Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 260 - 273)



  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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