HOUSE OF LORDS
House of COMMONS
MINUTES OF EVIDENCE
JOINT COMMITTEE ON THE DRAFT GAMBLING BILL
Tuesday 13 January 2004
PROFESSOR LEIGHTON VAUGHAN WILLIAMS, MS BRIGID SIMMONDS,
MR IAIN WILKIE, MR JOHN KELLY and MR JIM TWOMEY
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Taken before the Joint Committee on the Draft Gambling Bill
on Tuesday 13 January 2004
Mr John Greenway
Donoughue of Ashton, L
Faulkner of Worcester, L
Wade of Chorlton, L
Mr Alan Meale
Mr Richard Page
Dr John Pugh
Memorandum submitted by Business in Sport and Leisure
Examination of Witnesses
Witnesses: Professor Leighton Vaughan Williams, Nottingham Trent University, Ms Brigid Simmonds, Business in Sport and Leisure, Mr Iain Wilkie, Ernst & Young, Mr John Kelly, Cross-Industry Group on Gaming Deregulation, and Mr Jim Twomey, Pion Economics, examined.
Q305 Chairman: May I welcome, first of all, Professor Leighton Vaughan Williams; Brigid Simmonds who is representing Business in Sport and Leisure; John Kelly who is representing the Cross-Industry Group on Gambling Deregulation and who is accompanied by Jim Twomey of Pion Economics; and also, last but by no means least, Mr Iain Wilkie from Ernst & Young. We also have here Elliot Grant from the Department, from the bill team, whom we can consult, should any point on what is in the bill become contentious, for clarification. Could I also ask you to note that a transcript of this meeting will be produced and placed on the internet. In the extremely unlikely event of a division, the Committee will suspend for ten minutes and the public gallery will be cleared, but I do not anticipate any division this morning. Could I also ask you to note that a full declaration of interests was made at the beginning of the first meeting and information for the public and a note of members' interests is available. On that - and I am not sure it is an interest - could I make the observation that Brigid Simmonds and I sit as trustees together under the Register of Exercise Professionals of which I am the honorary Chairman. Could I remind witnesses and members of the Committee to speak up as the acoustics are not good here. On a point of information, the second witness session this morning will be with the Minister John Healey, who is in standing committee until 11.25. We expect to begin to take evidence from him at around 11.30/11.35. It is my intention, if we can get through the business with these witnesses, that there should be a brief pause in between but not a formal suspension of the Committee. Could I also make the observation, as there are five of you: please do not feel that you should all make a contribution in answer to every question. Some of the questions will clearly be directed at particular witnesses but if any of you has an additional point to make we would wish to hear it. The Cross-Industry Group and Pion report, the Gambling Deregulation Impact Study, suggests that the modernisation of gambling legislation will be very beneficial for job creation, public finance contributions and inward investment. Gentlemen, how accurately can you estimate the likely increase in demand and spending if the provisions in the draft bill became law? By what methods do you think the growth in gambling spend should be estimated?
Mr Kelly: Mr Chairman, the issue we have to respond to on that - and I make the point very firmly - is that the Pion report is not a forecast. I think that is fairly key to everybody's evaluation of it. It is an economic model based on a base case which has been delivered by the members of the Cross-Industry Group to Pion, and Pion have then extrapolated that base case forward. So it is not a forecast; it is a mathematical economic impact document. We are not suggesting that this is a forecast of what is going to happen. This is, if you like, an equation by which we arrive at certain conclusions regarding the possible impact of deregulation. I think we would freely admit, therefore, that there is nothing we could say which would convince the Committee that this is an absolutely accurate estimation of what will happen. This is our best view, given the aggregate investment intentions of the Cross-Industry Group, delivered to Pion. Pion have then made certain assumptions on the basis of the aggregate investment intentions that they have taken from the group and have then moved forward to arrive at the conclusions of which I know you are aware. However, I would make the point, I think, that we believe, because of the make-up of the Cross-Industry Group, because of the experience and because of the business expertise of those within the Cross-Industry Group, this is a pretty robust base case. So I would say that, although this is not going to be accurate to the nth degree, generally the Cross-Industry Group believes that, although this is an independent document, it is an independent document based on good assumptions. My view is that there will be other views; those views will be defensible. We are here to give information to the Committee on the Pion report and the Cross-Industry Group has mandated me as their spokesperson because they do have confidence in the way that the Pion report has been compiled. That is a short answer to your question but I do not know whether Jim Twomey would like to add to that from the perspective of the author of the report.
Mr Twomey: Mr Chairman, in response to the second issue you have raised, in terms of forecasting, I think we are in a terribly difficult situation here, in the sense that we are facing what could be a very complex structural change in the nature of the industry. I think, therefore, that concentrating on previous transient patterns is useful but may not actually give us too much in the way of information because of the nature of the change that is about to take place. In our report, quite clearly, we have looked at some of the evidence from other jurisdictions which has formed part of the process and we have taken quite seriously the perspectives and the investment intentions of members of the group, because at the end of the day, I think, these are the people who are standing by, willing, ready and able to make concrete investment decisions based on strict and sound commercial principles. If the Committee is looking for a way of forecasting the future, I would advise the Committee to stop at that point. It is a complex issue and a range of considerations come to form the perspective of the future.
Professor Vaughan Williams: I would make a semantic point really: an economic impact study effectively does forecast - or at least anyone who reads it will say, "This is what is going to happen." How is it different? I am not convinced that it is. I am also a bit more confident that you can predict, than these two witnesses on my right. For instance, when my team and I produced the consultation for the Customs & Excise prior to Budget 2001, we had to look at the impact of a radical change to the structure and nature of taxation in this country. On the estimates that we made (according to Customs & Excise's own report): Exchequer receipts, after one year, were within one per cent of our initial projections. That was a forecast based on econometric and economic techniques. So I say it is possible to forecast. Sometimes it is harder, sometimes it is easier, it does not mean that every study is going to be right or even that any study is going to be right, but I just think I could be more optimistic that we can gauge what is going to happen, that we can use economic impact studies, than the two gentlemen who spoke before me.
Q306 Chairman: At the moment the law does not allow demand to be stimulated and proof of need always comes across as a major requirement of licensing of new premises. When that changes, have you taken into account in these studies what stimulation might be?
Mr Twomey: Yes, indeed, we have. We had a very long and detailed discussion within the group of the nature of the participation once certain of the restrictions you are talking about are removed. We have had very detailed discussion and the nature of the content of the report here details that the group came to a decision that participation in casino gambling would increase from round about three per cent currently to about ten per cent over the course of the first five-year period.
Q307 Chairman: Estimates of the likely increase in spending and employment vary greatly. The DCMS has estimated that modernisation will lead to an increase of spending on gambling. Your report suggests £2.2 billion. How do you account for such discrepancies?
Mr Kelly: There are variances as opposed to discrepancies, Chairman. Excuse me getting into a semantic debate on this - and I do not intend to - but I think the issue is that there will be different views. We have taken the views of a significant number of both domestic and overseas operators, so we have blended the experience of the way that we believe the consumer will respond to a new landscape, new gaming environment. We have taken a view, as Jim has mentioned to you, about how they will respond in the light of other experience in other jurisdictions. Through that process, by establishing that base case and moving forward and arriving at some conclusions, we absolutely accept that other people may take different views about the way that they respond. I think the point Jim made is an important one: we are talking about a structural change in the landscape here. This is not necessarily just playing in the margins of an environment of legislative changes; this is a structural change and, therefore, I think we would all accept there are going to be different views as to how the consumer might respond. One key one is, of course: Will the participation rates in the adult population in casinos, for instance, move from three per cent to ten per cent? That is, to an extent, a subjective figure. It takes into account the experience in other jurisdictions but that is a very sensitive number. If that number were seven per cent or if that number were 12 per cent, the economic conclusions would be dramatically different.
Q308 Lord Brooke of Sutton Mandeville: When we were in Blackpool on an informal basis before we started taking formal evidence, we cross-examined the North West Development Team about a forecast which they were making about particularly the increase in jobs that would be involved. When we asked the supplementary question: How many jobs would be lost? - in other words, what degree of substitution is occurring - they referred us to you. Would it be possible for you to let us have a note - not now, but in writing afterwards - as to how that calculation came out?
Mr Kelly: I am sure we could do that. We would be happy to.
Q309 Chairman: We are going to come on later to potential displacement. It is a question that it is easy to push to one side. There is bound to be some balancing.
Mr Kelly: We will provide a note, Mr Chairman.
Chairman: Thank you very much.
Q310 Lord Wade of Chorlton: We have received evidence suggesting that, while some sectors of the industry will gain greatly from the proposals, others will suffer serious economic harm. What impact are the proposals in the draft bill likely to have on the existing industry?
Ms Simmonds: Lord Wade, if I could pick that up, I think the studies that we have done have shown that bookmakers and pools are unlikely to be affected by the Gambling Bill, but, because many people travel to bingo, there will be an effect there. We have supported the British Beer & Pub Association submission, which shows that pubs without full machines of right could lose as much as 20 per cent of their custom, which will put some of those marginal outlets out of business. Certainly Business in Sport and Leisure thinks it is terribly important that this is a balanced bill. Balance is not only about expansion but about controlling what we have now. It is quite clear from the intentions of the Government that people will have to control access to machines in various premises. It will have to make sure that they are properly managed. It will not be good enough to show that it is done by CCTV. Certainly all our members are very clear that social responsibility in this area is hugely important. It is getting that balance right, between the economics of what you are going to take away and actually seeing the expansion that is important.
Q311 Lord Wade of Chorlton: Are you satisfied that the balance is being struck?
Ms Simmonds: I certainly think we would support the BBPA, that pubs should have full machines of right. There is very little evidence to suggest that they have caused a problem in the past, why are you therefore making a restraint on something that is not causing a problem?
Q312 Lord Wade of Chorlton: Following on from that, the Pion impact study for the Cross-Industry Group notes that "increasing casino gambling may have some substitution effects on bingo activity." You have already commented on this. How significant do you think this could be?
Mr Kelly: I think, Lord Wade, we have said that about ten per cent of the additional spend that will come out of the deregulation (which is not related to increased income and therefore is just related to deregulation itself) will come from bingo. If you then transmit that over to bingo earnings, that is some way between seven and ten per cent of bingo spends could well migrate into the wider gaming landscape as a result of the proposed legislation. Having said that, I have the honour of being responsible for the country's largest bingo operation and my view is that bingo is an enormously robust business. It is embedded in the social infrastructure of the UK, it has a great part to play. I would say that, wouldn't I? - it is a major part of my business - but I am not personally projecting that there is going to be a significant impact on bingo. I believe that having a wider opportunity and high volume/low ticket gaming for a greater part of the population, without the barriers to entry which currently exist - and of course the proposed legislation is suggesting they would be removed - could in many ways benefit bingo. So I take perhaps a less bleak view but I understand entirely from an economic impact document perspective and from Pion's perspective that they had to make certain assumptions about migration. I hope that puts it in context in terms of my view on it.
Q313 Lord Wade of Chorlton: Because of your involvement, how do you think the actual bingo industry is likely to respond to these feelings?
Mr Kelly: I think it will be patchy. I do not think one can say it is going to be homogeneous activity across the whole of the UK and that different parts will change. It depends very much on the deployment of the new opportunities and new offers across the UK landscape. I am just intuitively, instinctively, hugely confident about the bingo business. I have worked with it long enough to know that our customers are enormously committed to this product. I do not necessarily see an enormous migration from what is a very specific and very well-defined product and environment into what will be a totally new and different environment. That is not the way that heretofore our patrons have behaved, and therefore I think there will have to be a response in terms of the bingo industry being aware of how it should conduct itself in a new gaming environment but I do not think that necessarily means to say it will be in distress - in fact, I would think quite the opposite.
