Examination of Witnesses (Questions 260
- 273)
WEDNESDAY 7 DECEMBER 2005
MR JON
CUNLIFFE, MR
DAVE RAMSDEN,
MR TONY
ORHNIAL, MR
JOHN KINGMAN
AND MS
MRIDUL BRIVATI
Q260 Ms Keeble: So the figures you
set out previously about the commitment on pensions on age related
spending, where you have a commitment on pensions which is quite
a substantial one, that includes pension credit at earnings indexation?
Mr Cunliffe: Do you mean in this
report?
Q261 Ms Keeble: Yes.
Mr Cunliffe: In this report we
are not setting out public finance forecasts of decisions. This
report is an illustrative report which looks at a range of scenarios.
It takes the most cautious scenario because it is designed to
look over 50 years and says, "If it was indexed to earning,
then what would it look like", but the policy decision has
not been taken. The policy decision will be taken on affordability
grounds in the way all public spending decisions are taken, and
they will be taken at the next spending review.
Q262 Ms Keeble: So that will make
things very much worse? If it was indexed to earnings it would
make it very much tighter?
Mr Cunliffe: If you index it to
earnings, it costs more than if it was indexed to inflation, but
all of public expenditure control is about dealing with pressures
and deciding policy.
Q263 Ms Keeble: How about the cost
of the citizen's pension?
Mr Orhnial: The only estimates
we have are the ones in the Turner Report. The proposal is to
give a citizen's pension, as it were, give universal rights to
pensions, for people from the age of 75 starting from 2010. Then
after that, there will be under that particular ideal scenario,
as Turner calls it, accruals at a universal rate thereafter, so
a rising cost. In the Turner package, at 2020 that is costed,
I believe, at an additional £2.4 billion, which adds to the
£14 billion that the rest of the package costs.
Q264 Ms Keeble: That is not included
in this 5.2 chart?
Mr Orhnial: No, none of that is
there. Those are Lord Turner and the Commission's estimates of
their options. None of that is in there.
Q265 Ms Keeble: So that would make
all of this very much tighter?
Mr Orhnial: Yes, it is a lot of
money.
Q266 Peter Viggers: Two points on
oil company taxation; North Sea. The first point is that I put
to you a proposition that oil and gas companies are international
and need to maintain their dividend cover, and it follows as sure
as night follows day that increased taxation will lead to an increase
in petrol prices at the pump. If you accept that, what estimate
has the Treasury made of the increase in the cost of living as
a result of the increase in oil taxation proposed in the Pre-Budget
Report?
Mr Ramsden: Can I start on that.
Oil is set internationally, it is set on global markets. Oil companies
are price takers for that. Given the tax system we have for oil,
that is what drives a set-up when, given that capital expenditure
can be set off at 100%, higher oil prices coming through is effectively
an economic rent, and that is something that after the reforms
which were done in 2002 independent analysts such as the IFS drew
attention to, so we were moving towards more a cash flow system.
We gave a summary in the PBR documentation in Chapter 5, which
was underlaid by an awful lot of considered research before we
made this change, and underlying it was detailed analysis of the
improvements in rates of return of oil companies following the
sustained increase in oil prices which we think will be carried
through into the medium-term. Given that we were saying that rates
of return pre-tax have risen to about 40% and that compares with
non-financial company rates of return of 13%, I do not think it
follows that prices get passed through to consumers in the way
you are suggesting. I think there are margins there that can be
squeezed whilst still keeping profitability in the North Sea and
investment in the North Sea highly profitable.
Q267 Peter Viggers: So you are assessing
this, as it were, as a free good? There will be no increased cost?
Mr Ramsden: No, we are not assessing
it as a free good at all. We are assessing it through a very considered
analysis of recent trends in oil prices and we think there is
a consensus on this—and it is something that Lord Brown
said in a debate in the House of Lords in July—the days
of 20 dollars a barrel oil have gone. We think we are into a new
medium-term structurally higher position on oil prices. We think
investment in 2005 was at very high levels, the highest since
1998, and that is both in exploration and on-going development.
Given that context and against the backdrop of very high levels
of profitability, we think that the measure we have introduced
strikes the right balance. That is a full analysis of the effect
on the oil companies.
Mr Cunliffe: On the point of whether
it is passed through, if you tax something then the effects of
that tax are shared between the shareholders, labour and the consumer,
and they can go all different ways. I guess in a very closed market,
where things produced in one country are only consumed in one
country, and the shareholder and labour do not take their share,
you get this one to one. But actually the oil produced in the
North Sea is part of the global market and the idea that somehow
it is going to feed back to higher prices at the British pump
because it was pumped out of the North Sea (a) ignores the fact
that shareholders are making very large returns and (b) ignores
the fact that people source their petroleum and their oil products
from the global market. So I would not see that relationship holding
up.
