(Clauses 16, 17, 43 and 45; Schedules 2 and 3; any new clauses and new schedules relating to the subject matter of those clauses or schedules)
Considered in Committee
[Mr Lindsay Hoyle in the Chair.]
Insurance premium tax: standard rate
I beg to move amendment 1, page 59, line 19, at end add—
“(6) The Chancellor of the Exchequer shall, within three months of the passing of this Act, undertake, and lay before both Houses of Parliament, a review of the impact of any further rise in the standard rate of insurance premium tax with particular attention to the impact on—
(a) the price charged for insurance policies; and
(b) the take-up of insurance policies”.
The change in the level of insurance premium tax from 6% to 9.5% will have an impact on insurance premiums, and it will mean increased costs for families. Treasury figures show that the increase will have one of the biggest impacts on Government finances of any policy revealed in the summer Budget. By 2021 Ministers will have brought in an extra £8 billion from the measure, a cost that is likely to be passed on by insurance companies to consumers, so as we debate clause 43 and Labour’s amendment I want to ask the Minister to explain the reasons behind the level of this tax rise and to ask whether Ministers have fully considered where the impact of this rise will be felt and which groups will be most affected.
In 2010 the coalition Government announced a similar but much smaller rise in insurance premium tax from 5% to 6%, but this most recent change increases the tax by 58%. I want to ask the Minister for the reasoning behind that scale of change.
A colleague of the Minister in the Lords, Lord Northbrook, has described the insurance premium tax increase as an easy target. Taxes should not be increased just because they are easy targets. Indeed, any decision to increase Government revenue should be undertaken after a robust analysis of the impact the changes will have on individuals and businesses. There are still many questions to be answered about the impacts of this measure on family finances and on the take-up of insurance. So in addition to other questions later, I want to start by asking why the Government have chosen to make such a marked increase in insurance premium tax from 6% to 9.5%, an increase of 58%.
Does the hon. Lady agree that the proposed new level of tax will still be substantially lower than the 19% rate levied in Germany, and that the proposals strike the right balance between raising revenue and making sure premiums are competitive?
I do not think making such comparisons is particularly valuable and I will come on to the reasons why.
The insurance industry has raised concerns about the impact of this increase. Huw Evans, director general of the Association of British Insurers, responded to the proposed increase in insurance premium tax by warning that consumers would be worse off. He said:
“Insurance Premium Tax is a tax on people and businesses at the point at which they buy a general insurance product. So it’s very disappointing to see a more than 50% tax increase being imposed on consumers, especially when the insurance industry and Government has worked so hard in recent years to bring down the cost of essential insurance.”
The ABI calculates that the new rate of insurance premium tax will add almost £10 to the average annual household insurance policy for buildings and contents combined, and over £12 to the average annual comprehensive motor policy. However, the increase will be much higher for some groups, and I want to come on to talk about them.
Does my hon. Friend share my concern about householders in areas prone to flooding who might already have to pay high premiums and for whom this is an additional amount they will have to find on top? That is certainly the case for a number of properties bought under the Help to Buy scheme set up by the Treasury, as those properties built after 2009 are not eligible for the Flood Re insurance scheme the Government have brought in.
Indeed, and I will come on to that, because the cumulative impact of this and other changes in the Budget on specific groups is of great concern. My hon. Friend is right that there could be a real issue in parts of the country prone to flooding. We do not want to see families in the properties my hon. Friend talks about that are outside the Flood Re scheme go without insurance.
It is not for me to make those suggestions; it is the Government’s Budget, not mine.
As I have said, the increased cost of this will be much higher than the averages for some groups. The AA has also shared its concern. After the Budget, AA president Edmund King said:
“The sting is in the tail. The Insurance Premium Tax increase on the average car insurance policy is still equivalent to a fuel duty increase of almost 2p per litre. Either way drivers are being hit in their pockets. This is an outrageous hike which could well backfire by leading to an increase in uninsured drivers.”
Will the hon. Lady join me in welcoming the fact that the freeze on the motor fuel duty escalator over the past three or four years has saved motorists far more than the 2p a litre to which she has just referred? It is saving the average motorist about £10 every time they fill up, which is far more than the 2p that she mentions. Will she join me in welcoming that measure?
No I will not. As I have just stated, the president of the AA, Edmund King, has said of the Budget:
“The sting is in the tail.”
It is fine to make improvements that help the motorist, but the sting is in the tail and he has made the point that this is an outrageous hike. I ask the hon. Gentleman to reflect on the impact on young motorists and the possible increase in the number of uninsured drivers. If that were the result of this hike, it would be a very dangerous development.
The chief executive officer of the British Insurance Brokers Association, Steve White, has also raised concerns about the impact of the tax on insurance policies and on the industry. He makes this important point:
“Those hit by this stealth tax will include the 20.1 million households with contents insurance, 19.6 million with motor insurance and 17 million with buildings insurance. The Government has been working with the industry to reduce the cost of insurance for consumers…It therefore seems counterintuitive to be taking measures which will add to the cost—effectively taxing protection.”
Let us be clear about what is going on. This is a tax on the protection that families need.
The Financial Secretary to the Treasury, who is now in his place, has made clear in the past his views on the impact of increases to this tax. In 2010, he said of the smaller rise that was introduced at the time:
“I am not denying that we expect the increase to be passed on predominantly to consumers; we expect that the bulk of it will be.”—[Official Report, 15 July 2010; Vol. 513, c. 1130.]
Indeed, some of the UK’s biggest insurers, including Aviva and RSA, have already confirmed that they are planning to pass on the cost to consumers.
We need to be clearer about which groups will be affected by this increase and what impact it will have. Car insurance and home contents insurance policies will clearly be affected. Of course we welcome the assurances that the Government have given about preventing a rise in VAT, income tax and national insurance, but families in the UK will still be hit by these changes to the insurance premium tax. This tax increase on families comes in addition to other Budget measures that will hit families, such as cuts to tax credits. We must always keep in mind the cumulative impact on families of all the Government’s policies.
Hon. Members have asked what else we would do. The tax rise is also contrary to what the Chancellor promised before the election. He said that
“tax increases are not required to achieve”—
further consolidation, and that this
“can be achieved with spending reductions”.
So the Chancellor did not foresee these measures. Despite his claim, however, he has chosen to deliver a Budget that increases taxes as well as placing a significant squeeze on public finances and services. The average household is likely to be affected by these changes in multiple ways. Many families purchase more than one type of insurance, which means that they will have to pay this tax increase more than once.
We must also consider the effect of the policy on different groups. People’s insurance needs differ depending on their age and income and on whether they own their home. Those who have high premiums are more likely to be adversely affected by this increase to the taxation rate. The groups that I single out are young motorists, homeowners and some businesses. For example, insurers have estimated that the average cost of a year’s cover for drivers under 25 will jump by around £50. The British Insurance Brokers Association has stated that
“a young driver or an experienced driver in an inner city area would see the amount of tax on an annual car insurance premium of £1,500 increase from £90 to £142.50”.
Young motorists already pay the highest premiums, with the average policy for someone who is under 25 already costing more than £1,200 a year. For a young apprentice, jobseeker or student, the increase could make the difference between being able to afford insurance so that they can travel to work for their first job and not being able to do so. Young people are already having their eligibility removed for housing benefit, jobseeker’s allowance and the new minimum wage, and this is just another financial burden that the Government are placing on them.
Another group facing higher insurance premiums are people who have become unemployed. A BBC report in 2012 showed that those without a job are generally asked to pay more for motor insurance cover than those in full-time employment. BBC research with three different brokers found that car insurance premiums averaged almost a third more—30%—for those out of work, but that the cost could be as much as 63% higher. People who are out of work already face many challenges: looking for a job; finding the money to pay their rent or mortgage; and finding the money to feed their families and run their homes. Insurance premiums are higher than regular premiums, so this increase is just another blow to people who are struggling to find work.
We must also consider the impact this policy will have on businesses, as corporate insurance premiums will also be affected by this increase. Although large companies might be able to absorb it, concerns remain about how small and medium-sized businesses will be affected by the extra cost. Will the Minister therefore tell me what assessment has been made of the impact of the tax rise on the take-up of insurance by business?
The insurance industry is also under a significant amount of pressure to implement the changes needed for this tax increase, which will apply from 1 November 2015. The Association of British Insurers has stated:
“Firms had no advance warning of the increase in Insurance Premium Tax announced in the Budget, meaning preparations for the implementation date of 1 November have placed sudden pressure on IT and back-office services.”
The Government’s failure to foresee this difficulty suggests the need for a more thorough assessment of similar tax increases in future and a consideration of whether industries can implement changes in such a short period of time.
The rise in insurance premium tax may also put extra pressure on insurance companies, given their other obligations. We have already touched on the Flood Re scheme, which was introduced in 2011 as a mechanism to protect households at risk of flooding from high insurance premiums. In 2013, as part of the Flood Re scheme, the ABI and the Government agreed to a cap on flooding insurance premiums in order to ensure that affordable home insurance was made available to those most likely to need it in the event of a flood. The Flood Re pool has two sources of income: the flood element of the policies passed into it; and an additional levy on the industry. Although the amount of money the levy needs to raise each year is fixed, if insurance companies start to see a significant decrease in profits because of the rise in insurance premium tax, they may consider passing on more of the cost of this levy to policyholders, again meaning a steeper increase in their premiums. My hon. Friend the Member for Kingston upon Hull North (Diana Johnson) has already raised the issue of households outside the Flood Re scheme suffering higher premiums. Once again, those with the highest premiums could suffer the most, particularly if those with lower risks decide to forgo insurance altogether.