Lord Wade of Chorlton: Thank you.
Q314 Chairman: Is it not a real concern that some bingo opportunities will be lost if the bingo club becomes a casino?
Mr Kelly: I think that is an issue, Mr Chairman, and I accept that entirely. Equally as much, I think, you could talk to a number of different bingo operators across the landscape and some would say they believe that a significant proportion of their bingo clubs should be transferred to casinos and others would not. My personal view - and I am not talking now about the Cross-Industry Group but of my own personal view, because you have put the question to me - is -----
Q315 Chairman: We will look at that when the bingo people come to talk to us. Professor Vaughn Williams wants to answer the question and then Lord Mancroft has a supplementary
Professor Vaughan Williams: If I may answer this question more generally. I have conducted an extensive review of the international literature on substitution effects within the gambling industry between one form of gambling and another. If you look at the US work, there tends to be an agreement that the expansion of slot-machines there has been associated with a reduction in lottery revenues, the strongest displacement effects being found for the big-prize lottery games. My own research into the UK markets supports this analysis. I have found that gaming machines and casino gambling are substitutes for lottery spending, at least up to this point. I have found only weak evidence, however, of substitution between casino and gaming spend and betting and only weak evidence to date of a substitution effect between gaming activity and bingo activity.
Q316 Lord Mancroft: You have not mentioned at all the issue of remote gambling. We are going to end up presumably with a brand new and enhanced remote gambling industry, probably leading the world. Bearing in mind the massive change there has been between high street retailing and internet shopping and the extreme change in casino establishments in a very short period of time, what effect is the arrival of a considerable remote gaming industry going to have on the terrestrial industry?
Ms Simmonds: I think it partly depends on how it is regulated. Gambling is available on every internet site you visit now - in fact, I am horrified in some cases, if I visit sites educationally for my children, to be offered that opportunity to gamble. I think we are all agreed that it is hugely important that internet gambling is well regulated, because only if it is well regulated, and those who regulate their sites well are encouraged by the regime to come here, will it work and we must take action against those who are not well regulated. I think only time will tell. As an overall theme, if you see gambling as part of leisure - which we very much do - leisure is fashion-led and fashion changes. You will get changes in fashion and you will come back to change. If you look at the cinema industry, the enormous expansion of cinemas did not mean that we shut down every small cinema; it actually increased the number of people who went to the cinema. I think you will see that change in gambling as well.
Mr Wilkie: I think remote gambling is here already. There are already, it is said, in excess of one thousand internet casino sites. For those to be strongly regulated is a real positive. At the moment, UK operators are not able to get an online casino licence regulated in the UK. It is a question of trust for the customer. I think the customer will be more attracted to an online casino which they know is strongly regulated and that regulation is enforced. I think that regulation also needs to be tied into enforcement around advertising codes and enforcement around broadcasting codes. I think that enforcement then protects those operators who do come onshore, and who are accepting and, indeed, supportive of strong regulations, which means that those who stay offshore and do not accept strong regulation therefore have to be taken to task over that - unlike the existing situation. In summary, I would say it is a very positive thing to bring remote gambling regulation into the UK, so long as it is of a high level and it is strongly enforced.
Q317 Lord Mancroft: But you do not see it as having a negative economic effect on the industry.
Mr Wilkie: No.
Ms Simmonds: No.
Q318 Mr Meale: Mr Kelly, you have described the bingo industry as being very robust and one which will adapt. Taking the Chairman's question a little bit further, the bingo industry has probably the best voluntary code in the whole gambling industry in how it supports and redistributes back monies to the customers - about 11 per cent, I think. If bingo establishments do adjust into casinos or a bit of both, do you still see the industry retaining that voluntary code of redistribution and support?
Mr Kelly: Absolutely. I think there are some key characteristics of bingo which you have just articulated - one of them in particular. I think that is not just a cosmetic characteristic, I think it is absolutely inherent in the offer and why that offer has been so robust and so defensive, if you like, over the past 20 to 30 years. It is an intrinsic part of the product offer and I do not think that will change one iota in a revised environment.
Q319 Mr Meale: I think that is very comforting, but do you think that from the casino side they will equally match that statement you just made?
Mr Kelly: I cannot say on behalf of the Cross-Industry Group because we have not had that debate specifically about how individual companies will operate their businesses, but there will still be a significant degree of regulation of casinos. That regulation will be in many ways economically led in terms of the returns to customers. One of the things we have to be very clear and have been clear on in the casino industry for a number of years now is that one is transparent about what the return to the customers can be. I would not see that changing one iota in a revised environment. I do not know, bluntly, any fellow operator of casinos who would want to change that. I think that is a very important part of our relationship with our customers as well as part of the regulatory environment.
Q320 Mr Page: If I could take you back to the question Lord Mancroft started on remote gambling, we see remote gambling going up day by day but it is also highly mobile. If we get the balance between regulation and taxation wrong, then, zonk, it is gone somewhere else around the world. How do you see the Government getting that balance right and in such a flexible fashion that, if there is a world alteration, the Government can react quickly enough to make sure that remote gambling stays in the UK and the revenue stays in the UK?
Mr Wilkie: I think, from the operators' perspective, they know that people will use their sites if those sites are trusted, in that the games are fair, they will be paid out if they win and their credit card details are secure. If you can create for the player and the operator, and, indeed, the investor, an environment where it is known to be a strong and trusted environment, that outweighs to some degree the advantage of lower taxation regimes elsewhere. I think there will always be companies, as, indeed, there are individuals, who do not like paying any tax. To an extent, I am not sure you can really gear the proposals to those individuals. Whatever you do in the UK, they will stay offshore because they do not want to pay tax. I do not think the majority of the UK operators fall into that. I think they recognise that there is an obligation to pay some tax but, equally, if they do come onshore and they take advantage of that trusted and respected regime, the other side of it is that that regulatory regime has to be properly enforced. I do not think you can expect people to pay tax and to fit in with advertising codes (which are going to be very important, whether it is PC or television gaming or remote gaming) or broadcasting codes and to comply with those, if you are not prepared to enforce those codes and the regulation that also fits around that.
Q321 Mr Page: I am sure you are aware of the concerns being expressed by the industry in the UK over the way in which betting exchanges could be used by internal insider dealing to the disadvantage of the ill-informed or uninformed punter. I wonder how you feel the Government should react on the whole question of integrity of betting exchanges - whether it is a role for them at all or whether it is for other people.
Ms Simmonds: In our evidence we supported quite clearly the role of bookmakers, that betting exchanges should be regulated, not in the way that they are going to be regulated at the moment but that they should be fit and proper in all the other ways that everyone else is regulated and, indeed, bookmakers are. I do think that is an important part of taking that industry forward. One of the interesting findings of public perceptions of the E&Y study was that something like 90 per cent of people considered that playing sport was more important than watching it but, of those who watched it, 47 per cent thought it was more exciting if you actually placed a bet on it. I think that is where you are going to see an increase in remote activity.
Q322 Mr Page: If I may follow up on that, we had a visit to BetFair and they have a very comprehensive paper chase, an electronic paper chase, through the betting system. A concern was expressed that there was not the system in place to follow up, if there were any doubts, about malpractice taking place; that inside the whole gambling industry there was not the necessary enforcement there to take action.
Ms Simmonds: I think that is going to be a very important part of the Gambling Commission's new role. I think we would all very much support the fact that the Gambling Commission will have the right to prosecute where something does not go right. At the moment you only have that ability if you are the police.
Q323 Chairman: Is there not a danger that the growth of betting on betting exchanges could exceed the growth of betting in other forms - which is really what we are talking about now - given that a few years ago they did not exist and they seem to be taking a bigger and bigger share of the gambling market?
Ms Simmonds: I have to say that we do not have any of our members who are involved in that part of the business as members. It is not an area we have considered and I think it is too sectorial for us to go into it in much more depth than I have.
Mr Kelly: I think it is the same, Mr Chairman, as far as we are concerned. We would never ever say that we were experts in betting exchanges and the forecasts that they might put forward.
Q324 Mr Page: They are a threat to your business.
Mr Kelly: At the moment there is no impact whatsoever on the bingo or the casino business, in my view, from betting exchanges. To quote Brigid, it is sectorial and I think it will have a different area of spend from which it will grow, as opposed to casino or destination casino or bingo business.
Q325 Mr Page: I find it impossible that you should say that. We had a visit recently to GamCare, where they said that problem gambling from the internet is their fastest growing area. If one assumes there is a pool of money available for gambling, if this section is taking more and more it must impact on your business. I am quite surprised to hear the answer you gave.
Mr Kelly: To be clear, there is no evidence at this moment in time of an impact. It is not an area particularly, in the Cross-Industry Group, that we have addressed, specifically because we wanted to address the economic impact of this proposed deregulation on the business as it currently stands.
Professor Vaughan Williams: I think Mr Page's question confuses internet betting in general with exchange betting. GamCare are talking about problem gambling resulting from internet betting. I do not think they are specifically pointing out betting exchanges, which I do not think are a major cause of problem gambling. I am not an expert in this field but, from my own research and analysis, we have looked at the effect of betting exchanges since the 2001 Budget and margins would have decreased significantly even if betting exchanges had never existed. Any effect that they have is small in the study that we have done. In large part because of high elasticity of demand and so on, the turnover that is going through betting exchanges is complementary not substitute for existing betting on bookmakers.
Q326 Lord Brooke of Sutton Mandeville: There was a famous article once by the editor of the Harvard Business Review that the problem with the shipping industry was that they thought they were in shipping and did not realise they were in transport! To the answers you gave Mr Page a moment ago, do you think that article has any relevance?
Mr Kelly: I feel like taking the Fifth on that one! I think one has to take an overall view. Clearly you made the point yourself that there is one pot at the moment that services the growth and the current revenues that come out of the gambling industry. However, there is a very, very clear view in my opinion - and it is my opinion - that at the moment there is no obvious substitution coming out of internet gaming or betting exchanges - of which I have very little knowledge, so, forgive me. It is not an area that I am involved in, not an area I am commercially involved in. Clearly, if there was an explosion of online or internet gaming, which I do not see occurring, luckily - and Iain Wilkie has already given evidence that there are one thousand sites available to play at this moment in time - were there to be a massive explosion either of those or, indeed, betting exchanges, then there might be some on destination-based activities. But I am not in the business of just providing gaming, nor at the moment are the Cross-Industry Group; we are in the business of providing destination leisure opportunities through which gaming is delivered. That is a very, very different market from somebody betting at a betting exchange or on internet gaming.
Q327 Jeff Ennis: In response to an earlier question, Ms Simmonds referred to the fact that the Gambling Commission will have powers to prosecute where we get offenders under the new regime, as it were. How often and how extensively do you envisage the Gambling Commission will have to resort to prosecution?
Ms Simmonds: I do not know how much they resort to prosecution now. I do not think I would see it as a huge amount but it would depend on how seriously they work with the police in this matter and how seriously the police take this. At the moment, I do not see a lot of resource going into, for example, checking that children under the 18 are not playing machines in fish and chip shops. Certainly we would support the Gambling Board in having machines removed from those premises where they are not properly monitored. I think that has to be something that they have to work very closely with the police to take forward and I think DCMS are involving the police in their consultations about the changes to this bill.
