Select Committee on Liaison Minutes of Evidence

Examination of Witness (Questions 200-219)


3 JULY 2008

  Q200  Mrs Ellman: The price of oil has now reached over $145 per barrel, petrol is 118.9p per litre and diesel, the second-highest in Europe, is 132.3p per litre. What specific work have you commissioned to look at the impact of these ever-rising prices on the economy and on businesses?

  Mr Brown: Well, we have not only looked at the impact, but we have, for the time being, frozen petrol duty.

  Q201  Mrs Ellman: No, no, I am asking you what work have you commissioned to look at the impact of this on businesses and on the economy?

  Mr Brown: Well, we are looking at that everyday. When you look at the effect that the price of oil has on other consumer spending, when you look at the effect that the price of gas and electricity has on the household bill and then of course when you look at the effect it has on industry generally, these are studies that we are doing everyday, and rightly so, but I was answering about what we have actually tried to do to alleviate some of the problems. We have frozen petrol duty most years since 2000 and we froze it in the Budget and, at the same time—

  Q202  Mrs Ellman: No, I want to know where you are identifying the specific problems that have arisen from this situation and then how you are addressing them. If you had to look at the specific areas, not what you have done in the past or what you have not done in the past, where are the problems now?

  Mr Brown: But, if you are asking me about the source of these problems, it is essentially that demand exceeds supply. That is the essential problem that has got to be dealt with in a rising population and of course the rising prosperity of some people in different parts of the world, like Asia. If demand exceeds supply, and it is likely to exceed supply for years to come, then people will expect the oil price to rise.

  Q203  Mrs Ellman: No, what I want you to answer, Prime Minister, is: where are the specific problems in the economy here now, which particular groups of people are being affected the most and what are you going to do about it?

  Mr Brown: Well, obviously those people, households, who are on the lowest incomes are hit most when food and energy are a very high proportion of the money that they have to spend. That is why we have taken action with the Winter Allowance to raise it yet again for elderly people and that is why I was referring to the deal that we have done with the utility companies, that they will give more help to low-income households, especially those who are paying higher costs for their energy than many other people because of the way that they consume energy, and we are always determined to do what we can to help those who might be people who suffer from fuel poverty.

  Q204  Mrs Ellman: So this is something you are looking at all the time?

  Mr Brown: Indeed, and will continue to do so and, if we can take measures that will help people cut their energy bills by using energy more efficiently or finding a way that we can help them cut the consumption of energy, we will do so.

  Q205  Mrs Ellman: One of the key questions for the moment of course is whether you are going to increase fuel tax duty, as you have said you will. Now, the Treasury are saying that the matter will be considered in the autumn and the decision will be taken based on economic and social factors. What are those factors?

  Mr Brown: Well, I think exactly the same factors that have led us to previous decisions. You have got to be conscious of what is happening to the oil price itself, what then is the effect on the cost of diesel and petrol and the impact that that is going to have on the economy as a whole. I think you will find in most years since 2000 that the duty has actually been frozen.

  Q206  Mrs Ellman: In view of what you know now, are you going to increase fuel duty or is it better that you say now that you are not going to?

  Mr Brown: I can say now that that is a decision for the Chancellor and he will make his decision in due course.

  Q207  Mrs Ellman: Are you seriously saying, Prime Minister, that the Chancellor will take that decision in isolation from the Prime Minister?

  Mr Brown: Not at all, but the Chancellor will take the decision looking at all these factors that I have just told you are borne in mind, and I think it is right, having frozen duty in April, that he has time to review the situation and then make his announcement before the time at which duty will go up.

  Q208  Mrs Ellman: Based on what you know now, will you be putting it that it should be increased?

  Mr Brown: I am not going to make a forecast, but it is clearly a matter that will be looked at very, very carefully over the next few weeks.

  Q209  Mrs Ellman: The Government have said that the policy on fuel taxes is to do with addressing the external costs of pollution and to fund public services. Is that still the Government's policy?

  Mr Brown: One of the problems about the whole energy market around the world is the subsidies in China, Asia and in the oil-producing countries, so you have a very unbalanced market where people can buy oil without knowing the real cost of it economically. We also have to take into account the cost to the environment and that is one of the reasons why successive governments have wanted to look at the cost of fuel in relation to its effect on the environment.

  Q210  Mrs Ellman: Yes, but is what you said at the time of the Budget, that fuel taxes are to be based on the external costs of pollution and to fund public services, still government policy in the light of current developments and current public concern?

  Mr Brown: Well, of course these are some of the issues that will be taken into account when the decision is made and it is right to look at the effect of oil consumption on pollution and it is also right to look at the balance of taxes as they affect our ability to provide public services.

  Q211  Mrs Ellman: One of the other concerns is to do with the increasing numbers of Continental vehicles, haulage vehicles, coming into the UK and, according to the Freight Transport Association, the costs of foreign lorries working in the UK are actually 10 to 15 per cent less than UK-based operators working in the UK. Now, decisions have been taken in Europe which mean there will be increasing numbers of Continental hauliers working in this country. In view of that, why did the Government state that they were not going to go ahead with the vignette scheme so that those hauliers could help to pay for the costs of using the roads here?