Her Majesty’s Revenue and Customs’ policy paper reports that the mechanism for monitoring and evaluating the policy will be through
“information collected from tax returns and receipts”.
We believe there is a need for more in-depth analysis and understanding of exactly who will be affected by the increase and the impact this will have on the take-up of insurance. Concerns have been raised that the increase in the insurance premium tax rate could create perverse incentives and market distortions, meaning that fewer people take up the correct level of insurance to cover them against certain risks and liabilities. Clearly, insurance is a vital tool that helps people plan for risks in their lives. We should be encouraging people to take out policies that suit their needs and encouraging the insurance industry to offer competitive and affordable policies—it seems the Government were concerned about that but their concern has now ended.
We believe that vehicle insurance is of the greatest importance, because drivers are legally required to insure their vehicles if they want to drive in the UK. The legal minimum of third-party insurance covers drivers if they have an accident causing damage or injury to any other person, vehicle, animal or property. It is right that the UK law encourages drivers to take that responsibility. When fines for driving uninsured are becoming a fraction of the costs of insurance, higher premiums could lead to more uninsured drivers, and there is a real fear about that in the industry. Young drivers already face premiums of more than £1,200, and that will increase with this tax increase, so a fixed penalty which can be only £300 and six penalty points could be seen increasingly as a risk that people are—wrongly—prepared to take.
There seems to be the assumption that the entire increase will be passed on—perhaps in part it will—but I visited one of the country’s largest insurers in my constituency and it did not seem to have cause to pass on the increase. Perhaps the hon. Lady should reflect on that and see that passing on such costs may not be automatic. It may be that a reduction in corporation tax means that the costs can be absorbed.
I think that I have already covered that. In a debate in 2010 it was accepted that these costs are almost always passed on. Almost every commentator has said that the costs will be passed on. Aviva and RSA have already announced that they will pass them on, so all the signs are that they will be passed on. Clearly, it would be good if any part of the insurance industry decided not to pass on the costs, but what we are seeing is an increase in premiums across the piece.
This tax increase on a merit good like insurance could undermine the message that individuals and society benefit if the correct level of insurance is taken out. An increase in the insurance premium tax of 58% punishes families and individuals for acting responsibly. When there have been previous increases in the tax, they have been something in the order of around 1%. There is a major concern that this steeper increase could be large enough to alter the coverage chosen by customers, which means that they would become underinsured. It may be that Conservative Members do not face problems of underinsurance in their constituencies. I must say that I have seen a lot of it in my constituency. People really suffer when they are underinsured. If levels of crime are high and there are other issues affecting them on the roads, underinsurance is a real issue.
The Government need to ensure that tax policies do not lead to a situation in which families struggling on low incomes decide to forgo insurance or let their previous policies lapse because prices have risen and they decide that they can no longer afford insurance. That could leave many families at risk of great loss in the event of burglary, or if they have a road accident.
Underinsurance could be a consequence of this rate rise. People could also opt for cheaper policies, which means that they do not get the right coverage, or they opt for higher excesses, which effectively means that their coverage is less. Buying insurance can be a complicated business and a good price may often take precedence over having the right level of coverage.
The HMRC policy paper for this rate rise estimated that there would be
“a small reduction in the demand for standard-rated insurance.”
Any fall in demand for insurance that leaves families open to greater risks should be avoided. Where does the Minister believe this “small reduction” is likely to occur and what is she doing to prevent reductions in the demand for insurance?
Finally, HMRC suggests that there could be changes in the behaviour of insurance companies. It states that there is likely to be
“a small increase in tax planning activity by insurance companies.”
What are the Government doing to minimise this further potential unwanted consequence?
Clause 43 is a typical measure from a Conservative Government who promise one thing and then deliver the opposite. In this case, the Chancellor promised before the election that he had no need to raise taxes, but then he raised this tax, which will have an impact on households throughout the UK and on their usage of insurance. The increase could have a number of negative consequences. Higher insurance premiums may lead to fewer families and individuals purchasing much-needed insurance to protect themselves against everyday problems, which happen much more often in some parts of the country than in others. I am talking about burglary and damage to property and possessions.
The Government must provide more information and analysis of the wider impacts of this tax increase, as well as strategies to prevent the negative consequences that are likely to result from this policy. Labour’s amendment to clause 43 asks the Government to consider the impact of any future increase of the tax.
The Institute for Fiscal Studies has called for a road map to indicate a long-term strategy for our tax system. The CBI has outlined its concerns about the UK tax system in a letter to the Financial Secretary, stressing the need for Ministers to recognise that
“changes to the tax system that appear innocuous can have wide-ranging effects.”
The CBI also stated that there was a need for “renewed discipline” in tax policy making and that the lack of consultation and notice period for tax changes can cause great uncertainty for businesses. None the less, the Government continue to increase and lower taxes for short-term policy goals. Labour believes that we need to consider how to reform our tax system so that people and businesses are taxed efficiently and fairly.
As I have outlined, there are particular concerns about this and any future potential rise in insurance premium tax because of the impact it might have on the price of insurance policies and the take-up of insurance by families and individuals. With that in mind, will the Minister comment on the potential for any further increases in the insurance premium tax during this Parliament, given the comment of her colleague in the Lords that the tax is an easy target?
Labour’s amendment will ensure that the impact of any future increase is properly considered by the Government. It will ensure that there are careful deliberations—much more careful than we have seen on this occasion—on the short and long-term consequences of any further increase in the insurance premium tax and its effect on families and business. I ask Members on both sides of the Committee to support our amendment tonight.
: I remind the Committee that I advise an industrial and an investment company and the details are set out in the register.
I found it interesting to listen to the hon. Member for Worsley and Eccles South (Barbara Keeley)speak from the Opposition Front Bench on this important matter. As someone who thinks that taxes are best kept low and that we need to do all we can to maximise the spending power of those we represent, I had a lot of sympathy with much of what she was saying. Of course, there will be people who do not want to pay an increased insurance tax—who does? In particular, some people will find it difficult because it is quite a high tax. I would have found the hon. Lady more convincing had she been able to answer the question in my intervention: if not this, what?
We have just had a passionate debate in this House in which the Opposition, understandably, wanted us to do more for Syrian refugees. That takes money. We are already being very generous with our overseas aid budget, and although we understand their motivation they are not proposing lots of reductions in spending.
That is interesting, because one of the difficulties with capital taxes is that they are sensitive to the rate and details of the scheme. The first rule of any tax must be that if it is raised, more revenue must be got from it. One thing that is certainly true of this insurance tax is that although we would rather it was at a lower rate, it is still at a low enough rate that if we raised it we would collect more revenue. I am not sure that that is true of the inheritance tax system, and the hon. Lady must understand that quite a lot of her constituents are not very happy about the current regime and are looking for changes.
The hon. Lady might well find that some of her constituents have aspirations and could be successful; I am surprised that she is so negative about them. Many people in all parts of the country welcome the idea. In 10 or 20 years’ time, if there is a death in the family and assets pass, they would be grateful not to have that limit. It was a good effort and I accept that the hon. Lady came up with the least bad of the Labour attitudes. Everything else that Labour wants to do involves either spending more money or increasing tax rates, which will reduce the revenue.
The right hon. Gentleman should be directing his question to the Chancellor, because, as I said, it was the Chancellor who said that
“tax increases are not required to achieve
further consolidation, as
“this can be achieved with spending reductions”
The right hon. Gentleman ought to be asking the Government and his right hon. Friend the Chancellor his question rather than the Opposition, because the promise to the electorate—this is the important thing—was that there would be no tax increases, yet here we are soon after the Budget with a tax increase that will hit many millions of households and bring in £8 billion.
But I support the Government on that. I think that they are right to want to make more progress in bringing down the deficit—I am not sure whether the hon. Lady agrees. I also think that they are absolutely right to honour the very important promise they and I made to our electors not to increase income tax or VAT. Better still, we must honour our pledge to get income tax down, particularly for people on lower incomes, by raising the threshold. I also wish to see reductions in income tax at the 40% level, which affects many of my constituents and those who aspire to better jobs and pay, which we hope our economic recovery will deliver to many more people. We are honouring our pledge not to increase income tax rates, but to make the cuts we specified over the five-year period, and we are honouring our pledge on VAT.
There seems to be a very selective honouring of pledges going on. The pledge not to increase taxes is not being met, because £8 billion is being taken. The other thing that I am very concerned about is the Government’s decision to ditch the pledge to cap social care costs. It is one thing to allow people with properties worth £1 million not to pay inheritance tax, but it is quite another when people up and down the country will be hit by the dropping of the pledge to cap care costs. Perhaps the right hon. Gentleman would like to comment on that, because I am sure that it affects his constituents just as it affects mine.
I think that we are now going rather wide of the amendment and the clause that we are meant to be debating. I wish to see a generous care system that is properly controlled and disciplined. If the hon. Lady has individual cases where people will be adversely affected unreasonably, I am sure that Ministers will be willing to look at them. The last thing I wish to see is unreasonable cuts affecting people who really need the money, but I also wish to see more work done—this is what the Government are doing—to promote the abilities of many people, including those she suggests are disabled, because many people have many abilities. This Government are about encouraging those abilities, helping people to do more for themselves and, where possible, to get into work so that they can lead more rewarding lives, and so that they can receive pay in addition to the benefit assistance for which they currently qualify. There is a complete policy there to promote better lives for everyone in society, and cutting income taxes is an important part of that, and promoting abilities and opportunities is another.