Q328 Jeff Ennis: So effectively there is going to be quite an amount of additional resource required to police the bill.
Ms Simmonds: I think there is, yes.
Q329 Jeff Ennis: The new conditions.
Ms Simmonds: Yes.
Chairman: Lord Donoughue wants to ask more about displacement.
Q330 Lord Donoughue: Yes. Increased spending on gambling may lead to displacement from other parts of the leisure industry. This has already been touched upon. I would welcome it if you would tell us the significant differences between substitution and displacement. Could you go back again and summarise for us the industries or sections of, say, the leisure industry which will be damaged by the expansions in some areas which are proposed under this bill and perhaps indicate the sections which will benefit. Could I finally put to you a more general point: Is it possible that after all this process of movement, of displacement, of substitution, that on a national economic basis there will only be a little - and I do not say none but a little - economic gain, but actually a movement, a displacement, from one sector to another?
Ms Simmonds: If you go back, you will be aware that in 1998 BISL commissioned KPMG to undertake the first study. In that study we looked at percentage of leisure spending. About ten per cent of GDP we spend on leisure, and of that gambling is about one per cent. I think the changes that we see coming about in terms of spending would be from other forms of leisure. We do not see it being that people will stop buying household essentials and turn to gambling but that they will use the money they have already spent on leisure to spend on other forms of leisure. That happens all the time. That is just like the argument about whether you have takeaway and you drink your beer at home or whether you go out to drink it in a pub. All the evidence so far - and I am sure Iain will have a view on this - is that leisure spending is continuing to grow. I do not see the change in gambling in having a huge effect on that. There is obviously the tourism issue to which we can perhaps return.
Mr Wilkie: I agree. Leisure service spending is continuing to grow at the same time as within society there is a growth in the number of people who are essentially money rich but time poor. There are some quite interesting trends going on in terms of not only how much money people spend on leisure but where and when they spend it. In terms of sectors to gain, to come back to your specific question, we ought to put tourism on the table. We have looked at the impact of tourism and that is quite complicated, in that there is tourism that is commercially driven, there are people who come to the UK because there are conferences or exhibitions, there is leisure tourism, there is holiday tourism and there is short haul and long haul. We believe that certainly the short-break market within Europe - and of course that is tied in with the low-cost airlines as well - will be stimulated: people will come into the UK partly for conferences and while they are here they will play at the new style casinos; people within the UK, we believe, will choose not to take some short breaks abroad but to take them in the UK as well. We believe there will be some tourism stimulation from this.
Q331 Lord Donoughue: No damage. I asked if the industry will be damaged.
Professor Vaughan Williams: I have looked at a number of international studies over the economic impact, the growth of casino and gaming establishments, and, to be honest, they generate widely divergent results, often dependent upon who is sponsoring the report, who is funding the report. An Arthur Andersen report for the American Gaming Association argued there were no substitution effects because gambling promotes economic growth, whereas a study for the US so-called "Better Government Association" contends that casinos have had a negative impact on the local economy. A mainstream view, in my opinion, published in a well respected US academic policy journal, found evidence of significant substitution between gaming and its closest substitutes; that is businesses in the entertainment and amusement sectors. Evidence about the likely displacement of consumer expenditure from commercial retail establishments is much more mixed. I think the balance of opinion is of the view that gambling succeeds as an economic activity when it is effectively exported to residents from other communities outside the area where it is located, based on the idea that people will travel to gamble.
Mr Twomey: You raised some important issues. I think right at the outset of this exercise we were very clear to the Cross-Industry Group that we would be taking a sophisticated look at the issue of displacement and we would be considering the issue in great detail. In some ways I can cope with Professor Vaughan Williams' view, in the sense that we are quite convinced there will be some dispersement effects from certain other leisure sectors, particularly areas such as pubs and maybe restaurants - nightlife type activities.
Q332 Lord Donoughue: They would be losers.
Mr Twomey: Well, you also raised in your question an interesting point. You placed a negative effect on displacement, but clearly from an economic perspective the process of displacement is a key driver into the way in which economies develop and in which products emerge and produce efficiencies, and consumers benefit through the process of gaining what we would call consumer surplus; in other words, they put their money where they feel they get the best reward for their pound. Widening the opportunities in deregulation may provide higher levels of consumer surplus and consumers may benefit from that process. The process of displacement generally has negative connotations but we should be aware of the fact that displacement is the battlefield through which progression and improvement takes place.
Q333 Lord Wade of Chorlton: In coming to these conclusions did you take account of the black economy?
Mr Twomey: In terms of this report, we do not make any conclusions about the black economy.
Q334 Lord Wade of Chorlton: In coming to the conclusions you do, do you take account of the black economy on the figures you are dealing with - or the figures in the public domain?
Mr Twomey: I do not think we do.
Q335 Lord Faulkner of Worcester: Can any of our witnesses tell us whether they carried out any work into the displacement effects of the National Lottery, where there was a new gambling product ... how many years ago? It clearly had a devastating effect on its closest competitor, which was the football pools business, wiping out around about three-quarters of their business. Where else did the revenue for the National Lottery come from?
Professor Vaughan Williams: May I refer you gentlemen to my earlier answer to the earlier question where I said that work in the US suggested the expansion of slot-machines was associated with a reduction in the lottery revenues, the strongest displacement effects being found from the big-prize games. My own research into the UK market found that gaming machines and gambling were substitutes for lottery spending.
Q336 Lord Faulkner of Worcester: Yes, but where did the lottery money come from? Where did the money that people have been spending on the lottery in the last eight years come from?
Mr Kelly: Certainly, as you have quite rightly articulated, the pools were almost devastated by the lottery. I do not think they would describe what happened with any other word. Bingo had about 12 per cent of its revenues ... Not from the lottery, but from scratch cards - and I am assuming that is generically what you are referring to -----
Q337 Lord Faulkner of Worcester: Yes.
Mr Kelly: It was scratch cards. Actually about three per cent was lost out of bingo at the time the lottery was introduced and then about another nine per cent of spend overall was lost out of bingo when scratch cards were introduced.
Ms Simmonds: I think that on a lot of the work that has been done, looking at the National Lottery, people see the National Lottery as very much akin to a charity raffle and a lot of people would say they do not gamble although they do play the National Lottery.
Q338 Lord Faulkner of Worcester: That is a subject we are looking at in this Committee.
Ms Simmonds: It is a subject that is worth looking at - and I have to declare some interest, obviously, as a member of Sport England, in this subject. I actually do not believe that people who play the National Lottery are going to be people who are then going to be moving to playing casinos. I think you are talking about really a very different market there.
Q339 Lord Faulkner of Worcester: That is not the question I was asking. I was asking what the consequence of the National Lottery was in terms of displacement.
Ms Simmonds: Yes. There has been a consequence and I think there will be a consequence on displacement of the National Lottery.
Q340 Lord Mancroft: Could I take this point a bit further. Professor Vaughan Williams, you talked about the United States. The American gaming industry now is completely different and will be even more different. There is not going to be that displacement between lottery and slots over here because we already have slots, in a way that America did not at that point.
Professor Vaughan Williams: We are talking about marginal changes in the number of slot-machines in the US from where we start now.
Q341 Lord Mancroft: It seems to me we have been back to this point several times and the answer that I am hearing - and it may be that this is wrong - is that you do not see a huge amount of displacement as a consequence of this bill becoming an act and the industry changing. But Lord Faulkner quite rightly pointed out that the National Lottery had a massive effect on the pools and a lesser effect on bingo. Where is this money going to come from? We know it is going to come from pubs. That is one answer you have given.
Ms Simmonds: Yes, pubs and amusement machines, arcades and things.
Q342 Lord Mancroft: Where else? I cannot see the person who is visiting a resort casino or who is going to do remote gaming as absolutely the same person who is going down the pub and who wants to play the football pools or the lottery. Where is this money going to come from?
Mr Twomey: We have assumed a narrow court in response. We have assumed that around one-fifth of the money may well come from general income growth in the economy. We have assumed that of the remainder, 75 per cent, approximately 20 per cent will come from other forms of gambling, so there will be a substitution from other forms of gambling. Of the remainder, 80 per cent, we have assumed 30 per cent come from non-leisure activities and approximately 50 per cent from other forms of leisure.
Professor Vaughan Williams: Although these are just guesses, aren't they!
Mr Twomey: I think they are quite conservative estimates. If you look at the original ISL report, they talk about possibly around ten per cent of gambling being spent in other areas of gambling, were it not to be taken forward. Actually, we have doubled that. We have actually increased the displacement. We have doubled the displacement effect in this model, to be conservative. We have actually adopted a more restrictive displacement regime than the original research suggests. And, if I may say so, Chairman, we have adopted a more restrictive regime than many of the members of the Cross-Industry Group believe will take place. Our view is that this is a fairly robust, fairly conservative estimate of displacement.
Q343 Chairman: The big supermarket did for the small corner shop. Is there a danger that more casinos in places where they do not exist will do for the betting shop in the high street?
Mr Kelly: Not in my view. I think one of the issues that this proposed legislation deals with is the whole issue of permitted areas. If a significant proportion of the growth in casinos (whatever that might be and whatever view one has of it) is in currently non-permitted areas, it is a completely new product that has been positioned in a completely new environment. As I am sure the Committee are aware, there are only 63/64 permitted areas in the UK where casino licences will be considered. That, in the proposed legislation, is due to be removed and therefore a significant proportion of that growth will go into areas that currently may have a market for a casino but cannot have a casino because of the 1968 Gaming Act.
Mr Wilkie: We specifically raised that point and the view we got back from the bookmaking industry is that they see it as being a very local industry; in other words, people bet where they are. If it is Saturday or Sunday, they will bet at the nearest bookmakers to their home. If it is Monday to Friday, they will bet at the nearest bookmakers to their work: they pop in at lunchtime and bet and then they go back to work. That is entirely different from having a new market, whether that is on the edge of town in a leisure park or at a seaside resort, where people have to travel further and they have to think about that and plan it into their day.
Ms Simmonds: And it is an evening activity. The new market is going to be an evening activity.
Chairman: This seems a good point to move on to investment.
Q344 Viscount Falkland: This question I pose to the Cross-Industry Group and Pion Economics. Your impact study suggests that the proposals in the draft bill have the potential to attract £5 billion of inward investment. What will be the optimum economic conditions for attracting such investment? Where will such investment come from?
Mr Kelly: I think, Lord Falkland, it is no longer a well kept secret about where this investment may come from. I think there are a number of North American gaming companies, there are overseas gaming companies that believe that this is an excellent commercial and economic opportunity for them. Many of them are pretty public in that aspiration. However, the relationship between inward investment and the economic regime around that, there is a definite correlation between the two. I would point out maybe three particular areas. One is clearly taxation. We do not have a view at the moment about what the taxation regime will be. Were the taxation regime deemed to be "draconian", then that might well have a negative effect - in fact, I think it is almost inevitable it would have a negative effect - on that inward investment number and on the investment decisions that overseas operators are currently making. In addition to that, I think there is an issue around planning. Again, if the planning regime around the new legislation was not investment encouraging, that would again have a negative impact almost inevitably on that £5 billion estimate of inward investment. There are then two other issues. One is the straight economic model: What is the proposed legislation going to say, for instance, in the casino environment about the number of machines available versus the number of tables played? That has a direct impact on the terms of capital. There are also other areas, which I know I do not need to describe to you, which as yet are fairly opaque but which will have a direct impact on the economic driver. Then of course there is one which is very current, that of exchange rates. The way that the dollar is moving at the moment is making it appear significantly less attractive for inward investment from, for instance, America on the basis of exchange rates. But I will not cover that because that is out of my control.
