Standing Committee H
Tuesday 9 May 2000
[Dr. Michael Clark in the Chair]
(Except clauses 1, 12, 30, 31, 59, 102 and 113)
The Chairman: It is a hot afternoon, so it will be in order if hon. Gentlemen remove their jackets if they so wish.
Rates of duty and rebate on hydrocarbon oil
Question proposed, [this day], That the clause stand part of the Bill.
Question again proposed.
Mr. Oliver Letwin (West Dorset): I welcome you to the Chair, Dr. Clark. I doubt that you will be sterner in your guidance than your co-Chairman, Mr. Cook, who rightly reminded me to address my remarks to him, not to others in Committee.
We were treated this morning to many arguments about the method that was used for what the Government are pleased to call valorisation--in other words, indexation. The Financial Secretary will be sorry to hear that that issue arises in relation to hydrocarbon oil duties. I wish to declare a potential interest as some clients may have an interest in oil matters, but I do want to know how the calculation was made for hydrocarbon oil duties. Since this moming's sitting, the Financial Secretary will have had the advantage of being able to refer to the fountain of all wisdom in Great George street and no doubt he is now fully equipped with the figures. I hope that he will let us into the secret and tell us the market expectations for mortgage interest rate increases that are built into the calculation.
Beyond that, will the Financial Secretary explain the relationship between valorisation and escalations? Last year, the Chancellor told us with some flourish that the escalator was to be brought to an end. It is a term of art, in that it is an automatic mechanism for uprating something, but other mechanisms are used for such purposes, one of which is straightforward, so-called valorisation or indexation. I shall not tediously remind the Committee that we have explored the composition of the forecasts of the RPI all-prices index increases, which are being used as a basis for the so-called valorisation. We know that the set-up is asymmetric in that it could contain a its persistent bias without its being corrected ex post.
Can the Financial Secretary guarantee that, if the indexation turns out over time to re-create the escalator or part of the escalator that had been abolished with such a flourish, the error will be corrected? The Chancellor said specifically to the public that there will not be an escalator, so I take it that that means that there will not be a revalorisation that goes beyond revalorisation. In such a case, for the sake of consistency, surely there should be an obligation to produce a correction after the fact on a continuing basis. However, there is nothing like that in the clause and it would be helpful if the hon. Gentleman explained the provision. Is there to be such an exposed adjustment in the light of the Chancellor's statements and, if not, why not?
Dr. Nick Palmer (Broxtowe): The hon. Gentleman is suggesting, as he did this morning, that there should be some compensation if the reality turns out to be different from the prediction. Is he also suggesting that if an overestimation was made there should be a surcharge--or is he suggesting a one-way ticket?
Mr. Letwin: The hon. Gentleman asks a reasonable question which I might, in the manner of an e-mail, forward to the Financial Secretary. It would be interesting to know whether the correction is to be symmetrical or asymmetrical. As I mentioned in another context this morning, it was the practice of the previous Government to operate a forward-looking variant of indexation. The adjustment was made on an asymmetric basis, so that the gain to the recipients was banked when the indexation turned out to be less great than the actual. The recipients were not asked to hand back social security payments when the indexation turned out to be greater than the actual.
Whether that variand should apply in the case that we are discussing is an interesting question of public policy. I would not presume to insist that it should be one way or the other, but we need an explanation of a symmetrical adjustment at least; at best, we should have an explanation of an asymmetric one. If it turns out to be the latter, the Financial Secretary will have a persistent bias in his favour. As things stand, we can conclude that there is an implicit escalator, if the forecasts persistently turn out to be above the reality.
To know how likely that is to be the case, we desperately need the answer to the following question. What is the figure for a so-called market expectation of the interest rate rise component built into the RPI all-prices index, and how much like a market expectation is that?
While we are on the subject, will the Financial Secretary also tell us what he means by a market expectation? We have had an opportunity to think about that question in the interim, and I have had the inestimable advantage of talking it over with my right hon. Friend the Member for Charnwood (Mr. Dorrell) over a drink of tea. The Financial Secretary may be able to tell us that we are mistaken and that the standard measure, the discrepancy of bond yields--of indexed and nominal bonds--is what led the Govenunent to create the forecast. However, it was not verified by the National Audit Office as being consistent with the RPIX forecast--that was true two years ago but not this year.