Does the right hon. Gentleman not recognise that there is a moral hazard to a degree in taxing insurance? There is a moral hazard that we recognise through the fact that 80% of activity in the insurance business is not taxed. Therefore, if we are increasing the tax burden on that 20% simply to raise revenue, it might be worth coming back and looking at the consequences.
That is very good advice, and that is exactly what this Committee is trying to do by highlighting the issue in a short but thorough debate.
I will now make some progress on the specific matters relating to insurance tax. It passes my first test, which is that if we have to increase a tax rate we must ensure that we get more revenue from it. It passes that test because the starting rate is sufficiently low, and the forecasts indicate that we will see a substantial increase in revenue as a result of the change.
The second question is what is its distributional effect. The hon. Member for Worsley and Eccles South understandably made much of the cases that are the hardest, but overall I would imagine—the Minister may have some figures—that people who are better off will pay more of this tax than people who are not so well off, because a lot of it is insuring property and asset and businesses, and it will be the people with the most substantial assets and businesses who will pay rather more of that tax. It therefore meets a general test of fairness in the sense that it is progressive.
My one nervousness about that—I look forward to the Minister’s response on this—is over the issue of the young driver, which the hon. Member for Worsley and Eccles South raised. I think that we need to ensure that we have a very supportive package for young people generally, because they are finding it difficult to price themselves into housing, and they do not always get the rates of pay at the beginning of their careers that we would like to see them enjoy. It is very important that we keep cutting the income taxes at the lower end of income, especially for them, because they really need to keep everything they earn if their starting pay is not very good.
The biggest problem for the young driver, particularly the young male driver, is that the starting prices for insurance can be exceptionally high. Indeed, it is sometimes difficult for the very young male driver to get insured at all. We have to ask ourselves why that is. The main reason, of course, is that the young driver is perceived to be a bad risk by the insurance company. There is some evidence that the younger driver may, on average, have a worse record than the older driver, and that is why the premiums can be particularly high on younger people.
Perhaps the Government can help rather more, through and with the industry, to tackle the main problem, which is not the tax on the premium but the initial height of the premium. Some good work has been done in the industry to provide methods of reassurance that the young person will drive well and safely by means of technology in the car that monitors them, at their own request and with their agreement. That may be the price of their getting the lower premium. We need to look at how technology and support for good driving can be reinforced so that a young person is more readily insurable at a realistic price. Of course, if the young person behaved recklessly, that would become obvious and the arrangements would have to be changed, but there are ways in which this can be done.
It is not a question of technology changes. This £50 increase, at least, in the duty paid on the very high premiums that the right hon. Gentleman is talking about will prevent young people—presumably young men, more than young women—from getting to the point where they can start to gain experience. The age at which people will be able to be insured will advance and advance so that they will be unable to get started. That is the issue. It is not a question of technology but of making insurance affordable, and this makes it worse.
I am trying to deal with the underlying reason why it can be very difficult for young men, in particular, to afford insurance. The big problem is not the increment on top of the current insurance tax or the bigger increment resulting from this Bill; it is the starting level of the premium. People are working on ways in which we may be able to address that.
If the young person can accept a system that will reassure the insurer that they are going to drive sedately, prudently and safely, then the reason for charging them more disappears. By accepting the constraints of the technology, they can demonstrate that they are driving safely. That reinforces their cheaper premium and they can start to earn the bonuses that the rest of us enjoy if we have driven safely for a long period and then get discounts on the insurance costs. It is getting started that is so difficult for young males, in particular, when they are all judged by the average standards of high claims that the industry experiences. I hope that the Minister and her colleagues in Departments more directly related to the insurance industry will look at this problem. It is not caused primarily by the tax system but by assessment of risk and perceptions of driving behaviour. It can be very unfair on individuals, and the more that can be done to smooth that out, the better.
I do not like tax rises. Part of the reason I am in Parliament is that I want to be a voice to try to keep taxes down and have a more prosperous society as a result. I cannot say that I welcome this part of the Finance Bill, but as someone who believes that there are important public items that we cannot cut, and faced as we are with Opposition parties that very rarely come forward with any proposals to save public money, we have to raise a reasonable amount of money. We have been borrowing too much, and this is part of a series of measures to try to get our borrowing under some kind of control. With regret, I conclude with the Government that this is one of the least bad options for trying to do that. I hope that they will take on board the need to work away at some solutions to the underlying problem of individual categories such as young drivers who may find this to be another increment on top of a difficult situation.
I want to speak briefly to amendment 1, tabled by my hon. Friend the Member for Worsley and Eccles South (Barbara Keeley). It centres on the need to review within three months the impact of clause 43 on the charges for and take up of insurance policies. As I said in my intervention on my hon. Friend, the proposal relates directly to those properties that are not part of the Flood Re scheme.
I want to address this issue because of its effect on Kingswood in my constituency. Hull was one of the most successful areas in the country for the previous Government’s Help to Buy scheme. I welcome that. Obviously it is important that people are assisted in buying their own homes and properties. The problem, however, is that more than 95% of the city of Hull is below sea level and it has been prone to flooding in the past. In 2007 we had very bad surface water flooding, so insurance companies look at what has happened in Hull and fix their premiums accordingly.
The Flood Re scheme has assisted in the past and we now have the new Flood Re scheme. The problem, however, is that it does not apply to properties built after 2009. Those young people and first-time buyers who have bought properties in Kingswood over the past few years are not able to access the Flood Re scheme, so they have to go to the open market for house insurance. I am concerned that those people, who are trying to do the right thing and buy house insurance, may find themselves being doubly penalised, because not only are they not entitled to the Flood Re protection, but they will have to pay this increase in insurance tax.
I am interested to hear what my hon. Friend has to say about the Flood Re scheme. Cockermouth and Workington in my constituency have suffered very badly from floods. Does she agree that it is also a problem that businesses are not covered by Flood Re and thereby fall short?
Yes. There are many welcome things in the Flood Re scheme, but, if I recall my reading on it correctly, it does not cover small businesses operated by people from home. I do not want to go too far down the road of Flood Re, because clause 43 relates to insurance tax.
I welcome the Labour Front Benchers’ proposal and I hope the Minister will be willing to consider a review. I do not agree with everything the right hon. Member for Wokingham (John Redwood) said. The properties I am talking about are small starter homes. These people do not earn a lot of money. They do not have big properties or an income that would allow them to pay sizeable premiums for a property. They are struggling and are often on the minimum wage. They have bought their properties, but every penny counts and I am worried that they will not be able to afford to pay not only a hike in premiums because they are not in the Flood Re scheme, but an additional increase in tax.
The cost of home contents insurance has fallen across the country by about 8% since last year. Does the hon. Lady agree that, as a result, clause 43 will have a limited effect on those sorts of costs and that it strikes a fair balance between raising revenue and maintaining a competitive insurance market?
Unfortunately that is not the experience of many of my constituents in Hull. Every year lots of people contact me when their premiums are up for renewal, because they have such difficulty in getting affordable insurance. I stress that that is particularly the case for those who are not in the Flood Re scheme, which offers some protection at premium levels. I am concerned about those who are not part of the scheme and are in small properties and do not earn very much—as I have said, every penny counts. There should be a review so that those people, who generally will do the right thing and pay for insurance, do not find themselves unable to afford to do the right thing in the future. I hope the Minister will take on board what my hon. Friend the Member for Worsley and Eccles South has said.
I thank the hon. Member for Worsley and Eccles South (Barbara Keeley) for raising the significant issue of fuel duty, which affects all our constituents. It is, however, important to recall the context in which that taxation arises, which is the need to close what is still a very large deficit. Where opportunities exist to adjust taxation sensibly, it is prudent to do so.
My hon. Friend the Member for Havant (Mr Mak) mentioned the context a few moments ago. Home insurance premiums have reduced by 8% year on year during the past year, and car insurance premiums have reduced by about 10% during the past three years. Those reductions more than offset this relatively modest tax increase. I share the distaste of my right hon. Friend the Member for Wokingham (John Redwood) for tax increases, but I understand how, in these times of financial difficulty and given the need for deficit reduction, difficult choices have to be made, and I fear that this is one of those difficult choices.
I want to expand on my intervention about the effect of the fuel duty escalator. One of the most significant areas of insurance premium taxation is that of motor vehicles. The suspension of the fuel duty escalator has had a really quite impressive effect on the cost of motoring. The hon. Member for Worsley and Eccles South mentioned an estimate that the insurance premium tax increase would add about 2p to a litre of fuel. I have done some rough calculations on my iPhone during the debate, and I estimate that the saving delivered by the freeze in the fuel duty escalator in 2011 has saved approximately 12p per litre. Taken together, the effect of this Government’s policies on the cost of motoring is a net saving of 10p per litre, which I very strongly welcome.
I want to say more about an opportunity to do more to combat the cost of insurance premiums. I have personal experience of the very widespread practice of making fraudulent claims, particularly for personal injury. I will mention some statistics in a moment, but I will first talk about my personal experience.
A year or two ago, my wife and I were involved in a very minor traffic collision: the car got a bit of a bump and the bumper had to be replaced, but it was nothing more serious than that. A claims management company based in the north of England somehow got hold of my mobile phone number. I have no idea how it did so—from the breakdown recovery company, the insurance company or the police—but weekly for at least a year after the accident, I was called by an extremely pushy and aggressive salesperson. Essentially, they incited me to commit fraud. No matter how often I explained that I, my wife and my young twins had suffered no injury, they insisted that I must have suffered an injury such as a bad back or an aching neck and that I had a claim that could be settled at the insurance company’s expense. They repeatedly and persistently incited me to commit fraud.