Q345 Chairman: I think that one must go beyond the scope of this inquiry.
Mr Kelly: Indeed.
Chairman: We are going to ask you about taxation in a moment.
Q346 Viscount Falkland: If I could ask you as a supplementary to that question: what potential benefits from such investment do you think there would be for jobs and the local infrastructure? How can these be best secured?
Mr Kelly: The Pion document has said in total they believe there is the opportunity for 117,000 new jobs, both direct and indirect and taking into account the potential tourism effect. I have no doubt whatsoever that the expansion of the destination gaming business that might be facilitated by new legislation would have a beneficial effect on jobs. It is going to mean a significant amount of employment service in order to deliver the opportunity. These can best be secured, I would suggest, through appropriate legislation, properly and responsibly legislated. I think that is the only way in which sustainable jobs can be delivered into the economy.
Mr Twomey: I think it is clear, if you look at all of the restrictions, that the emergence of larger scale casinos provides quite extensive opportunities for a wide range of people from differing backgrounds to secure some career opportunities. There are also additional potential benefits through the servicing structure, the supply chain gains, because several of these large ventures require a lot of maintenance, a lot of servicing, in terms of materials, products, produce. I think the supply chain issues are quite interesting and quite beneficial. In terms of securing them - and maybe it is an issue we will come back to on resort casinos - certainly we have already heard of the visit the Committee has made to Blackpool and I know, for example, that in Blackpool there is a very clear local partnership, a very forceful local partnership - I think it is the Lancashire West Partnership - which is combining with the industry to take advantage of and to prepare for the influx of the inward investment. They are actually securing participation amongst a whole variety of groups to ensure that local residents and local people benefit, so that they simply do not get an inward migration of people to take the opportunities at hand.
Q347 Dr Pugh: I think somebody earlier on said that leisure represented ten per cent of our available spend and gambling represented one per cent of that.
Ms Simmonds: No, one per cent of GDP.
Q348 Dr Pugh: If that is the case and the industry says it will increase the yield by £2.2 billion per year, what does that make that one per cent? By how much does it go up? Are there any international comparisons we can look at to indicate where we stand?
Mr Twomey: I think we would have to give you figures.
Mr Wilkie: We have looked at this. Broadly the UK is slightly less than what is spent in the US and significantly less than is spent in Australia in terms of percentage of GDP.
Q349 Dr Pugh: Moving to resort casinos, forgive me, but it looks a bit like a special pleading by the industry to talk about regeneration, because gambling has always been an excellent method of redistributing money from people who do not have a lot to people who have enormous quantities of it. How effective do you think it is going to be as a regenerative tool?
Ms Simmonds: I think you have to look at Atlantic City. I was here when the Mayor of Atlantic City came over and made a presentation to a number of members of parliament. They have 12 casinos there which contribute $450 million in tax and employ 50,000 people and attract 34 billion visitors. That is a huge amount. There is no doubt that resort casinos will contribute to regeneration. I think some of the new things that are coming in, like the business improvement districts, which will allow businesses to contribute to local taxation, are going to be something that will be used instead of the method that they used in Atlantic City, where they actually gave a percentage direct to local projects. You can say that section 106 agreements in the new proposals, which I have to say I disagree with on planning obligation, may also have that contribution. There is no doubt that it will have an impact.
Q350 Dr Pugh: There is a distinction between regeneration of a region and regenerating a city or town within a region. At sometime all that will happen, I guess, is that one town will corner the market for leisure spend. Is there any evidence of that happening in Atlantic City or anywhere else?
Mrs Simmonds: Not that I am aware of. Obviously, in America it is slightly different because you have a state-by-state decision on whether or not you have gambling, which is obviously not going to be something we are going to have here, and I think what will be important is how the Regional Development Agencies actually work in this process. I think one of the things that is unclear is whether the Regional Development Agencies are going to look at all casinos which are over 10,000 square feet of gaming area or if they are only going to look are resort casinos. I think that is going to have some impact on how the industry changes.
Q351 Chairman: We are aware of that distinction. Did Professor Vaughan Williams want to speak?
Professor Vaughan Williams: Just to repeat what I said earlier that the balance of opinion of studies that have been done is that gambling succeeds as an economic activity when it is effectively exported to residents of other communities outside the area where it is located. So it is a big difference, I think, where the casinos are located, at least historically it is.
Mr Twomey: Very quickly, going back to the Blackpool example. If you look at the proposals in the master plan in Blackpool, and the numbers of jobs, you will see, for example, the number of jobs that will be required to service the proposals far exceed the stock of available labour supply in Blackpool. It is clear, therefore, that if that venture is going to proceed it will have to suck in some labour from surrounding areas. So I think, as Professor Vaughan Williams has said, there will be some expansion of the opportunities above and beyond the city.
Q352 Dr Pugh: But there may also be some expansion possibilities for Manchester, Liverpool, Southport, Morecombe and other areas as well.
Mrs Simmonds: I think it will depend on what sort of holiday they want; not everyone will choose to go to somewhere that is offering resort casinos.
Q353 Viscount Falkland: Could I briefly ask this: one absolutely accepts that the ambition is to draw in travellers from outside, both from home and from abroad, but against the background here, which has always been a problem with our tourism, of a service ethos that is very much inferior to that, certainly, which you find in the United States, and also neighbouring European countries, there is going to have to be, apart from a lot of training, surely, for people operating in casinos and all the things that you have mentioned, a huge leap, is there not, in the culture of service, so that people "have a good time", which is a particular American strength, and not just in Atlantic City and Las Vegas?
Mrs Simmonds: I think you will see that. I think some of the American operators coming here are very clear on what they view as "entertainment" as much as gambling, and I think that is an important part of it. The leisure and hospitality industry has been working with the DTI for some time on something called "product and productivity" which is exactly that; it is business learning from business, it is employing, it is helping with training to improve the productivity levels but also to improve the staffing and the training that actually happens in this country, and we have a long way to go in that field. There will be required to be qualifications with the new Sectors Skills Council involved, and hospitality, leisure, travel and tourism is going to have a very important role here and is very much supported by gambling companies.
Mr Kelly: If I could add to that and speak on behalf of the industry operators, we see this as one of the biggest challenges, and I know the Cross-Industry Group spent some time on this, which is expansion. Firstly, it is about the available labour pool, but not only the available labour pool but also the skills required within that labour pool. Obviously, the regulation issues of licensing staff in casinos is another area. Brigid referred to overseas operators importing an overall leisure, both entertainment, food, beverage and gaming, opportunity which has different investment required of it than, maybe, traditional gaming products have done in the UK, but I do not think there is any doubt at all that we are already working very hard on that, but it is a challenge that the industry is going to have to confront in order to be successful, both competitively with new operators coming into the environment, were that to be the case, and in order to ensure that the product is sensibly delivered. I think it is a big issue for the industry.
Professor Vaughan Williams: I think Lord Falkland makes a very good point because if it is going to work properly, as it should do, then it has to be as part of the entertainment industry, not as part of gambling, especially, as Richard Page mentioned earlier, the idea of remote gaming, the expansion of that. People just want to gamble and can gamble without going anywhere; they can gamble on their mobile phones and they can gamble on the internet, so if we cannot make it an entertainment experience then the future is bleak.
Q354 Viscount Falkland: To return the compliment that you gave me, that is another interesting development. So what you are really saying to us, are you not, is that the idea that you may deduce from the proposals that this is going to be gambling-led is not true; it is going to be entertainment-led?
Professor Vaughan Williams: Exactly.
Mr Kelly: Absolutely.
Q355 Chairman: That is your point about the destination experience, even now why people going to bingo rather than bet on the betting exchange.
Mr Kelly: Precisely.
Mr Wilkie: If I may add, in the research that we commissioned, the issue about quality of service was raised through the groups that we talked to. People are very interested in the idea of having entertainment-led casinos. The research confirmed that but it also showed that there are concerns over the levels of service that they might receive.
Q356 Mr Meale: There seems to be rather a conflict between what Mr Kelly has been saying and what Mr Twomey and Mrs Simmonds have been saying about what this will create, with 170,000 jobs being plucked from the air. The normal formula is if you take an establishment size with direct employees in that, you multiply that by less than 300 per cent and then you get the formula for the service additions. To create the amount of jobs you are talking about, we recently visited a fairly large casino in Regent Street, and that operates with about 80 employees directly - indirectly, as I say, just under 300 per cent more than that. One hundred and seventy thousand, that means directly you have to find or invent something in excess of 800 such establishments up and down the length and breadth of Britain. What Mr Twomey has been saying, and Mrs Simmonds, about opportunity - what about displacement? You have mentioned Blackpool and all these jobs that have been created, but the areas in which the displacement would occur - job losses in other words - would be in all the machines which operate in Blackpool or the hotels which are in Blackpool. So set against the jobs that will be created in an area like Blackpool there will be an enormous loss because of the creation of such an establishment. How do you judge those contradictions?
Mr Twomey: With respect, I think you may be reading the figures the wrong way. I think it is very important, in reading my report, to distinguish between the impact of the gambling related activity and the tourism element on top of it, because what is crucial to recognise is that any tourism that is generated by gambling has an enormous impact because it is totally and completely new money. If people come to the UK and expect to spend on gambling as part of their wider activities, that is money that would not come into the UK ----
Q357 Mr Meale: That would not be the case in Blackpool. There is enormous money there already and you would be displacing quite a lot of that money.
Mr Twomey: Yes, but I think it is a fallacy to adopt the argument that you spend the same amount of money here or you transfer money from here to here and there is no impact, because the way in which money is spent is as important as the amount of money that is spent.
Q358 Chairman: I think the figure is 117,000 not 170,000, but I think we just need to note your offer, Mr Kelly and Mr Twomey, to respond to the question put by Lord Brooke and give some explanation as to how that figure was arrived at, particularly with regard to displacement.
Mr Twomey: We will give you the details.
Q359 Lord Faulkner of Worcester: This is really a question for Mr Wilkie because in your report you are very global (?) about the prospects of resort casinos in saying that the likely number is closer to 3 than 20.
Mr Wilkie: I would not say absolutely. The way that we see it is that the UK market is pretty well supplied in terms of gaming and it is different to the US, and I have been slightly concerned that the US has been used as an example a lot. We have bookmakers on the high streets, we have bingo, and we have machines available in pubs or in amusement arcades. What we say is that these proposals create the opportunity for a new form of entertainment-led gaming. Then the question arises, in what form may that be? We believe that there is scope (and it comes down to demand as much as supply) for a relatively few number of resorts to have large casinos in them. In our report we talked about three resorts. We are talking about one in Scotland, probably, one in the North West, possibly one in the Midlands and one in the South. It is three or four. When you get down to it - and my firm and I are working with a number of people looking at the opportunities - you have got to look at the existing leisure supply, the existing demand and how much you are prepared to invest. I think the issue is not only the number of resorts but how many casinos within those resorts. So we would see that if there is, say, a resort on the south coast you have to consider not only, firstly, is there going to be one but also where it is going to be and how many individual casinos is it likely to have in it?
Q360 Lord Faulkner of Worcester: When the minister came before us he made it very clear that the Government is not interested in resort casinos being given a special status. You are saying that they would have to take their chance on the basis of the way in which the free market works. Do you not feel that there is a real danger that if the free market applies to the location of a few casinos, particularly big ones, then they will not go to Blackpool at all and they will not go to Scarborough and they will not go to Great Yarmouth but they will go to places like Liverpool or Manchester or Leeds?
