to excise duties on cider. A systemic bias one way or the other could be introduced by switching from a backward-looking use of the index to a forward-looking use. It is not for me to suggest that any Government would engage in such an activity, but the Chancellor could systematically year after year consciously overestimate inflation for the year ahead, as measured by the RPI all-prices index, and never catch up with himself and so introduce a hidden form of taxation.


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