The figures show that that is not an isolated example. Aviva is currently investigating 5,500 claims of personal injury fraud. Such fraud has increased 20% year on year. Personal injury claims have increased by 50% since 2007, despite the fact that the number of road traffic collisions has fallen during that period. In this country, personal injury claims make up 35% of insurance pay-outs; in Germany, it is only 4%. Aviva estimates that those claims add £50 to each and every insurance premium paid in this country, which is significantly more than the tax increase we are debating. It is estimated that one in nine personal injury claims is fraudulent.
We have an opportunity to do more to stamp out such fraud and to reduce the cost of insurance premiums, as hon. Members on both sides of the House have mentioned. I believe that there is a case for simply banning outright outbound phone calls by ambulance-chasing law firms. We should just make it illegal for them to call people to incite fraudulent claims. I would certainly be very happy to vote for legislation to outlaw such a practice. If anyone has a genuine claim, they can find a law firm’s number in the “Yellow Pages” or on Google; people do not need to be phoned in this way. I urge both Government and Opposition Front Benchers to take my proposal very seriously.
I will do something that feels slightly unusual and address my brief remarks to clause 43.
We know that there is a planned increase from 6% to 9.5%—an increase of 58%—but let us not forget that that also applies to administration costs. Throughout the debate, the figures have been evaluated and we have realised that the increase to house contents cover will affect about 20 million people. The people who are likely to move more frequently are those who are not owner-occupiers. Of course, that plugs into the argument, which has already been proven, that lower income groups pay more. The so-called poverty premium, which was explained by Donald Hirsch and backed up by the Joseph Rowntree Foundation, is therefore valid in this instance.
The Government state that the tax applies to only one fifth of all premiums, but that is the wrong measure. We should be concerned about the distribution of those premiums. Young drivers aged 21 to 29 make up 14% of the driving population, but 34% of uninsured drivers. Perhaps Adrian Smith of KPMG called it correctly when he noted wryly:
“All I can guess is that there were so many taxes David Cameron ruled out increasing that there weren’t so many left”.
If the driver for this proposal is an increase in tax-take, it should be noted that the rise in January 2011 actually saw a fall in tax receipts of 1.3% between 2011 and 2015. Despite that, the Government suggest that receipts are expected to grow by 1.9% year on year between 2015-16 and 2020-21. I wish I shared their confidence. It may be that higher income groups will drop their health insurance, which is included in their P11D liability. That would, of course, put more pressure on the NHS.
Although the tax is levied on companies, I believe that it will inevitably be passed to consumers. It seems somewhat anti-business that the insurance industry, having done the right thing in making determined attempts to reduce fraud and passing the savings on to consumers, is rewarded with such a significant tax rise over such a short timescale. Let us not forget that businesses will also be affected by the application of the increase to corporate premiums. My worry is that that will disproportionately affect small businesses, which continue to struggle with a range of factors in the current operating environment.
Ultimately, if insurance is about protection and the negation of risk, why should it be more expensive for those who have the most to lose—in other words, the lower income groups?
In responding to the debate, I hope to touch on many of the questions that have been raised by hon. Members.
Clause 43 increases the standard rate of insurance premium tax to 9.5%. The policy will increase the revenue raised from the tax and help to close the deficit.
Before I turn to the amendment, I will cover some of the points that have been mentioned. I confirm that the insurance charge includes the gross premium that the insurer chargers, including the broker commission and any other directly related costs. It is a charge on the insurer rather than on the individual. It is due on general insurance, which accounts for approximately one fifth of insurance premiums. As we have heard, it includes motor insurance, home insurance, employers liability insurance and medical insurance.
Some 80% of the insurance market is exempt, including reinsurance, long-term insurance such as life insurance and permanent health insurance, and the permanent health insurance that is used to pay for critical illness insurance.
Travel insurance and insurance that people purchase on warranties with, for example, white goods, is already charged at the considerably higher rate of 20% to prevent VAT avoidance. That, too, is unaffected by the change. It is important to remember that there is no VAT overall on insurance.
The new rate for the taxable insurance premiums will begin to apply with effect from 1 November 2015. In the tax year 2016-17, it will raise an extra £1.4 billion, which can be used to reduce the deficit. If insurers pass on the increase, it will affect businesses and households, particularly by increasing the cost of their property and motor insurance. However, we expect that any impact on consumers will be modest. Most households and businesses have some form of general insurance and any impact of a rate rise is therefore shared by a large number of people and organisations, as we have heard. To give some idea of what that means, if insurers chose to pass on the whole increase, the average household expenditure on insurance would increase by 70p per week.
We do not anticipate that the tax increase will reduce the number of people taking out general insurance. Even if insurers choose to pass on the increase, any increased costs will be a very small proportion of the overall cost of insurance. As the insurance market is competitive, customers affected by the change can shop around to find a policy that best fits their needs.
I hope the Minister will address the point I made about the impact of insurance costs on unemployed people. I quoted BBC research, but work done for MoneySavingExpert.com found that there is an enormous differential when people lose their jobs. In one case, insurance for an office manager to insure her vehicle went from £359 a year to £1,034. It is all right to talk about averages of £10 here or £12 there, or even £50 for young people, but insurance premiums can be disproportionately increased by unemployment. That point was made in the social media debate on the Budget, and that is one reason why I have taken it seriously. The increase is unfair, because it hits people straight away when they become unemployed. We must start to reflect on that.
I will come to the distributional points raised by questions from hon. Members but, with the greatest respect, the situation the hon. Lady describes would be unaffected by the changes the Government propose this afternoon.
We heard from my hon. Friend the Member for Croydon South (Chris Philp) that the increase must be seen in the context of significant Government action to reduce costs for the insurance industry and for motorists. We are taking a lot of action to reduce insurance fraud. According to the Association of British Insurers, insurance fraud alone adds an average of £50 a year to average household insurance costs. Our previous action to reduce the cost of fraudulent claims includes a ban on referral fees in personal injury cases and reform of the regulation of whiplash claims. Those actions have been welcomed by both industry and consumer groups. The insurance fraud taskforce is due to report at the end of the year with suggestions on how further to reduce the cost of insurance fraud.
In the summer Budget 2015, my right hon. Friend the Chancellor announced a further consultation to establish how to introduce a cap on fees charged by claims management companies, and a fundamental review of the regulation of claims management companies, which is due to report in 2016. I note with interest the point my hon. Friend the Member for Croydon South made about banning outbound calls. More generally, the Financial Conduct Authority is working on how to encourage people to shop around for insurance, which will ensure that people find the best deal for their circumstances and that the market remains competitive.
The Government have been working hard with the insurance industry to develop the Flood Re scheme, which will continue to allow insurers to offer affordable home insurance. The hon. Member for Kingston upon Hull North (Diana Johnson) and I both have constituencies where there are a lot of flood-prone properties—I pay close interest to the topic. Of course, properties built after 2009 will be exempt from the scheme because we do not want to incentivise builders to build in flood-prone areas.
I fully accept that; in fact, I think it is absolutely right. The problem for me and my constituents is that 90% of the city of Hull is below sea level. Anything that is built will, by definition, be on a flood plain. A bit more thought has to be given for areas of the country. It is not just Hull; other low-lying areas will find themselves in this difficulty.
The hon. Lady makes a very good point. She and I come across the same sorts of issues in our casework, and a lot of London is built on a flood plain. In some cases, I have had to work with specialist insurance broking to find a broker service. The British Insurance Brokers’ Association is very useful in that regard. I am sure she and I will continue to pay close heed to how the Flood Re scheme is delivering for our constituents.
A number of hon. Members raised the issue of motor insurance, particularly for young people. My right hon. Friend the Member for Wokingham (John Redwood) asked whether technology could help young people with the costs of their insurance. Young people can currently take the opportunity to install a telematic device. Many insurers will reduce the cost of motor insurance in those situations.
I am able to reassure hon. Members on the impact on young drivers’ insurance premiums. Young drivers pay a much higher premium at the moment, but the overall cost impact of this change for young drivers in their 20s is estimated to be 25 pence a week and the overall impact for a driver aged 17 or 18 about £1 a week. Obviously, all tax increases are unwelcome, but this needs to be set against the fact that drivers are currently saving about £9 every time they fill up their vehicles.
The figures I was given from the industry were that the increase in duty alone on the average premium paid by a young driver would be from £90 to £142.50. That is not 50p or 25p a week; that is £1 a week. Various points have been made about fuel duty, but this is a tax that has to be paid. This is a very serious increase for young people who are being hit in the other ways that I outlined.
The hon. Lady and I can duel with statistics all afternoon, but I wanted to point out that it was the 17 and 18-year-olds who pay a substantial amount more than those in their 20s. I think she is probably quoting statistics relating to 17 to 25-year-olds. Nevertheless, the changes need to be seen in the context of the amount that young drivers are saving and the opportunities they may have from using a telematic device to measure their driving performance.
Finally, I want to say a word about implementation. We recognise that the insurance industry needs notice to effect the changes. We have tried to ensure a smooth implementation of the new rate by following the approach agreed by industry representatives and HMRC back in 1995. That sets out transitional arrangements required by the insurance industry to account for the tax at the new rate. The rate, as we said, comes into effect on 1 November, which provides a period of nearly four months from the date the measure was announced. There is a further four-month statutory concessionary period for insurers who have elected to account for the tax using a special accounting scheme. In simple terms, the concessionary period ensures that premiums for policies beginning before 1 November will be taxed at the current rate effectively until 1 March 2016.