Mr Wilkie: I think that comes down to the quality of the entertainment experience and the service and the other attractions that are there.
Q361 Lord Faulkner of Worcester: How is the market - if that is what is going to determine the location for casinos - going to decide that, when the operators come in, say, from the United States and say, "I want to go to where there is an established population"?
Mrs Simmonds: I think that is the distinction we have got to make between resort casinos and single casinos which are over 5,000 or 10,000 square feet in individual towns or cities. I think we have to be careful we do not confuse the two here. The question was specifically about the number of resort casinos, which is somewhere like Blackpool that has five or six casinos within it, not about having a single casino of a certain size in various cities. There is a distinction between that, and the Regional Development Agencies have a key role in helping that determination.
Q362 Lord Faulkner of Worcester: You are saying, though, that the Regional Development Agencies should say no to Manchester, no to Liverpool and concentrate on Blackpool.
Mrs Simmonds: No, because I think it depends on what you are talking about.
Q363 Lord Faulkner of Worcester: I am talking about a big casino.
Mrs Simmonds: If you are talking about a big casino, then I think they have got to look at them differently. There is a big difference between Blackpool having five or six and Manchester having one. I think there is a market that is probably big enough for both. As we all know, there are lots of things that are going to determine this; it is about investment, it is about planning. I am hugely concerned about planning and not convinced by what the Minister said to you all last week. Instead of demand we are going to have need, and local authorities are going to argue a lot about where you are going to have these casinos on grounds of need.
Q364 Viscount Falkland: I have certainly, and I think colleagues also, had the impression when we went to Blackpool that there was some doubt because of the enormous investment which would be needed to convert Blackpool from its historic position into a huge resort of the kind that we are discussing, and that the strategy involved in having nationally what you described as four of these destination casino developments/entertainment developments would require a strategic plan which would need to go beyond the regional and needs to be a national strategy. So what the Minister said to us was very interesting. The conclusion that I drew from what the Minister said, that the market must decide, was that this is just not going to happen, because it has to be a strategic decision. The economic and social impacts of letting the market decide, in the way that he suggested, would create absolute chaos.
Mrs Simmonds: I just do not think that planning works like that in this country. We are going to have these new Regional Spatial Strategies which will very clearly have to identify sites for various types of leisure activity. If it is not zoned for leisure you cannot put leisure on it.
Q365 Chairman: You made the point that - forgive me if I try and summarise this wrongly - there is a difference between large casinos of more than 10,000 square feet and the resort casino which would be considerably larger.
Mrs Simmonds: Yes.
Q366 Chairman: Do any of you have a view on whether the Government has got it right in suggesting that once you get to 10,000 square feet and more than 40 tables you can have unlimited jackpot machines with no maximum stake and no maximum prize, or should that opportunity be the preserve of these resort casinos in order to give them a chance of succeeding?
Mr Kelly: It is my view, and I think it is the Cross-Industry Group's view as well, that the current proposals are about right; that to actually confine unlimited machines to a particular set of business which is differentiated from the rest by a huge number of different characteristics would be wrong. There has to be the opportunity for sensible and fair competition within casinos, and that to a great extent is going to depend upon the products they can offer. So the 10,000 square feet/40 table issue is about right. You could place that trigger at any particular point, but if one chooses to look at the 10,000 versus the 5,000 I think that is almost where we need to be. There is an interesting issue that has been raised about resort casinos and whether one does it in a free market or whether one does as a planned, national strategy, and the Cross-Industry Group has not entered into that debate, and Brigid I think has answered that, but on your specific point I think we are about right. I would be extremely concerned about a proposal that said "only resort casinos"; you would then have to be very clear about what the definition of a resort casino is. Is it with 400 bedrooms? Is it with 400 car-parking spaces? Is it on a minimum investment basis or is it on a square-footage basis? If they are the only people who could be allowed to operate unlimited stakes and prizes machines, I think that would be quite wrong.
Q367 Mr Meale: This is to Mr Wilkie or Mr Twomey. The £5 billion of inward investment, it is only three or four large resort casinos. Where does that fit into that kind of investment? It is £1 billion plus each.
Mr Twomey: Ian will help me if I misquote it, but my understanding is that he was talking about determining numbers of resorts. Within each resort there may be three, four, five casinos.
Q368 Mr Meale: Do you think that matches £5 billion of inward investment?
Mr Twomey: We have certainly seen in the press some of the overseas' operators are committing themselves to investment figures of half a billion for single site entities.
Chairman: We need to move on. The Minister will be with us very shortly and we are going to ask him about taxation, but we ought not to let you go before we ask you the same. Lord Donoughue wanted to put a question. You have already indicated that taxation, Mr Kelly, is one of the three ingredients in terms of the general economic environment which might make this expansion happen.
Q369 Lord Donoughue of Ashton: How do you think the existing and somewhat complicated duty regime will fit with the modernisation of the legislation, and what if any changes will need to be made?
Mr Kelly: Lord Donoughue, my view is that a blunt answer to your question is no, it will not fit with the new, proposed shape of gaming. At the moment, the definitions of gaming are pretty well defined both within locations as well as within businesses. We know what a casino is, we know what a bingo club is, we know where the betting shop office is. They, therefore, are all taxed generally at very different rates. Once you put all those under one roof, which is what the proposal is, just the logistics and the organisation of the taxation regime that encompasses three or four different modes and methods is an absolute nightmare. My view, and the view of the Cross-Industry Group is quite clear that there should be a gross profit tax regime (that is the most appropriate regime), that it should be a non-VAT regime - as the licensed betting offices and pools operators are - and that it should be levied at around 15 per cent. In the covering letter to the document you will see I caveated that very heavily; that that was there in terms of allowing a model to be constructed rather than a firm and absolute proposal. I cannot believe that it is going to in any way viable to have under one roof three or four different taxation regimes on three or four different products being sold to the same customer. It just seems to me to be completely unworkable.
Q370 Lord Donoughue of Ashton: Could I ask specifically of you, Professor Vaughan Williams, do you think it is possible to create a taxation regime that is future-proof of technological developments, for example, (and betting exchanges we have already discussed) already making the existing taxation system outdated?
Professor Vaughan Williams: I think one can argue with some conviction that the move to a gross profits tax on betting was in some respects borne out of a desire to create a tax regime that protected - in some senses, future-proofed - the betting industry against changing economic and technological circumstances. For example, technological or economic changes which act so as to increase competition to UK-based bookmakers from overseas operators could serve to reduce the gross profits of UK bookmakers. The tax system as it is now constituted automatically reduces the tax burden on bookmakers in these circumstances. Similarly, if gross profits increase the tax burden automatically increases. What is happening is that a tax based previously on quantity has been replaced by a tax placed on price, a system which is designed to reduce price and to increase quantity. This benefits the twin objectives of efficiency and equity at any given point in time and in a manner which is proof against changes and developments over time. Since Budget 2003 betting exchanges, which had previously been taxed on the net aggregated profits of the layers on the exchanges, are also subject to the same gross profits tax, levied at the same rate, of 15 per cent. To the extent that the gross profits of exchanges are lower than their competitors, they pay commensurately less tax. If their gross profits should increase they will pay more tax. Far from betting exchanges making the existing taxation system outdated, therefore, they are the most modern example of the application of the new taxation system to this latest application of new technology to the betting sector.
Q371 Lord Mancroft: You have already talked about remote gambling, and whether it works in this country or not depends upon getting the balance between the regulation and the taxation right. How do you govern to ensure that we do get that balance right?
Mrs Simmonds: I think there is no doubt about it, that investment will be dependent on taxation. That has been proved elsewhere in the world. There is no doubt that at the moment we have taxation on gaming tables which is 40 per cent, and you are comparing that with 8 per cent in Atlantic City. Where I think we have to be very careful - to come back, in other words, to the question that John was asked - is it would certainly be ridiculous to have four or five different types of taxation in a resort casino. I do not think it would work. On the other hand, there is some argument, and the industry has put forward this argument with the proposals from Customs, that we should change to GPT on AWP machines, that we do not think it is right for that to happen now and there is some argument that AWP machines in part should remain on the taxation system they have got now, rather than move to a GPT scheme. One simple reason for that is GPT, obviously, can encourage proliferation if it is used in the wrong way.
Q372 Chairman: Is it your view then that the taxation regime should not just be about raising revenue but also has a role in managing the size of the industry?
Mrs Simmonds: Yes.
Chairman: Thank you all very much for answering our questions so clearly. We have, of course, yet to take evidence from a number of the elements that feature within the Cross-Industry Group and businesses in their membership. So there will be further opportunity to explore some of these issues again with them. Did Lord Brooke want to raise a matter?
Q373 Lord Brooke of Sutton Mandeville: It is not a question, Mr Chairman, but everything I know about King Draco suggests that he would regard taxation as a very modest and wimpish instrument for exerting Government policy. I am not suggesting Mr Kelly should alter his answer but I offer that as a historical footnote.
Mr Kelly: I appreciate that. Thank you very much.
Chairman: Thank you, Lord Brooke, for that. Can we particularly thank our witnesses for appearing today and answering our questions. Thank you very much.
Memorandum submitted by HM Treasury
Examination of Witness
Witness: John Healey, a Member of the House of Commons, Economic Secretary to the Treasury, examined.
Q374 Chairman: Can I welcome John Healey, Economic Secretary to the Treasury. We really are very grateful to you for coming to our Committee. We know you have already had a two-hour stint in a Standing Committee upstairs, which from personal experience I know is a pretty draining experience. I do not think there are any interests in this element which are relevant, except to remind everyone that all the interests that have been declared by Members are available, if anybody wishes to see them. The only interest - if that is not too strong a word for it - that I would mention is that Mr Healey stood against me in Rydedale in 1992, and what a lot of good it has done him!
John Healey: But not in 1992.
Q375 Chairman: John, you say that Treasury officials are actively working with the Department of Culture, Media and Sport on tax policy issues. Is this an area in which, to your knowledge, there has been a great deal of interdepartmental activity, given the interests of DCMS, the Office of the Deputy Prime Minister, the Department of Health, the Department of Trade and Industry and so on? Or is it early days?
John Healey: The short answer is yes. If I may say, as part of my initial response, I have always been a strong supporter of pre-legislative scrutiny and I very much welcome the Inquiry you are doing. I notice, Mr Chairman, you interpret your brief quite widely, and Lord Falkland before we started here, said that in 20 years in the House this is the most interesting and fascinating thing he has dealt with. I was glad to be invited to submit the written memorandum. I hope that has been useful. I hope it points out that there is indeed work going on between the departments and has been for some months on this, but that on the tax side we are inevitably at a relatively early stage. Secondly, I hope it points out that there is a very important potential supplementary role for tax reform to reinforce and reflect the sort of regulatory changes that, Mr Chairman, your Bill is looking at. Within Government, it has been the responsibility of DCMS to co-ordinate the communication and the work that has gone in so far to the draft Bill's measures. There has been a series of meetings, both interdepartmental and bilateral including the Treasury, on framing the deregulation policy that this contains. Recently Lord McIntosh and I have agreed that we should set up and formalise certainly between the two departments, DCMS and the Treasury. So we have set up now a formal steering group of officials to back the work that we need to do together. Principally, the first task of that group of officials will be to try and develop the analysis that allows us better to estimate the economic impact and the potential benefits from the deregulatory reform and, also, form the modelling that is obviously essential to considering any tax options for the future.