  Mr Brown: The problem about that scheme is that the capital costs of introducing the new proposals were so great that it would have cost us more to introduce the proposals than the amount of money it raised. As far as Continental hauliers are concerned, I think you have also got to look at the fact that there are higher VAT rates in these countries, there are higher social insurance payments in these countries and there are higher taxes in these countries, so I think you have got to balance that off against the costs of fuel.

  Q212  Mrs Ellman: So, when the Freight Transport Association make this statement, are you saying that that is wrong?

  Mr Brown: We have had lengthy discussions over time and there has been previously a transport forum when these issues are looked at and I would very much like for the Department for Transport to have talks with those people concerned about the freight industry and hauliers generally, but I think you will find that the Continental costs of operating, particularly from many of the countries from which they come, are, in VAT, social insurance and general taxation, higher than they are in Britain and that is balanced off against the costs of fuel.

  Q213  Mrs Ellman: When you say that the study that the Department for Transport commissioned on introducing the vignette scheme in relation to hauliers would cost more than the amount of money it would save, over what timescale?

  Mr Brown: Well, it would take a very long time for it to pay back the costs of the initial investment in it.

  Q214  Mrs Ellman: How long?

  Mr Brown: Well, I cannot remember the exact details. I dealt with that when I was in the Treasury about two years ago, if I remember rightly, and I am very happy to send the Committee the figures, but it was a very expensive capital cost to introduce the scheme in the first place.[1]

  Q215 Mrs Ellman: But, in view of the current situation and the current disquiet, do you not feel that is something you should revisit?

  Mr Brown: Well, it is obviously something we would continue to look at, but I think we have got to be aware of the very big costs of introducing the scheme in the first place.

  Q216  Mrs Ellman: But do you not think you should look at the benefits and at the anger that there is now in the absence of a scheme or an equivalent and, if you are not going to have such a scheme, why is there not something else?

  Mr Brown: Well, I think there has been discussion on other possibilities and I do say that the debate and the dialogue between the freight industry, the hauliers and the Government about these issues should continue, and I would be very happy to make sure that it is expedited.

  Q217  Michael Connarty: One thing which has not been covered, Prime Minister, when I was at the last meeting with members of the UK oil and gas industry, their chief executive said that "the Prime Minister and Chancellor are sitting on a big, fat windfall from production tax from the North Sea". Why is it not going to be used to relieve some of the problems that you have been discussing in the past 30 minutes?

  Mr Brown: I was trying to explain yesterday in the House of Commons that essentially, when you have higher costs for oil, it is true that, if you have North Sea production delivering oil and you tax it, there is additional revenue, although production in the North Sea has not been increasing. However, that is offset, when oil prices are high, by the fact that people spend less on other things and, therefore, VAT revenues go down, people spend less on property as a result of some of the things that are happening in the economy and your stamp duty receipts go down and companies tend, with a few exceptions, to make less profits and, therefore, your corporate tax receipts go down, so the effect of a rise in the price of oil is that it affects the rest of the economy in such a way that you usually have lower receipts overall than you have higher receipts and that is the impact of high oil prices.

  Malcolm Bruce: Thank you, Prime Minister. You can see that oil and food prices are not going to go away and your political challenges will intensify. Thank you.

  Chairman: We now move on to managing the economic slow-down. John McFall?

  Q218  John McFall: On the theme of oil, Prime Minister, can I add that it is reported that both presidential candidates in the US say that action is needed to rein in speculators in the oil market. If so, what action are you taking? I would remind you of what Joe Lieberman said when he said that they are a "significant contributing factor to the economic distress now being felt by American consumers every time they stand in the grocery store checkout line or pay for a fill-up at the gas pump". Lieberman is very close to McCain, and Obama has also made these points. What are you going to do about the speculators?

  Mr Brown: Well, we are looking at this, the Treasury is looking at this and the Financial Services Authority is looking at this, just as the US authorities are looking at it and the European Union, so, if there were any market manipulation, it would be exposed and we would take action.

  Q219  John McFall: But, Chancellor[sic], the Financial Services Authority are not looking at it yet. I had Lord Adair Turner before my Committee yesterday, the incoming Chairman, and I pointed out to him that the Americans are saying at the moment that there is a `London loophole' in oil futures market trading and artificially boosted prices, and indeed the Commodity Futures Trading Commission, the chief futures regulator, imposed limits on the US last week on the size of speculative positions that could be taken on the London futures market, so there is a real problem here. I am going to have an inquiry in a couple of weeks, one session, on that, but we really need some action because it was reported that there is $260 billion of speculative money in the oil futures market.

  Mr Brown: I have looked at that, I know what you are talking about and there are these inquiries going on, but I would say to you that, in an oil market where demand exceeds supply today and tomorrow and people expect it to exceed supply next year and for a few years afterwards, that is the primary reason why the price is going up. We have got to have measures that both make more efficient the use of oil itself so that you can actually reduce consumption where it is possible to do so and increase supply from other sources by reducing the dependence on oil, so you cannot put down to speculation the whole of the problem that we are dealing with at the moment; there is greater demand than there is supply and that is why we have got to take economic action to deal with that.

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