That leads me to the Opposition’s amendment, which proposes that a report be produced on the impact of the change in the standard rate of insurance premium tax as soon as three months from the enactment of the Finance Bill. It calls for the report to be undertaken very soon at a time when the impact of the rate will have hardly begun. That is why we will not agree to the amendment this afternoon and encourage the hon. Lady to withdraw it.
The impact of any increase in the rate of insurance premium tax will depend on whether insurers change their prices to pass on the increase. As I have said, it is a tax on insurers, not customers, and we are aware of at least one insurer—we heard earlier of another example—that has pledged to absorb the cost of the increase for at least one year. We think this is partly because insurers have benefited, and will continue to benefit, from the reductions in corporation tax announced in the Budget. Any such benefit might encourage more of them not to pass on this additional cost.
We have investigated what the overall distributional impact would be if all insurers passed on the entire rate rise. If the entire rate rise of 3.5 percentage points were passed on, households in the top income decile would pay just over £1 a week more for their insurance, while the additional costs for those in the bottom income decile would be less than 40p a week. We calculate that almost two thirds of the overall distributional impact will fall in the top half of the income distribution.
Does my hon. Friend agree that this slim and modest tax rise should be viewed in the context of the falling cost of home insurance and comprehensive car insurance and our commitment not to increase VAT, national insurance or income tax? Overall, will not these policies benefit householders and families?
My hon. Friend is right to point out the overall context; this measure should not be seen in isolation. The cost to businesses was mentioned earlier. I am sure that Members will welcome the fact that, according to the British Insurance Brokers’ Association, the overall cost of insuring a commercial vehicle has fallen by more than 13% in the past 12 months alone.
I hope that I have answered hon. Members’ questions, particularly those about young drivers and household flood insurance. In particular, I want to support the points my hon. Friend the Member for Croydon South made about personal injury claims management.
In drawing my remarks to a close, I must stress that most households will see very little impact from the increase in the standard rate of insurance premium tax. It will remain at a low rate compared with many other countries and will certainly not make the UK a less attractive place to do business. I therefore ask that clause 43 stand part of the Bill and request that amendment 1, tabled by Opposition Members, be withdrawn.
I do not propose to withdraw the amendment. The reason for it is the lack of a full analysis of where the impact of the increase will be felt and the groups that will be most affected. I have been quite disturbed by the complacent attitude of some Government Members, including the Minister. I have quoted many senior industry figures on the impact on their business and industry and the strength of their feelings about this tax, which they have called a stealth tax. I will quote some additional comments. Janet Connor, managing director of AA Insurance, said:
“That premiums have been falling seems to be the Chancellor’s justification for the tax increase but he is wrong. His timing couldn’t have been worse; not only are premiums starting to rise but the tax can only lead to even greater premium increases than could otherwise be expected over coming months.”
“There is no justification for this underhand and unfair tax increase.”
I have quoted various insurance organisations, but the ABI said:
“UK drivers benefit from one of the most competitive motor insurance markets in the world. But with pressure on claims costs”,
which some Government Members have recognised,
“and an increase in insurance premium tax adding an additional £12.80 to the cost of the average policy…other factors are starting to put up costs.”
The key thing is that a range of factors are in play, despite our having had a successful couple of years, which has reduced premiums and rates. I hope Ministers will not continue to be complacent about the cost of premiums for young drivers and the danger of under-insurance or no insurance.
Graeme Trudgill, the executive director of the British Insurance Brokers Association, has said:
“Insurance has been seen as a special case in terms of taxation as it is a social good”.
Ministers seem to be ignoring the fact that it is a special case, in that it is a social good. We must take that into account.
No, I will not.
Mr Trudgill went on to say:
“Young drivers are the most over-represented age group for uninsured driving and increasing the cost of their motor insurance further is likely to increase the level of uninsured driving, which we are aware has now started to deteriorate.
The increase completely undermines the constructive work that the industry and government have done in the past few years to tackle fraud—particularly with regard to whiplash claims—which previously saw premiums soar.”
Ministers and Government Members should be clear that what they are doing is hitting the industry at a point when premiums have started to go in the wrong direction and the good work that has been done could be undermined.
I want to leave Government Members with a couple of other points about this amendment. The AA calculates that uninsured drivers cost the insurance industry around £380 million a year and add £33 to cost of every motor insurance policy. Finally, the Motor Insurers Bureau reports that 2.8% of UK motorists—and about 1 million vehicles on the road—are estimated to be driving without insurance. That is the risk that the Minister is taking.
Question put, That the amendment be made.
Clause 43 ordered to stand part of the Bill.
CCL: removal of exemption for electricity from renewable sources
Question proposed, That the clause stand part of the Bill.
With this it will be convenient to discuss new clause 2—Report on the removal of the Climate Change Levy exemption—
“(1) No later than 6 months following the passing of this Act the Chancellor of the Exchequer shall publish a report into the effect of the removal of the Climate Change Levy exemption on renewable energy generators.
(2) That report must include information about:
(a) The effect that the removal of the exemption has had on existing generators
(b) The effect that the removal of the exemption has had on projects which were in the planning process
(c) The cumulative effect on investor confidence in renewable energy of this change in the context of wider government policy on renewable energy; and
(d) The effect of these changes on the United Kingdom’s ability to meet its climate change targets and commitments.”
Clause 45 ends the exemption—[Interruption.]
Thank you, Mr Howarth.
Clause 45 ends the exemption from the climate change levy for renewably sourced electricity. The CCL renewables exemption was misaligned with today’s energy policy and represented an inefficient way of supporting renewable electricity generation. In the past 15 years the UK’s renewable energy policy has fundamentally changed. When the renewable electricity exemption was introduced in 2001, renewable generation made up just 2.5% of the UK’s electricity supply; it now makes up around 20%. Since the exemption was introduced, more effective policies have been put in place which support renewable electricity generation directly.
In contrast, the CCL exemption provided indirect support to renewable generators. Together, policies such as the renewables obligation and feed-in tariff will provide over £5 billion-worth of support to renewable generation in this financial year.
I can absolutely say how we justify this measure. As I have stated, there are now more effective and efficient direct methods of encouraging renewable generation than the CCL exemption. We have also seen a sharp decline in CCL revenue over the last Parliament. The forecasts from the independent Office for Budget Responsibility show that, without change, by 2020 virtually no CCL would have been paid on electricity at all. Removing the exemption helps maintain a price signal through the CCL for all business to use energy more efficiently. In addition, last year a third of its value went to renewable projects based overseas—projects which of course do not contribute to our climate change or international development commitments, making this a poor use of taxpayers’ money.
Clause 45 ends the existing exemption for renewable energy from the CCL. It applies to any renewable electricity generated after 31 July 2015, when it is supplied to businesses or the public sector under a renewable source contract. From 1 August we entered into a transitional period in which suppliers may claim a CCL exemption on any renewable electricity generated before that date. The Government are discussing the details of this transitional period with the affected suppliers, to determine an appropriate length for it. We intend to put the final transitional arrangements in place through legislation in the Finance Bill 2016.
It was necessary, because of the imperative to deliver value for money, to move quickly on this change. The Government are committed to supporting the investment and innovation needed to achieve a cost-effective transition to a low-carbon economy while ensuring security of energy supply and avoiding unnecessary burdens on businesses and households. We are making great strides towards achieving those goals, with emissions down 30% since 1990. We will ensure that our policies provide maximum value for money for the taxpayer in delivering environmental benefits without harming the economy.
Several hon. Members have voiced their concern about the impact of the clause, and I want to take a moment to address those concerns. The change will not increase household energy bills, because the climate change levy is not charged on households. Business customers should not lose out from the change either. The business energy market is competitive and wholesale electricity prices will not be increased as a result. Energy-intensive businesses are already exempt from 90% of the costs of the climate change levy for electricity by being in climate change agreements. The change will also not affect renewable generators’ long-term investment plans. Most generators were expecting to receive a negligible value from the exemption by the 2020s.
Of course, the renewables sector will also benefit from Government’s recent cuts to corporation tax, which will save businesses over £10 billion a year, giving the UK the lowest rate of corporation tax in the G20. Lastly, the change will not affect the UK’s ability to meet its climate change goals, as emissions from electricity generation are capped through the EU emissions trading system. Nor will it affect our ability to source at least 30% of electricity demand from renewables by 2020. The Government remain committed to meeting their climate change objectives but we believe we must do so in a cost-effective way.
The Minister has outlined the various assessments that the Government have made, but have they assessed the effect of these measures on the industry itself, and on the many companies that have built successful businesses installing and manufacturing these products? Those companies have just had the rug pulled from under their feet by the Government’s measures.
It is a bigger rug than that. The climate change levy is only a relatively minor part of the support that was given to the industry, compared with the support given through the renewables obligation and through contracts for difference.
It is essential that we show that our measures to achieve climate change and renewables objectives provide good value for money, in order to retain long-term public support for them. I look forward to hearing hon. Members’ views and I urge them to give their support to the clause.
I am grateful for this opportunity to contribute to the debate on this clause, which I believe should simply have been deleted. Ministers have failed to provide a robust or even remotely convincing justification for removing the renewables exemption to the climate change levy. This would be laughable if it were not so serious. The Chancellor has complained that this is all very fine because the UK now has
“a long-term framework for investment in renewable energy in place”.—[Official Report, 8 July 2015; Vol. 598, c. 331.]
If only that were the case! The reality is becoming increasingly distant from the rhetoric, especially now, after yet another wave of destruction has been unleashed by the Treasury on sensible and popular climate and clean energy policies.