Q376 Chairman: We are going to come on to some of the specifics in a moment, but you have just said that you do see taxation as part of the regulatory framework. In other words, is it still an objective of taxation on gambling, as it is for example on tobacco and drink, that it has a role in deterring excessive gambling?
John Healey: I think the proper place for potential tax reform in the territory that this Committee is considering, if I may say so, is as follows: as I said in my written memorandum, deregulation is the foundation for the future development of the industry and for its future prospects. Certain tax changes or planning policy certainly could amplify the impact of the deregulation, but deregulation and the Bill that this Committee is considering remains central. I note Lord MacIntosh mentioned tax planning and deregulation, if you like, as three legs of the stool; I see it more as table and chairs, where the central and important policy area is deregulation; planning policy and tax policy may be very useful supplementary policy changes we can bring to bear, and certainly from the Treasury point of view we are drawing up the tax chair to this deregulation table.
Q377 Baroness Golding: Your memorandum also states that " ... it is not possible to make evidence-based policy decisions on tax until there is sufficient certainty about certain central features of the new regulatory regime and we have a clearer picture of estimated implications, for example the size and distribution of the new market." However, we have been told by the Casino Association, for example, that "Nobody can assess the future viability of a casino until the future tax and duty regime has been resolved." We have also been told this morning by the Cross-Industry Group that the level of investment will depend on taxation. We are in a bit of a dilemma over this chicken-and-egg situation in our deliberations. Can you give us any help?
John Healey: I will certainly try, Lady Golding. There is certainly an element of chicken-and-egg. The Casino Association itself in its response to our consultation on amusement machine licence duty (by-the-by, Chairman, the summary of responses we are publishing today, which I hope the Committee may find helpful) recognised the importance of careful timing of any tax changes, and also the difficulties involved in considering duty reform in advance of clear, settled and shaped regulatory reform and some estimate then of the likely economic impact changes to consumption, changes to markets and changes to business models that that would entail. So we are entering a period now where many of the principal details of the regulatory reform have recently now largely been settled (I am thinking of gaming floor sizes, number of machines per table, issues like that) which I think probably gives us, in terms of the regulatory shape, sufficient information on which to do now some serious tax modelling. In terms of the interest of the industry I quite understand, clearly and reasonably, they want to see as much clarity as possible, but they also do want to see a degree of certainty and stability. The worst of all worlds, I think, for many of these companies that are looking at potential long-term investments is to see us make changes rapidly in order to reflect some of the issues immediately apparent in the Gambling Bill, only to find that, perhaps, a couple of years later we want to radically overhaul another aspect of the gambling taxation regime. So we have to take a view on the likely developments in the industry, the likely developments in consumption, market share and business models. We are not starting from scratch, in the sense that we have already, right across the gambling and gaming field, an established and evolving industry. That gives us, particularly with the reforms that we have carried out over the last three years, quite a lot of important industry data on which to base the work, and I think now the co-ordination of the work with the main interest groups from the industry will be important. Mr Chairman, you raised the issue of co-ordination and communication within government; I think now the co-ordination and communication with the industry's assessment and analyses indicates that they are willing to share their information with us to allow the sort of assumptions they are making, on which their modelling is based, on the inputs that they are anticipating, because in that way I think we can get ourselves into a position where we have got tax impact models that allow us to look at the potential options that may be part and parcel of reflecting the deregulation that this Bill is attempting to achieve.
Q378 Baroness Golding: Could I, on that, say what if we decide (I am not saying we will) that the floor size and number of machines is wrong; that the number of large casinos is wrong? What difference will that make to your tax deliberations?
John Healey: It would make a substantial difference. These, as I have indicated, are key elements. I would see the sequence as follows: based on what the DCMS appear to be settling on as their proposals in those types of areas, we can begin some of the work that we now need to do on further analysis modelling. Clearly the Committee may well take a view on those issues when it reports in early April. The Government then, led of course by DCMS, will need to respond to that. Now, if some fundamental aspects, for these purposes, of the regulatory regime are then changed, clearly we will need to reflect that in our modelling. So really, I think, in terms of sequencing, the conclusion I would suggest is we can do the tax work and we can conclude our tax work only after elements of the regulatory regime have been properly settled. Hence my argument in the memorandum that we need to align the work on any possible tax reform with the progress of regulatory reform, including this Committee's conclusions and recommendations, the Government's view in response to those and then, obviously, the introduction of the Bill itself.
Q379 Chairman: You see, one reason why we might (I am not saying we will) make some recommendations that would suggest that the proposed regime should be adjusted would be concern that if deregulation comes too fast, too quickly, it will lead to problem-gambling. That is why I really would like to come back to the question I asked you before. If there was a big increase in problem-gambling then, bearing in mind the health issue, the inevitable cry will be "You have got to put the taxation up", and that is why I asked you the question (and perhaps I could ask you to think about answering in a different way): to what extent is that taxation regime seen by the Treasury, still, as a key objective to be a deterrent against excessive gambling?
John Healey: Perhaps, Mr Chairman, I can answer that in two ways. The first is an observation about the nature and potential scale of problem-gambling in the role of regulation, and then I will tackle the question about whether or not taxation has a role. It is clearly the case that there is a risk with this Bill that it will increase the availability of gambling, therefore the amount of gambling and, potentially, the risk is it increases the amount of problem-gambling. On the other hand, and I know the Committee will be giving equal attention to this, it builds in safeguards through the regulation to ensure that that does not happen. Certainly my colleagues in the DCMS would argue it builds in safeguards which are as good as or better than anywhere else that one might find in the world. So the Government, as you may be aware, expects no overall increase in the level of problem-gambling as a result of the Bill. If that were to happen, one of the advantages of this approach, set out in the Bill, is that rather than the very inflexible primary legislative-based regimes that we have at the moment, the framework is one of regulation that can be adjusted rapidly and responsively if research or experience demonstrates that problem-gambling does increase or becomes apparent in certain areas that we had not anticipated. So the Bill itself builds in the safeguards, I would suggest to the Committee, sufficient to deal with any potential risk of an increase in problem-gambling. On taxation, were one to argue or suggest that taxation might be the tool by which to try and potentially control problem-gambling, I would suggest two or three things. First is that it is, particularly compared to regulation, a relatively blunt instrument. Second, there is no established link in this field between levels of taxation and levels of problem-gambling. Third, if we view problem-gambling as essentially an addictive problem where the essential harm is the impoverishment of the person that has the problem-gambling and those that may be related or live with them, then arguably if you have very high rates of tax, rather than simply deter problem-gambling it may exacerbate the impoverishment and the problem that the Committee and certainly the Government will be seeking to avoid.
Q380 Lord Wade of Chorlton: You also stated that "The erosion of the traditional boundaries between discrete gambling activities may raise questions about the suitability of the current tax structure and also raises issues around compliance costs and the administrative efficiency of such a system", also referring to specific issues relating to remote gambling and casino taxation. What is your timetable for addressing these issues and which do you think is the most challenging of the two?
John Healey: The timetable is rather as I indicated to the Committee earlier on - at least at this point, as far as one can anticipate it. It is important to get the principal regulatory decisions confirmed, and that is certainly impossible to do definitively until this Committee has passed its judgment. That would suggest that options for any tax reform that may be appropriate would have to follow decisions on regulation, which would suggest that any legislation (which would, of course, be a matter for the Finance Bill) would not be feasible before 2005. As I said earlier, it would need to be aligned with the progress of settling and introducing deregulatory reform that the Committee is looking at. I hope the memorandum, to some extent, has pointed to the dilemmas and tensions that both deregulation and some of the trends in the industry throw up for us in tax terms. Essentially, as Members of the Committee will know much better than I do, the structure of gambling taxation has really evolved in silos. We have six different, essentially, gambling taxation regimes. There are, in some ways, some strengths from such a system: it allows us, for instance, to take account of particular competitive costs or circumstances that one might find in one part of the industry if not in the other. So the pressure on the general betting activity from the movement on to the Net and offshore is very different to the sort of pressures that there are on the bingo industry, and it is possible to make taxation decisions that reflect that. On the other hand, as I mentioned in the memorandum, with new activities such as remote gambling, the question really arises, do we treat these as an online facet of an existing silo - in other words, an online variant of betting or an online variant of bingo - or do we come up with a different regime which is essentially about online activity, so that you may have different types of activity, physical bingo and online bingo, treated for tax purposes in a different way? It is not easy to resolve. There are other more difficult, generic questions, to answer your point directly, if I can, Lord Wade. The question of how we deal with VAT, if there is any radical reform across the board; whether or not there is a case, as some argue, for unitary rates irrespective of the gambling activity; whether indeed there is a good case for one-roof regimes where, with resort silos or resort casinos, for example, you are likely to have a number of differently taxed activities located in one place, and the potential complexity there for businesses to comply with having a number of different activities taxed in different ways at different rates in the same location does throw up some questions that, frankly, I have not faced before. I think the most difficult question we face, actually, is none of those, although I would suggest they are all complex and the Committee will well understand that. I think the most difficult question that we face would be how we look to reform regimes to reflect new developments in the industry whilst, at the same time, weighing the concerns of established activities and established businesses. I think for me a cautionary point into this is the wide range of views that we have had in response to the consultation we did on amusement machine licence duty, where it is quite clear that any possible reform is likely to have a highly differential effect with a very wide range of winners and losers. I think you could scale that up when you consider the regime of gambling duties right across the board. That, I think, will be the Government's - in fact for all of us wanting to see a way through this - most difficult issue to resolve.
Q381 Lord Brooke of Sutton Mandeville: In the interests of transparency, Mr Chairman, I think I should probably start by saying sympathetically to the Economic Secretary that I held his responsibilities in the middle-1980s and, incidentally, in the context of Customs & Excise most pleasurably. Do the tax yield implications of substitute expenditure enter into the tax planning of the Treasury in the matters which we are discussing today? If so, has Customs & Excise already started work on what that substitute expenditure might be? Secondly, and I am not really asking about the dimensions of substitute expenditure, because I see those as what the eventual regulatory process is, but I am asking whether analysis has been done of the sectoral areas in the economy which would generate that substitute expenditure.
John Healey: May I say, Lord Brooke, that I entirely agree with your view of the very special responsibility it is to be Customs Minister. It is a very special service with an extraordinary range of responsibilities and some first-rate staff. I appreciate the distinction you draw between questions on the principle of substitution diversion rather than our ability to judge the dimensions of that at this stage. The short answer is yes, it figures very significantly, not just because it is a potentially (as the industry will recognise and do recognise in their Pion consultants' study) significant dimension for us but, also, because the government's own approach to additionality is set out in the Green Book, and that applies right across the spectrum of taxation decisions. So, to quote the Green Book here, the effect on net employment and net output is likely to be much smaller than the direct employment and output effects of a particular project. The industry is attempting to do this in its own study producing both the net and gross impact. Now, we are still at an early stage - and I think probably the industry would say in their own workings as well - of trying to assess the likely dynamics of any diversion. The industry study, and it is certainly a plausible belief, is that there is likely to be some diversion of existing gambling activity, particularly from some of the new business models, the new resort-style casinos. I think it is plausible, also, to believe there is likely to be some substitution and diversion from other forms of leisure activity. I certainly know that in my own area in Yorkshire, where we are looking at, potentially, a development which could encompass a new resort-style casino operation, some of the existing leisure operators from tourist attractions to cinemas, to bowling alleys and theatres are all concerned about the potential substitution effect. From the Treasury point of view, our first task is to try and bottom out the data, convince ourselves that the assumptions that we might build into any model are as sound as they can be, and then ultimately make any tax decisions based on that work concerned principally with making sure that we see the net impact rather than any gross impact as the yardstick by which we make those judgments.