Q268 Peter Viggers: I am drawing
on 25 years' experience as a chairman and director of an oil company,
and I think the price will be passed on and the Treasury does
not agree. We will leave it there.
Mr Cunliffe: You think the price
will be passed on to the British consumer?
Q269 Peter Viggers: Ultimately the
British consumer.
Mr Cunliffe: But not to consumers
in other countries? Or that companies would not source cheaper
petrol from abroad?
Q270 Peter Viggers: I appreciate
we are moving into global markets—
Mr Cunliffe: This is the most
global market.
Q271 Peter Viggers: I would submit
that if you put an impulse of 6.5 billion over three years on
oil companies operating in the North Sea, this will mean oil prices
in the United Kingdom at the pump will be higher, but let us pass
on. What is the Treasury view of the relationship between the
taxation of oil companies and their willingness to invest in the
North Sea?
Mr Ramsden: We have done a very
considered analysis in the Treasury, and if you look at recent
trends—I was talking about investment over the last 10 years—we
cannot discern an impact on investment from the reforms that were
introduced in 2002. Where we introduced the supplementary charge
of 10%, we cannot see a discernible impact on investment. Investment
has been lower than in the 1990s for some years but that trend
started before 2002. What we are clear about is that investment,
and particularly exploration investment, does seem to be linked
to the oil price. So this picture we now have that the oil price
is going to be sustained at a higher level in the medium-term
does seem to be feeding through into the amount we are seeing
of exploration and appraisal, where I think the trade estimate
shows that for 2005 drilling 82 wells compared to 70 wells was
the estimate back in July. So just in the space of three months
there seems to be an effect which is driven more by global trends
in oil prices than tax. We have done an analysis looking at what
we think will happen to rates of return—and I know the industry
is also doing analyses, both individual companies and also the
trade associations—and we are confident of our analysis
of 68 new plans with maybe one at the margin which might go as
a result of changing the supplementary charge, but that is out
of 68. So we are pretty confident. We would not be doing this
if we thought it was going to have an effect on investment. We
think the sustained projection of higher oil prices in the medium-term,
plus all the other factors which make the North Sea a good place
to invest, will still apply, and that this change in tax from
10 to 20% on supplementary charge—remember with some of
the new mitigating effects particularly the deferral of 100% tax
allowances in 2006 but also the new measure to encourage smaller
new entrants—will sustain good investment in the North Sea.
Q272 Chairman: Thank you very much.
Mr Cunliffe, on the Today programme this morning there
was a piece about Nigeria and an £18 billion debt write-off.
It was stated that they are writing a cheque for £1.8 billion
to the UK Government and the net effect of that, and maybe other
issues, will be that the UK receives more from Africa than it
is giving in debt write-off. Do you have any information on that
for me?
Mr Cunliffe: The deal which was
done with Nigeria is a landmark deal because the issue of Nigerian
debt has dogged both Nigeria and its creditors for over 20 years.
It was a deal in which the Nigerian debt was written off, or a
large proportion of it, 60%, and the Nigerians agreed or decided
that they wanted to buy the remainder back at a discounted rate.
So for them it was a pretty strong deal, particularly as Nigeria
is an oil exporter and has a huge amount of revenue coming in
at present. That deal was not only supported by the Nigerian Government,
the Nigerian Government wanted to use its oil revenues in that
way because they felt that would prevent them being used in other
ways which might be less beneficial because of the story of Nigeria's
credit rating. Nigeria does not come under the HPIC definition
of a highly indebted poor country. The UK wrote off all its debt
to highly indebted poor countries several years ago. The debt
initiative we now have for highly indebted poor countries is the
UK making higher contributions to the World Bank and the African
Development Bank to pay for bad debt to be written off, but Nigeria
is at a rather different stage. This was the debt deal which Nigeria
sought.
Q273 Chairman: There is a view that
the UK has got more back than it is giving in debt write-off and
Vince Cable was on and he supported the Government, but there
was this question left at the end that it does not look very good.
Can I prevail on you for a letter, so we get that issue in detail?
Mr Cunliffe: Certainly.[9]
Chairman: It is very important. Thank
you and your colleagues for this afternoon. We have not got any
more requests for letters, have we? We thank you for your evidence
this afternoon, it has been very helpful. What I forgot to do
at the beginning was to congratulate you on your appointment as
Second Permanent Secretary. You have been very helpful to us in
the past and, from what we have seen today, you will continue
that. Congratulations and best wishes in your new job.
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