The most outrageous of those policies is the proposal to cut support for rooftop solar by up to 87%. That risks making it impossible for my constituents and many others to afford solar panels for their homes, schools or community centres. Solar power can become subsidy-free, but not if Government cuts to support are wildly disproportionate to the admittedly impressive cost reductions that the industry has managed to achieve. And then there are the 35,000 people who work in the solar industry and who are facing a very uncertain future.
Clause 45 of the Finance Bill is one of several such senseless attacks on sustainable energy and climate policies. It will have negative impacts on existing and potential renewable energy developments, some of which are already being reported to have become unfeasible and which have now been cancelled. It will also have negative impacts on the overall investment climate for everyone from small community groups to multinational businesses, all of which are looking to put their money into clean power. This is the very last thing we need, for our economy, for our jobs and for tackling climate change, and it flies in the face of public opinion. New polling this month found, yet again, overwhelming support for renewables, including onshore wind and solar, with even greater levels of support for community energy generation. Some 78% would support local projects, even within 2 miles of their home. For all those reasons and more it seems intelligent to have an incentive, so that when a business or public sector organisation purchases clean renewable power, rather than dirty polluting power, it pays less tax.
Ministers claim that the change is intended to prevent taxpayers’ money from supporting renewable electricity generated overseas, but in reality ditching the renewable energy exemption is a completely disproportionate measure, which turns a policy designed to encourage low-carbon electricity into little more than an electricity tax for businesses. If a third of benefits do go overseas, that should surely still mean that two thirds support home-grown renewable power generation and jobs here in the UK. If Ministers really want to cut out overseas generators, they should therefore modify the policy to fix the anomaly at that rate. Did anyone ever even consult industry about what level of cut to make? We have already seen by the Minister’s inability to answer my question a few moments ago that there simply was no consultation with the industry in advance. Ditching this exemption completely is, as Friends of the Earth has said, like making people pay an alcohol tax on apple juice. It harms British renewable energy businesses and undermines efforts to tackle climate change. No wonder it has received widespread condemnation, on both environmental and economic grounds.
This is all happening less than three months before the crucial climate talks in Paris. Yet at that time we will hear the spin machine in the Department of Energy and Climate Change going into overdrive, coming out with all kinds of lovely rhetoric which is completely at odds with what the Government are doing on the ground with this measure. It is yet another example of the huge gulf between the rhetoric and the reality of the policy. When it comes to avoiding dangerous climate change, the shift to clean renewable energy is key. Phasing out fossil fuels and phasing in a 100%-clean agenda has to be at the top of the agenda. Yet, once again, the UK is going in the wrong direction, with generous tax breaks and taxpayer-funded propaganda propping up the fossil fuel companies, while the knife is being stuck into our own home-grown renewable energy sector.
Does the hon. Lady not agree that this is only part of an ongoing series of issues: a lower strike price for nuclear than for renewables; the continuing unfairness with the connectivity charges, where the bulk of the renewable potential is; the pulling of support for onshore wind; the threats potentially even to the green investment bank; and the threatening of funding for future projects? This is all part of the same anti-environmental agenda.
I am grateful to the hon. Gentleman for his intervention, and of course he is absolutely right; long gone are the days of hugging huskies and we are now in the days of “green crap”—even, ridiculously, when there are strong economic arguments for pursuing green policies. The idea that that is somehow against the interests of business is completely belied by the fact that so many businesses are crying out for a change in direction on the part of this Government.
I am listening to the hon. Lady’s comments, which are always passionate, well made and eloquent. Does she not agree that the industry is complicit in the problems she alludes to because it has gone for the easy win of developing on agricultural and green-belt land, rather than doing the more difficult thing, which is developing on previously developed land? That is why people have been resistant in communities to solar energy projects such as those in my constituency.
I do not agree with the hon. Gentleman’s comments. There are some cases where renewables are being sited in areas where there is opposition, but those are a minority. I assure him that if he thinks there is going to be much popular objection to renewables, he should just wait until his constituents and others see the impact of fracking. That is when he is going to see an awful lot more opposition to the energy choices that this Government are making.
The fact is that the renewable energy industry is a fantastic advantage to our economy. It does some brilliant things, and it does so despite Government policy, not because of it. It is now absolutely at risk of not being able to get away from the subsidies. It does not need subsidies for much longer and has always understood that there will be digression. [Interruption.] From a sedentary position, the hon. Member for Daventry (Chris Heaton-Harris) is suggesting that this industry is surviving only because of subsidies. Nothing could be further from the truth. The subsidies are coming down. There is digression, but it has to happen in a planned way. It is not justifiable, or even reasonable, to expect an industry to not know what kind of economic situation it is working in from one year to the next. This Government keep changing the goalposts on an almost monthly basis. The renewable energy industry and the solar industry know that digression will happen and that subsidies will be withdrawn, but it must be to a predetermined timetable. When that timetable keeps changing, it is incredibly difficult for business to adapt.
Compare that with what is happening to the nuclear industry. The nuclear industry will have subsidies for decades to come. It is already 50 years old, and yet Hinkley Point C could not even begin to be built were it not for the fact that it has massive subsidies, which are hugely bigger than anything that the renewable energy industry could ever dream of. I will not hear suggestions that the renewable energy industry is somehow greedy when it comes to subsidies; absolutely nothing could be further from the truth.
I thank the hon. Lady for giving way. I am sorry for stopping her in mid-stream, especially as she was getting so passionate about the subject. She cannot have it both ways. She cannot say that renewable electricity and power are coming down in cost because the industry is becoming more efficient, and at the same time wish to have tax breaks and subsidies maintained. Either the industry is becoming more efficient, its costs are converging and the tax breaks are not needed or, as many of us suspect, it will always be a lame duck and will always impose higher costs on electricity consumers.
I wish that the hon. Gentleman had done a little bit more homework before making that point, because it is simply not the case. The point about the subsidies to the solar industry is that it has always been deemed that they would come down over time. The objection here is that they are suddenly being forced to reduce overnight at a time when the industry had been told that there was going to be a very different economic situation. Of course the costs of solar are coming down; they have been coming down in a remarkable way, and all credit to the solar industry for achieving that. But they are coming down in spite of the Government—in spite of their chopping and changing, their uncertainty and their lack of vision—and not as a result of something that they have done.
In conclusion, if the Government go ahead with applying this climate change levy to the renewable energy industry, they will strangle an industry that has so much potential for getting climate emissions down, creating jobs and bringing on a stronger and more resilient economy.
I am grateful to be able to contribute to this debate. Members on both sides of the Committee will agree that keeping the lights on is one of the primary duties of any Government. Some of the more senior Members in this Chamber will recall the three-day week in the 1970s—I apologise for glancing over my shoulder to my right hon. and learned Friend the Member for Rushcliffe (Mr Clarke)—when British businesses were forced to conserve their electricity at great commercial cost and television companies could not broadcast beyond 10.30 in the evening. We have come a long way since those bad old days and we cannot and should not allow this nation to find itself in a similar situation ever again.
With that in mind, we also need to recognise that the energy industry in modern Britain cannot be taken for granted. Like any other business, energy companies make difficult decisions every day. They decide what projects to invest in, using reasonable commercial principles. It has not been fashionable in recent years to praise energy companies, but we should not forget the significant number of jobs that rely either directly or indirectly on energy companies in this country. Many Members present will be aware that in my own constituency in North Yorkshire, energy companies have played an important role in the community over many decades, employing thousands of local people and generating millions of pounds in business for local companies.
Recent events in my constituency have prompted me to participate in today’s debate. Sadly, last week the Czech owners of Eggborough power station announced that the station was set to close, shedding 240 jobs in the process. That is not only a great personal loss to my constituents but a great loss to the nation, given that Eggborough provides roughly 4% of the UK’s electricity. I remind the Committee that National Grid recently announced that the capacity margin this winter is only 1.5%, and many analysts predict it could be much lower next winter.
Eggborough power station employs a lot of my constituents, as it does my hon. Friend’s. Does he agree that the assessment undertaken by Ofgem is simply not robust enough and does not take account of that 4% figure? All it will take in 2016-17 is for the wind not to blow, for there to be a problem elsewhere on the plant or for the winter to be a little bit colder, and if Eggborough goes we will face blackouts. As I said on the radio recently, Governments that allow blackouts on their watch normally get their lights put out at the next election.
I could not agree more with my hon. Friend and neighbour. Whoever is in charge of ensuring that we have security of supply must ensure that they have robust numbers, and I am sure that my hon. Friend and I will be asking serious questions of them over the forthcoming weeks.
It saddens me greatly that this is not an isolated event. Many Members have communities that have been affected in some way by similar announcements in recent months: Longannet in Scotland, Didcot in Oxfordshire, and Ferrybridge, right next to my constituency in west Yorkshire. The Chancellor is rightly keen to create a northern powerhouse, and so am I, but I would rather see a northern powerhouse with some power in it. I do not want to see a no-power house.
There are no easy answers left on energy policy. I urge those hon. Members in opposition and in government who believe otherwise to think again, or to visit areas such as mine and talk to the constituents whose livelihoods are being put at risk. This is a commercially challenging time for the energy sector. Wholesale electricity prices are at the lowest level in years, in no small part due to the crash and the glut of oil in the global marketplace. That makes the investment case for any energy project, be it biomass, nuclear, gas or wind, incredibly challenging.