Q382 Mr Meale: Can I start, Minister, by firstly saying that it is refreshing to hear a Treasury Minister actually use the phrase "tax scale increases might lead to impoverishment of those least able to pay." I think that is very refreshing from the Treasury, responsible for doing that. The difficulties about modelling, which you mentioned a little bit earlier, on tax-type modelling within the department, there has been much criticism over the year, particularly by Customs & Excise, that they use a particular type and range of modelling based on the Oxbridge tax modelling techniques. It is refreshing to hear you say those things early on about "a new way forward, a new analysis". Are you going to rely upon the age-old methods of tax-gathering rather than, as I say, this new innovative and quite radical dimension that you mentioned earlier about looking at the industry, how it is going to affect it and base it much more on the needs of the industry and those that work in it rather than gathering tax?
John Healey: I am not familiar with the particular Oxbridge modelling, Mr Meale, whatever that is.
Q383 Mr Meale: Can I just say, Minister, if you have any doubts you might reflect and go back to Customs & Excise and have a look at how they did it on beer and whisky. That might give you a clue.
John Healey: As it happens, part of my other responsibilities means I am looking very closely at the various modelling in the whisky industry and spirits industry at the moment. I think the memorandum sets out, and the Members of the Committee know full well, that the sort of reforms that we put in place in the taxation regimes in a number of the gambling sectors already were closely based on analysis modelling before we made the decision to go ahead. None of those, as far as I am aware, rest solely on an Oxbridge model of that. I would suggest that we are constantly, both in this field and more generally in Customs, ready to refine the modelling that we use, whether it is tobacco, gambling, alcohol or indeed VAT. Secondly, we have quite widely shared the assumptions that we have made that underpin the modelling that we undertake in order then to arrive at the sort of taxation decisions that we have made. We will follow the same principle of approach with the issues that we now face on this.
Q384 Mr Page: Minister, you mentioned taxation being carried out in silos and developed in silos. My question is, I think, an almost impossible question for you to answer but it is just to get your thoughts on how the Treasury is approaching these matters. You mentioned that we have new gambling activities coming in and you mentioned the betting exchanges and things like that. As we all know, the casino operators desperately want to know what is the taxation regime in order to determine their investment. So, in short, what I would like to know is what work is being carried out not for today and not for the model of the day but the model for the future? What anticipation is being made of future possible trends so that we can have a taxation regime (I use the word "future-proof" rather loosely) that is not subject to change unless necessary and one that the industry can then work with with a degree of confidence and invest with a degree of confidence?
John Healey: The principle of trying to devise a regime that is future-proof is an important ambition. I mentioned earlier in my comments that on the one hand the industry quite understandably wants as great a clarity on future tax structures and rates as it possibly can, because it is an element of the investment decisions they are going to now need to make. I quite appreciate that and I also quite appreciate why they are arguing for as low a rate as possible in the context of this discussion. They are also concerned, and this certainly came through in the evidence on the amusement machine licence duty and more generally, that we do not make decisions about tax changes now which we thoroughly overhaul in a couple of years' time. The ability now to get them right with a degree of certainty and stability for the longer-term future - the sort of time periods that investment decisions and returns need to be planned over - I think is an important duty and responsibility on my part as the Minister responsible for this. Whether or not and to what extent it is possible entirely to future-proof such decisions is a more complex and more open question. Clearly, one of the drivers in the sectors, generally, recently, has been technology and it is likely to remain a very important dynamic of change. In many ways, Mr Page, I think technology creates more difficult questions for those responsible for regulation than it does, perhaps, for taxation. If I may explain as follows: essentially, the broad principles on which we base the approach to taxation decisions that we take in particular taxation regimes are largely consistent and largely continuous. So, for instance, with indirect tax systems in gambling we generally place the liability to account and pay for gambling duties on the business rather than the player, and I do not see that changing. On the other hand, in regulation, if you look at what is happening in betting, whereas in the past bets could only be placed either on courses or on licensed premises, the technology has enabled betting exchanges to grow up, presenting if you like a number of headaches for the regulators without a change in regulation. It is in fact strictly, one could argue, an illegal activity. Secondly, it creates some quite serious challenges to the integrity of some of the sports with which it is associated. Thirdly, in the end, the capacity for such activity to move offshore and on to the web means ultimately it is possible to evade that regulation and indeed taxation altogether. So a very central issue, an important concern, and responsibility which I take seriously and will be a feature of the work we do, but in the end probably the implications of the regulation are perhaps more profound and more difficult for the regulatory regime rather than the taxation regime.
Q385 Mr Page: I am very grateful for your answer. The only small point I would bring to your attention is that intelligent anticipation would have given us a gross profits betting tax rather than the other duty, and that would have meant that a lot of companies would not have started to move offshore, they would have stayed onshore. I am very grateful for the tax change, I think it has been a tremendous advantage, but that is the sort of thinking to the future which I think we must do so we do not have the migration of companies and activities from our shores and the loss of the duties and the taxation benefits.
John Healey: It may be a fair area for argument as to whether or not we acted quickly enough, but I would just suggest to you, Mr Page, we did act at that point, by doing so we were able to bring what was going offshore back onshore both through the change in the taxation regime and in discussion with the industry ----
Mr Page: I am not knocking it, I am saying thank you very much, but if the thought had been there in the first place we would not have had to get out of the hole we got into.
Chairman: We did hear in the previous session that some support for gross profit tax is a means to doing precisely what Mr Page says. Unfortunately you were not here to hear that but the transcript will be available.
Q386 Lord Mancroft: Minister, the Treasury could, with a little bit of luck, be quite a significant beneficiary from this new legislation. How much has the potential for increased revenue as a result of the change to the gambling industry been a motivator for this new legislation? What contact has there been between the Treasury and the DCMS on this specific issue?
John Healey: The possibility of increased revenue to the Treasury has not been a motivator in the design and framing of the deregulation proposals. Beyond that, I am not aware of any discussion within Government in which the possibility of substantial revenue gains to the Treasury forms a part of the consideration in how to design the deregulatory regime proposed in the draft Bill. The motivations for the legislation I think are quite clearly set out and I do not need to rehearse those. From the Treasury point of view, we strongly support what we would regard as sensible deregulation and we do so generally because it contributes to our broader objective, the Treasury and Government objective, of increasing the productivity and potentially the activity within the economy. So those are the motivations, and the potential for any increased tax revenue has not formed a part of that, though the potential for revenue risk and revenue loss to the Treasury will form a part of the work I now do.
Q387 Lord Mancroft: I think that is a very helpful answer. What assurances can you give that the right balance will be struck between securing revenue for the Exchequer whilst at the same time encouraging investment and innovation, which will be one of the keys to the success of this legislation?
John Healey: It will indeed be one of the keys to the success of the legislation and the design of any tax reform which may be aligned to it, Lord Mancroft. Clearly we have a responsibility to ensure that a fair contribution towards general exchequer revenues is made from the industry in the future, but clearly we also have a very strong concern in the Treasury to promote and see stronger economic growth in the UK, and striking the right balance will be one of the central decisions and judgments that we will need to make.
Q388 Jeff Ennis: Taxes on gambling are often seen as regressive. Do you have concerns that increasing the opportunities to gamble will effectively be increasing a regressive tax?
John Healey: The principle that underpins the regulation of course and therefore the general Government approach to this is that adults generally have to take responsibility for what they do and are responsible for their actions, and one of the objectives of the deregulation is to increase the choice of these type of activities which may be available to people. I suppose my principal concern as a Treasury Minister is that the product that people chose to consume, the activities they choose to engage in, are fairly taxed, based on a belief that it is both fairer and a better balance if Government levies taxes on consumption as well as income, and that it is a better balance more likely to put in place a regime which properly gives incentives to work, to save and also to invest. On the concern you have about gambling duties being regressive, it is certainly true that gambling duties are one of the more regressive taxation regimes - although not as regressive as tobacco for instance - but I think probably I would suggest a sense of perspective here. It is generally thought people are by and large not spending a great deal on gambling activities. If you look at the statistics, households on average in this country spend £3.70 a week on gambling activities, £2.50 of which is with the Lottery. So that gives me really some grounds for not worrying too much about that as a problem. I would worry much more if we were not able to put in place across the rest of the taxation system the sort of provision we, for instance, have for zero-rated VAT on food and children's clothes, essentials which people do need, and if the taxation rates are too high are indeed seriously regressive, particularly when attached to essentials rather than if you like discretionary activities which clearly gambling falls into.
Q389 Jeff Ennis: Generally speaking, there is broad all-party support for this over-arching Gambling Bill which will be welcomed when the gambling legislation comes in. Are you concerned at the fact that the potential expansion into gambling appears to be more industry-led, shall we say, than demand-led? Is that a concern for you as a taxation minister?
John Healey: No. I would expect the industry to be leading the arguments in the current context, number one. Number two, the industry would expect me to treat those with close scrutiny. Number three, some of the reforms we have put in place to individual silo regimes if you like in the gambling field have liberated and encouraged individual demand rather than simply an expansion of supply. Clearly the impact of the reform of betting duty has had that effect. I expect the reform of bingo duty to have a similar effect. So I think we can see some important demand drivers in this field, not just the interests of the producers and suppliers.
Q390 Lord Faulkner of Worcester: I wonder if I could take issue with your first reply to Jeff Ennis about the regressive nature of gambling and just share an anecdote with you; more than an anecdote, an experience? I was in Australia in October and I was taken around a large number of gambling outlets in Melbourne and Adelaide and what distinguishes the Australian scene from Britain is the enormous proliferation of what are called clubs and hotels which are populated with poker machines. These are located almost exclusively in the working class areas of those cities and they appeal to people who do not have a lot of money, people who receive benefits, and they are very close quite often to the places where benefits are paid out, and they get their benefits from the equivalent of post offices and they go into the bars and play on these machines. I tackled somebody there who was a university professor and said, "Aren't you worried about the incidence of gambling in your state?" and he said, "I'm not worried about it, because the gambling pays for things I like to do and if we did not have the gambling I would have to pay more taxation." I found that a very hard attitude to understand. What I am concerned about with your first reply to Jeff Ennis is that you would appear to be sanctioning that sort of approach where the complete freedom for adults to gamble is paramount and the social considerations of who is doing the gambling and the effect the gambling is having on people seem to come second. I am sure I am misrepresenting you, but I would like to give you an opportunity to correct that.
John Healey: I am very grateful for the opportunity. Clearly none of us is looking at complete freedom for adults to gamble. The whole nature of the Bill and the Government's approach to this balances and puts in place the sort of safeguards which may be required to stop such problems getting out of hand. My argument is that is properly and most effectively a matter for regulation and questions of access rather than taxation. Gambling duties do indeed make a significant and important contribution to the general exchequer, £1.3 billion plus about a third of a billion on VAT and corporation tax as well, but it is essentially for the provisions in this Bill and the judgments which are made on regulation rather than the judgments which are made on taxation which will help deal with what is clearly a legitimate fear, particularly if it has been proved in practice in parts of Australia, and certainly with your experience, Lord Faulkner, something which the Committee will consider very carefully, as indeed the Government will.
Q391 Lord Brooke of Sutton Mandeville: Minister, like Lord Faulkner, I will follow up on a question Mr Ennis asked you, and I am thinking particularly of his last question where he raised the motivation and pressure for the legislation, where it came from, and you answered him. Large-scale gambling developments seem to be much more popular with local people when there is a possibility of generating benefits for local communities. Given this seems to be the case, would you consider permitting the use of a local levy or a hypothecated tax?