The Chairman: Order. I would like to draw it to the attention of all members of the Committee that electronic devices are not permissible. I should be grateful if those that have them would put them away.
Mr. Letwin: I wish that I possessed the kind of machine that I would need to--
Mr. Michael Jack (Fylde): On a point of order, Mr. Clark. I should be grateful for a definition of an electronic device.
The Chairman: It may be that in front of you, Mr. Jack, there is a computer of some type or a PC laptop. I do not know what it is, but it looks like an electronic device to me. If you tell me that it is not and that it is only a plastic paint-box, I will be pleased to hear it.
Mr. Jack: Further to that point of order, Mr. Clark. The device is electronically powered, but the system contains the notes on clauses for the measure that we are discussing. I was not aware that there was a ruling of the House that hon. Members may not obtain their data for use in the Committee by other than the printed fashion.
The Chairman: Mr. Jack, there is a ruling of the Chairmen's Panel, over which the Chairman of Ways and Means presides, that electronic devices of the type that you describe are not allowed in Committee. I would be very pleased if it was taken off the desk and put away.
Mr. Letwin: The irony of that exchange is that an electronic device is probably exactly what the Financial Secretary requires--or perhaps he should obtain guidance from somebody who has one. I believe that he is so well endowed in the intellectual department that he could invent programmes for electronic devices. Between sittings, he may have invented a programme to discover the answer to the very question that we are asking.
I return to the seminal question, which is whether the market expectation to which the Financial Secretary referred as the basis for the interest rate rise component in the RPI all-prices index used to "revalorise" the hydrocarbon oil duty is a bond yield-based measure or a judgmental measure based on the forecast of someone in the Treasury. That is vitally important. To refer to the question by the hon. Member for Broxtowe (Dr. Palmer), whose constituency I temporarily forgot--
Mr. Graham Allen (Nottingham, North): Labour gain.
Mr. Letwin: The hon. Gentleman and I are fast becoming pals.
The hon. Member for Broxtowe rightly referred to asymmetry; it is probably true that if the Treasury, with or without the approval of the National Audit Office, builds those estimates into its forecast of the RPI all--prices index as a bond yield-based measure--even where genuine market mistakes, in the sense of impact on long-run bond prices, occur--they will probably turn out to be symmetrical over time. I say that without empirical proof but simply as a matter of theory. I take it that there is no inherent bias in the market and therefore that, over quite long periods, the taxpayer ought to end up just about even stevens on hydrocarbon oil duties, compared with genuine ex post inflation measures, if the market measure is used. If, however, the Treasury has simply made a judgmental insertion into the forecast of the RPI all-prices index, there may be--this comes back to the point raised by the hon. Member for Broxtowe--a systemic bias, making it all the more important to know whether there will be correction and whether we have an implicit escalator in the hydrocarbon oil duty increases. The Treasury is not just the body that sets the hydrocarbon oil duties through the Finance Bill; although no longer responsible for the setting of interest rates, it is also a main player. It is at least the second most important player in the land in determining macro-economic policy--and since the Chancellor sets the RPIX targets for the Monetary Policy Committee, it could be argued that it is the most important player in that. If the Treasury had put in a judgmental measure, that would convey--bizarrely in the case of indexing hydrocarbon oil duties, for example--a signal for the markets.
There is therefore a problem of feedback when talking of a market expectation and it is extremely important for the Financial Secretary to recapitulate several points. First, what is the figure for the mortgage interest rate rise component in the RPI all-prices index forecast that yields the 3.41 per cent. being used for that indexation? Secondly, what is the basis upon which that estimate of the interest rate rise has been made? Is it a judgmental measure or a bond yield differential measure? Thirdly, at which date was the forecast constructed? Finally, what measures will be taken in the light of the Chancellor's remarks that there will not any longer be an escalator in the hydrocarbon oil duties to ensure ex post that any over-egging of the rises will be removed?