It is at times like these that our constituents and the energy industry look to Government for genuine leadership, and it saddens me greatly to say that on this issue the Government led by my party appear to have fallen short. “Investor confidence” is a phrase that is readily thrown around in debates like this and is perhaps too easily taken for granted, but when an esteemed member of the investment community such as Neil Woodford is quoted in a national newspaper in the days following the Government’s announcement on this issue as saying:
“If Government cannot be trusted to fulfil its long-term commitments then it will have to accept that it cannot rely on support from institutional investors”,
it would be irresponsible of me and other hon. Members not to heed his words.
It seems sensible to me that at a time when the energy sector is in such a sensitive and precarious place, policy decisions should be taken in the round rather than in isolation. The Government have already made public the saving they believe they would accrue as a result of removing the CCL exemption, but what about the consequences, intended or otherwise?
Drax Group, an energy company of which Members will be aware and that is based in my constituency, has invested hundreds of millions of pounds in recent years to become the largest renewable generator in the UK. It lost £425 million of its value on Budget day—£425 million in one day, a third of its total value. To me, it is incredible that a Conservative Government have effectively done that to a company that has done all that has been asked of it. The superb management team at that station has delivered Europe’s largest decarbonisation project. It is producing the lowest-cost renewable power available when we take into consideration full system costs, and it has done so while providing 8% of the UK’s power day in, day out. Furthermore, that is money that could otherwise have been invested back in the company further to fund its biomass operations or to support White Rose, one of the country’s two flagship carbon capture and storage projects. That is not an isolated case. I understand that many other renewables companies saw huge falls in their value on the back of the decision.
Discontinuing the CCL exemption would also eliminate the only financial incentive for businesses in the UK to use renewable energy instead of fossil fuels, and it has been in place for over a decade. Hon. Members will know that it is a rare occurrence indeed when I agree with Friends of the Earth, but its observation that the situation is comparable to imposing an alcohol tax on apple juice seems spot on. It appears to me to be a retrograde step, and one that will put small business owners, for whom I have the greatest respect, given my background before entering the House, in a position of uncertainty. Furthermore, as a Conservative it pains me to say that, far from being the removal of an unnecessary burden on business, the removal of the CCL exemption is the extension of a tax. Every business in the UK, whether large or small, must now pay the CCL; they can no longer avoid it by using renewable power.
I understand that one of the Government’s principal objectives in removing the CCL exemption is to prevent taxpayers’ money benefiting renewable generation abroad. However, the reality is that more than 70% of the income generated by levy exemption certificates went to UK-based energy producers. Furthermore, generators supplying renewable energy to the UK through interconnectors are currently exempt from a range of transmission charges that British generators are required to pay. Surely it would be better for the Government to look carefully at that loophole, rather than at measures, such as those proposed in the Bill, that will make the economics of generating in the UK less appealing.
As hon. Friends will know, I am not given to highlighting problems without suggesting solutions. I believe that all that Drax and the renewals industry are asking for is to be treated the same as other industries. When exemptions were removed from the combined heat and power industry, it was given two years’ notice. That contrasts with the 28 days’ notice given this time.
I thank the hon. Gentleman for giving way—it is not easy to come to the House and take issue with one’s own party. Following his last point, does he agree that there were other ways to deal with any sense of unfairness about renewable energy coming through interconnectors, rather than taking a big hammer to smash a small problem in the system? We know how many jobs and how much future investment are based on business plans, whether at Drax, which I have had the pleasure of visiting, and at other renewables firms, small and large, across the country, which are doing their best to put some growth back into the British economy.
I agree with the right hon. Lady. Companies need certainty and time to plan, and 28 days’ notice is clearly ludicrous. A two-year notice period would allow companies to honour contracts they have signed, allow the industry to adapt and, above all, it would be fair.
I know that this is a topic of considerable interest and that other hon. Members wish to make their views known, so I will conclude my remarks by returning to my original point: nothing in life is guaranteed, including the availability of energy in our homes and businesses. I believe that we are entering a very precarious time for the UK, when our capacity margins are getting ever tighter and when plant closures continue to leave us reliant on gas imported from the middle east. Against that backdrop, we are in a global marketplace where investors are taking a sober, pragmatic approach to energy projects, and not just in the UK but elsewhere. We should be giving them greater certainty that the UK is a reliable environment to invest their money in, because that money is needed to deliver the energy projects that will power this nation in future. My concern is that the proposed revision to the climate change levy will do exactly the opposite. That is why, with great regret, I shall not be supporting the Government on this issue.
It is a pleasure to serve under your chairship, Mr Howarth.
I rise to speak to Opposition new clause 2 relating to the Government’s changes to the climate change levy in clause 45, which have already been outlined by hon. Members. The climate change levy is a carbon tax on the non-domestic use of energy. Clause 45 is concerned with the removal of the exemption currently available to electricity generated from renewable sources in the form of levy exemption certificates. For some years now, these certificates have ensured that electricity generated from clean sources has not been liable to what is, or was, essentially a tax on carbon emitted from the generation of non-domestic energy supplies. In removing the certificates, the clause reverses that principle, leaving us in the utterly perverse situation where renewables generators will be taxed for their contribution to climate change, regardless of the fact that they make little or no such contribution. Several Members have mentioned the apple juice analogy, so I will hold back from repeating it, but it goes without saying that it is an excellent one.
The clause is just one aspect of this Government’s new approach to energy and climate change, which entails abandoning the most cost-effective forms of renewables, reviewing environmental taxes, and, apparently, abandoning their commitment to tackling climate change. That approach risks undermining an area of the economy that has some of the most promising prospects for the future. That sector offers more productive, higher-paid, higher-skilled jobs, particularly in the northern regions and in Scotland; and one would think that it was central to the Chancellor’s so-called productivity plan and his alleged northern powerhouse.
New clause 2 would therefore require the Government to set out the cumulative impact of the removal of the exemption on existing renewables generators and projects currently in the pipeline, where almost all the projects and the banking arrangements or investment decisions underpinning them will have been based on the current fiscal and subsidy framework; on investor confidence in the UK’s green energy sector, which is clearly vital to the future of the green economy and the high-skilled, more productive jobs that will flow from it; and on the UK’s ability to meet its climate change obligations, in which renewable energy has a vital role to play and may make up the shortcomings in other sectors—something that Ministers do not recognise at the moment.
Clause 45 retrospectively removes the exemption from the climate change levy—a tax levied on all non-domestic energy use—for electricity generated from renewables from 1 August 2015. The climate change levy was introduced in 2001. Its aim was to help the UK to meet domestic targets for cutting greenhouse gas emissions. It has always been charged as a flat rate of energy consumed for non-domestic use. However, energy generated from renewable sources has always been exempt from the levy in the form of the exemption certificates that are awarded to renewables generators and, in turn, sold to electricity suppliers for less than the cost of the levy. This regime has helped to make clean energy more attractive and provided greater financial support to renewables projects for their lifetimes.
The Government have set out two justifications for the removal of the levy exemption from renewables: first, that it seeks to correct a so-called imbalance in the tax system whereby renewables generators based overseas benefit from the levy exemption when, according to the Government, they already receive state subsidies in their origin countries and are therefore unfairly benefiting from British taxpayers’ money; and secondly, that it provides so-called better value for money for UK taxpayers—or, to put it another way, raises a considerable amount of revenue to help the Chancellor balance the books. According to the tax information impact note accompanying this measure, the renewables exemption, as it stood, would cost nearly £4 billion over the course of this Parliament, one third of which would go to overseas generators. HMRC claims that there is evidence to suggest that some of these overseas generators receive support in their own countries, although it does not provide any specific evidence. Perhaps the Minister might like to comment further. Regardless of that, the fact is that what was essentially a carbon tax is now becoming simply an energy tax. As Friends of the Earth has asked,
“When is a carbon tax not a carbon tax? When it is a tax on zero-carbon things.”
It is quite straightforward really.
These changes to the climate change levy come on the back of a raft of announcements since the general election, most notably from the new Energy and Climate Change Secretary, which reflect the Government’s apparent U-turn on tackling climate change. Since 7 May we have heard that subsidies for large onshore wind projects are to be axed, while other subsidies for onshore wind and solar photovoltaics are set to end a year earlier than previously announced. The previous coalition Government’s commitment to increase the proportion of tax take from environmental taxes is to be abandoned, while all environmental taxes are to be reviewed. The coalition Government’s flagship green deal scheme to provide energy efficiency standards in homes—which, sadly, proved to be a complete flop—will be not reformed but scrapped. The link between a vehicle’s tax liability and its CO2 emissions is to be loosened under the reform regime. The zero-carbon homes commitment, first made in 2006 by the then Chancellor Gordon Brown and which would have ensured that all new-build homes from 2016 were self-sufficient, is to be scrapped.
We have also had cryptic announcements from the Department of Energy and Climate Change about the next contracts for difference auction round, which was meant to take place this autumn but has now been postponed, adding yet more uncertainty to a frankly fragile renewables industry which relies on strong, long-term signals from policy makers, as the hon. Member for Selby and Ainsty (Nigel Adams) has said so eloquently.
All of those announcements signal the end of the UK as a pioneer and world leader in tackling climate change. That role was embraced by the previous Labour Government, who led the way, and the Prime Minister also seemed happily to embrace it during his husky-hugging days of opposition. However, just months into a Conservative-majority Government and just months before major climate change talks in Paris, the UK is shying away from its international commitments, just as the likes of the USA and even China face up to them.
The reality is that this Conservative Government have happily relinquished the UK’s role as a world leader in tackling climate change. Not only does that undermine the UK’s moral authority in hammering out a deal in Paris in December; it also risks enormous economic consequences for some of the most promising and productive sectors, as well as for the regions and nations, of the UK.