John Healey: I think we can all understand, and certainly in your days as a constituency MP you will understand, Lord Brooke, as acutely as any of us do representing constituencies, that where a significant development of any nature is proposed in a local area, the local community and local authority look to see what potential gain there may be and benefit for the area. That is an established part of the planning system in a sense, looking for planning gain as part of any development. On the question of localised tax regimes, the short answer is no. I hope that is clear!
Q392 Chairman: The clearest thing this morning!
John Healey: Let me explain. There are probably five concerns I have with the proposition. The first is that hypothecation of that sort constrains the capacity and ability of Parliament to determine the distribution of Government spend. Secondly, gambling duties make an important contribution to the general tax revenues used for a variety of purposes. Thirdly, there are serious questions about the proposition we should treat gambling in a different way from other forms of business. Fourthly, there is a risk of substantial volatility in the tax-take where it is based simply on a single or a small number of businesses in the local area. Finally, there is a concern about equity in that some areas clearly are in a better position to attract such activity than others. For those reasons, that is not an approach or a structure to taxation in these circumstances that I am attracted to.
Q393 Lord Brooke of Sutton Mandeville: All of us, I think, on the Committee greatly admire the candour of a Treasury Minister saying what you said at the beginning of the answer, and I can hear myself saying a number of the things you subsequently said. Against that background, and I ask in the context of another topical area out of curiosity, why did the Treasury in the context of higher education arrangements let payments in Scotland go back into a trust rather than go back into the Treasury? One of the consequences of that of course was to make it an attractive proposition to the Scots, that in fact their higher education was going to benefit.
John Healey: The answer is simply devolution. This is a devolved area of policy-making that is a responsibility for the Scottish Parliament, and that is the system they have put in place there. With gambling taxation, we have a unified UK regime at present. It is not, I have to say, Lord Brooke, a dimension to the potential tax issues we may face, and I cannot really consider it. I am not obviously immediately attracted either to devolution or disintegration of a unified UK tax regime on gambling. The answer on fees of course is devolution.
Q394 Chairman: But it has been put to us that if you want to have significant regeneration of seaside resorts, such as Blackpool, were they to be able to take up the opportunity of becoming an international casino resort, there would have to be investment from the companies setting up those casinos into the local infrastructure. Is this something that the Treasury has taken a view upon? It may not necessarily be done through hypothecated tax, but is it your judgment it could be done through planning agreements?
John Healey: It would indeed need investment. It would not, as I have suggested to the Committee, need a local levy or hypothecation in that way. Conceivably, it could be encouraged through the planning regime, it could conceivably be encouraged at local authority level, it could also be a matter that Regional Development Agencies concerned about projects of strategic economic importance in their region would be interested to take a view on. To use the metaphor I suggested to the Committee earlier, planning policy, the way these sort of issues are dealt with, is one of those chairs which needs to be brought to the table of the deregulation in the Bill.
Q395 Chairman: But you accept that the tax regime obviously has a bearing on how generous the investing casino company could be?
John Healey: The tax structure and tax rates are likely to form - and certainly the industry would argue it is an important dimension - a dimension in their ability to prepare convincing investment plans. That is clearly a relevant factor.
Q396 Mr Meale: Minister, as you know, the DPM has been involved over the last few years in quite a number of cases where the principle of hypothecation of tax has actually been supported. The London Underground, public-private partnerships, there is a whole range of them. We have been told the betting yield from this will be £2.2 billion, which is a considerably large amount of money, and we have also been told that probably there is going to be investment in only three or four areas which are going to have to bear the brunt of all that. We have seen examples elsewhere in the world, particularly New York State but elsewhere, where tax revenues and profits have been hypothecated to stay in a particular area to deal with that. Bearing in mind these previously different approaches to hypothecation, for instance in airport areas and taxes gathered from fuel at airports, why can we not look at the concept of these communities - as I say, there are not going to be many of them - actually retaining some of this revenue?
John Healey: To be honest, I am not sure some of the designated funding streams, whether PFI credits or PFI partnerships or regeneration projects which are designated and targeted at particular areas like the New Deal for Communities or the Neighbourhood Renewal Fund, constitute hypothecation under the auspices of the Office of the Deputy Prime Minister. However, I think there are often better ways of getting resources into local areas that require major projects or require regeneration than looking to the tax regime to do it. You ask a more general question, why can local authorities not hold on to some of the essentially business tax returns from the companies in their area. One of the five problems I have with this proposition of a local levy for resort-style casinos is that it would be a return to the local authority and local people based on perhaps a single or a very small number of companies. In fact, you may have seen in the Pre-Budget Report the Chancellor delivered in December before Christmas confirmation that the Government will introduce what we are calling a local authority business growth incentive. This is where all local authorities stand to gain additional funding based on the increase in economic activity in their areas. If we had had that in place over the last three years, it would have been worth a total of an extra £1 billion to local authorities. It seems to me to be a similar principle you are interested in but a much more stable and sustainable base on which to stay, "We want local authorities to take a greater interest in the economy and the health of the labour market in their area", where they are playing a part in local economic growth, than there are rewards in order to incentivise and give that proper attention. I would suggest that is a better and more stable and sustainable way of doing the sort of thing you are looking for than simply looking at a rather narrow sector with a very small number of potential companies and looking to follow that model with them.
Mr Meale: I am not looking for it at all, I am just posing the question.
Q397 Lord Faulkner of Worcester: A quick question on the regulatory impact assessment, Minister. The Cabinet Office guidance says that an RIA should contain an assessment of the benefits and costs of a proposal as the central analytical component of the RIA, yet the one produced by the DCMS on this Bill does not contain any monetary assessment of the benefits of the proposals. Do you think it should?
John Healey: Clearly setting monetary assessments of the potential benefits of future changes is difficult. It is complex, it is uncertain, it requires sometimes heroic assumptions which, whether it is a potential investor, a potential developer or a Government, one does one's best to try and narrow down and ground as much as possible. In fact, the RIA does have an important feature, and it is on page 19, in paragraph 1.78, where it suggests that the projected annual average increase in net expenditure on gambling would rise by at least £500 million over the period 2004/05-2008/09. That is probably around 6 per cent of the £7.8 billion that was last year spent on gambling. So there are figures in there. There is that specific figure which was, at the stage the Government prepared the regulatory impact assessment, our best estimate. Part of the work, to bring the Committee back to our starting point, that now needs to be done by formalising the work between DMS officials, Treasury officials and Customs officials, is to see whether or not we can get a more reliable and more robust assessment, if you like, of the potential economic impact. Clearly, after this Committee has made its recommendations, and in advance of any legislation, an up-dated regulatory impact assessment would and will be produced, and that will draw on any sounder economic modelling that we are able to produce within Government.
Q398 Chairman: That Option 3, as you point out, does produce that figure but it does also suggest that other costs might be a potential reduction in income for good causes by the National Lottery, and possible costs for the NHS and other agencies. Are there any figures available to the Treasury which you can share with the Committee as to what those costs might be? From our first evidence session this morning, there is some concern that the Bill could have an adverse impact on National Lottery proceeds, for example. It might be something you want to look at and write to us on.
John Healey: I can answer you now, Mr Chairman. I regret we do not have hard figures, and this in a sense refers us back to the proposition Lord Brooke was questioning me about. The principle and plausible assumption that there is going to be substitution and some diversion I think is sound. Our ability to assess the dimensions, as Lord Brooke put it, still requires further modelling work but it is clearly something we will be doing.
Q399 Lord Donoughue of Ashton: Minister, provisions in the draft Bill will extend the use of credit cards for gambling purposes. Surely such easy credit card use will significantly increase the levels of gambling and will significantly increase the levels of problem gambling, because it makes possible rapid gambling, chasing losses and gains beyond the real resources of many individuals involved, with the consequential increase in consumer debt which many commentators - the Treasury, I do not know - consider already high. Do you have any concerns about this? Is it right for the Government actually to promote these consequences?
John Healey: The Government is concerned about this. I would suggest to the Committee it is reflected in the nature of the deregulation proposals which are part of the draft Bill, where the extension of the scope to use credit cards or credit in this area is actually rather restricted. So that is the first point. The second is that much of the work that the consumer protection part of the Department of Trade & Industry has been doing is relevant in more general terms to these sort of concerns, and the Department of Trade & Industry may have some valuable information to provide the Committee on the sort of plans in the Consumer Credit White Paper and other safeguards which we are putting in place. On the general debate which is being conducted at the moment about levels of debt, in the context of a stable and steadily growing economy, in the context of record historic levels of employment, in the context of interest rates being close to their lowest levels since the 1950s and inflation low and stable, I would suggest to the Committee that in many ways the debt that people generally now have is affordable in a way that in previous periods it was not. For me, the important measure of that is the proportion of interest payments which households have to make, if you like, as a proportion of their disposable income. Figures for total interest payments are now just 7.1 per cent of disposable income compared, for instance, to a rate in 1990 which was over 15 per cent.
Q400 Chairman: We had high interest rates then, what if we get them back?
John Healey: If you look at the macro-economic situation, if you look at the levels of debt, whether that is straight forward mortgage debt or wider interest and consumer debt, the levels at present compared to previous periods are actually rather low. Interest rates remain low, they remain relatively stable, and in those circumstances many households and individuals are not taking unreasonable decisions when they make decisions about the sort of debt they take on.
Mr Meale: Minister, that is a bit blasť as an answer, if you pardon me saying that. Surely what you as a good Treasury Minister want to do is to keep that situation, and clearly the extension and use of credit cards and large amounts of debt open the door to severe difficulties arising for people who are drawn into gambling using modern technology. Surely it would not be difficult for some guidance, some opinion, from the Treasury to come forward to help us in ways to put restrictions in to stop different situations and scenarios arising?
Q401 Chairman: Before you answer, could I make the point that several members of the Committee visited GamCare last week, and we were quite shocked by the extent to which known problem gamblers were able to get hold of yet more and more money by being offered yet more and more credit cards, even when it was patently obvious they already had sufficient level of personal debt which ought to deter anyone from lending them any more money, let alone that they were someone who had a clear, addicted gambling problem. It may not be opportune for you to answer that question today but it is an additional point. Apart from the use of credit cards as a means of paying for gambling, and actually paying for it at the point at which they gamble, people can actually get hold of money from credit cards which they then use as cash to gamble in circumstances where, quite frankly, they ought not to have been given any further credit at all. That is the wider issue which perhaps your Department and the Department of Trade & Industry need to examine.
John Healey: Mr Chairman, Mr Meale, I certainly do not mean to sound blasť or complacent. I did say earlier that as a Government we are concerned about the predicament, particularly for individuals who are over-exposed. I simply wanted to get a proper perspective of what sometimes is a distorted debate about the levels of debt in the economy and what is sustainable, and point out that other parts of the Government are giving some attention to this. In many ways, Mr Chairman, the point you have just made as a result of the visit the Committee made last week underlines the valuable role of the pre-legislative scrutiny process because, if indeed this is a problem which this Committee is concerned about, it is certainly something the Government will give greater attention to.
Q402 Chairman: Thank you very much. Can I formally thank the Minister for coming. You have had almost, by my reckoning, a four-hour stint, and that is just the official period, in the two committees. We are very grateful for your answers. I can assure you we will endeavour to produce a report which is helpful to you on issues which clearly you still have to reach decisions about.
John Healey: Thank you very much.