Clause 45 completely undermines and even puts at risk hundreds of renewable projects throughout the country in wind, solar and biomass conversion. Some of those projects are already up and running, while others are in the planning or development phase and have secured investment based on a policy environment established over many years. That policy framework has been completely undone since 7 May.
Each day since the Chancellor’s Budget statement in July has seen more bad news for the low-carbon sector, including investors pulling back from projects, key players in the sector seeing millions wiped off their value and institutional investors completely turning their backs on the UK’s renewable sector. As a severely disheartened Tony Juniper, a long-standing environmental campaigner, wrote in The Guardian:
“The last few months mark the worst period for environmental policy that I have seen in my 30 years’ work in this field.”
I remember those days of the “greenest Government ever”—how hollow those words ring now.
RenewableUK, the industry body for on and offshore wind, suggests that the certificates account for up to 6% of an onshore wind project’s revenues and that they are worth roughly £5 per MWh. In its view, taking away the exemption certificates could be the difference between profit and loss for some marginal projects. It is as simple as that.
Was this industry not one in which we had a lead on innovation and design and technology that we could have exported across the world? There are numerous examples in my hon. Friend’s constituency and mine of companies going under as a result of the proposed changes. She may be interested to know that a major installing company in the Chester area estimates that 90% of its employees will have to be made redundant as a result of the Government’s proposals.
That is terrible news for our region and the rest of the country. My hon. Friend and I have a great deal in common, not least that we have both visited renewable energy firms in our constituencies. I visited one recently that was similarly disappointed at the Government’s attitude and the business now faces risks that it simply did not expect.
Of even more concern than the fact that the removal of the certificates may mean a difference between profit and loss is that such income has been factored in to the strike prices agreed for projects awarded a contract for difference to date. Surely the removal of the certificates will either open the Government to legal challenge or some contracts for difference will have to be reassessed. Which is it?
I will give an example of such an impact. One small onshore wind project in Scotland generates about 35,000 MWh per year. The loss of the certificates could cost the project £175,000 each and every year. As with many such projects, it was financed with bank loans, the terms of which anticipated an exemption certificate of roughly £175,000 a year. Somebody involved in the project told us:
“We identified each of these projects and risked development capital to secure planning permission, and invested a large amount of time, all on the understanding that the LEC would be available. We raised debt funding from banks, who look at the expected revenue from the project to determine what amount they are willing to lend—they based their calculations on the LEC remaining in place. Therefore, the sudden removal of the LEC will reduce the turnover of these projects, which at the very least will reduce the returns to our investors and in the worst cases, could cause problems with banking covenants.”
Does that example not demonstrate the responsibility that we in the House have to provide a stable regulatory environment for business? That is not a lesson I ever thought I would have to preach to the Conservative party.
NAREC Distributed Energy, the National Renewable Energy Centre in the north-east, has suggested that it knows of at least four European wind developers that have decided to cease, or significantly to reduce, plans to develop in the UK. It says that another firm from mainland Europe with which it was in talks has decided to avoid the UK completely. We have also heard from sources in the solar industry about the growing concern that the industry faces severe challenges ahead.
We can see the impact of clause 45 and other recent policy changes in the announcements made by key energy companies operating and investing significantly in the UK. For example, Vattenfall the Swedish energy company, has already abandoned two onshore wind projects in the UK, one in Wales and one in Lincolnshire. Frankly, those are both regions of our country that could do with the investment. In one case, it cited the Government’s changes to onshore wind planning policy, and in the other, it cited a market that had “moved on”.
What does that picture mean for the UK economy? More importantly, what does it mean for the Chancellor’s ambition, which he tells us he has, for a high-skill, high-wage exporting economy of the future? How do such policy decisions impact on our prospects for overcoming the current productivity crisis, which, as Labour Members have repeatedly set out, must be at the top of the Chancellor’s priorities?
According to the Renewable Energy Association, some 112,000 people are employed in the renewable energy value chain across the UK, some 11,000 of whom are employed in the north-west—my region—alone. Companies in the north-west turn over some £700 million a year, which is investment we can little afford to lose. According to the REA’s figures, the number of renewable energy jobs has grown seven times faster than those in the rest of the economy. Green jobs are undoubtedly vital to regional economies in the north and in Scotland, where renewable technologies are deployed much more widely, and renewables supply chains are more established there than elsewhere in the country.
RenewableUK, which is predominantly the voice of the wind industry, has said that the onshore wind industry alone supports almost 14,000 jobs in the UK and contributes almost £1 billion of gross value added. As the CBI has said,
“green is not just complementary to growth, but a vital driver of it”.
This is a central economic question for our country. It means establishing clear and stable market frameworks, as well as the UK playing a strong role internationally.
The REA agrees, estimating that the industry could create up to 400,000 high-skill jobs by 2020 and, equally importantly, contribute a cumulative £60 billion benefit to the UK’s trade balance. What could be more vital in these times of global economic uncertainty? The Office for Budget Responsibility forecasts that the UK’s current account deficit will remain broadly unchanged up to 2020—a deficit, by the way, that we rarely hear mentioned by the Chancellor. The low-carbon sector could play a key role in turning that around, yet here we have the Government stripping out the support that underpins it.
The first majority Conservative Government for years have been in office for little over a hundred days and this policy framework will severely diminish their business credibility. That fact is evident not just because I say it is, but from the reaction of the business community. The senior vice-president of Veolia in the UK and Ireland has suggested that Ministers risk
“sending this country back to the dark ages”
when it comes to green policy. She said:
“What I don’t understand is why the government would apply the carbon levy on renewable energy plants which are carbon-positive—it’s illogical.”
Jon Ferris, the head of energy markets for the consultancy Utilitywise said the decision would
“do little to convince investors of UK policy stability”.
The chief executive officers of 10 leading environmental charities penned a strongly worded letter to the Prime Minister, pointing out that the Government’s rhetoric post-election runs entirely counter to that during the campaign, concluding:
“We have, as yet, seen no positive new measures that would restore the health of the environment or grow the low carbon economy.”
If the Minister does not like to hear it from me, perhaps he will take it from those on his own side, because there has been no shortage of criticism from Conservatives. Various members of the Conservative party have, quite rightly, failed to comprehend the lack of coherence not just in the Government’s climate change agenda since the election, but in their wider approach to ensuring that the UK is an attractive proposition for investors. The Conservative peer and former shadow Chief Secretary to the Treasury, Lord Flight, in a damning verdict of the Chancellor’s revenue-raising decisions, said:
“Charging renewable companies the Climate Change Levy is a contradiction of Government energy policy, which is still seeking to encourage Renewable Energy investment.”
The Chair of the Conservative Environment Network, Ben Goldsmith, wrote a letter to the Financial Times describing the climate change levy changes as “perverse” and “contradictory”. He even drew parallels with Greece:
“Introducing a retroactive subsidy cut with one month’s notice means more guesswork over what the government will do next—the very worst basis for raising capital. This makes the UK look more like the volatile markets of southern Europe—impacting on newbuilds and undermining confidence in generating assets.”
I often hear the Chancellor compare the UK to Greece, but I never thought I would hear a Conservative activist use his own words against him.
The reaction across the business world and among other stakeholders speaks to a wider point about what these changes mean for the UK’s economic future. Despite the rhetoric from the Conservative Chancellor about a plan to boost productivity, deliver higher-skilled, higher-wage jobs, pursue cost-effective climate change policies and act always in a business-friendly manner, the truth is that clause 45, taken together with a string of other policy announcements since 7 May, symbolises the exact opposite of that approach.
As the Chancellor wrote in the foreword to his productivity plan in July:
“The drivers of productivity are well understood: a dynamic, open enterprising economy supported by long-term public and private investment in infrastructure, skills and science.”
I could not agree more. Unfortunately, the Chancellor’s actions in recent months speak louder than his words ever will. He would do well to heed the advice of some in his own party, including the hon. Member for Selby and Ainsty and those I have just quoted.
New clause 2 calls on the Government to assess all of the impacts I have just outlined. It aims to highlight the true impact of removing the climate change levy exemption for renewable-sourced electricity. It asks Ministers a number of questions that are crucial to the future of the UK’s green economy, its role in achieving a more balanced, productive economy, and the UK’s role in the world. How does the removal of the exemption affect existing renewables generators and projects currently in the pipeline? What impact will clause 45 have on investor confidence? Finally, what does it mean for the UK’s ability to meet its climate change commitments?
Clause 45 speaks clearly to the Government’s wider business and economic approach, which undermines investment and is short-termist in outlook both economically and on climate change. It falls well short of the bar that the Chancellor has set to rebalance our economy and create a higher-skilled and more productive one. In short, the Government have made it clear that they consistently put placating their Back Benchers who are opposed to renewable energy generation above the jobs and investment that moving to a low-carbon economy would provide. That is the ultimate consequence of clause 45 and a damning verdict on the Government so early in this Parliament. As new clause 2 indicates, it is time Ministers face up to the truly damaging impacts of clause 45.
It is a pleasure to follow the hon. Member for Wirral South (Alison McGovern), and I agreed with much of what she said.
I find myself, not for the first time, standing to criticise a Government of my own party, but they should pay heed when Members such as my hon. Friend the Member for Selby and Ainsty (Nigel Adams) make such speeches. When my hon. Friend and neighbour makes such a speech, the Government need to consider whether they are in the right place, because he is not a serial trouble causer, as some of us are sometimes labelled—for a Yorkshireman, it is a badge of honour. Given that he made the speech he made, I hope the Government listen to him.
I support my hon. Friend, representing the constituency that I represent, and having looked through the proposals and the impact they will have on my area. I will say something about Drax in a moment, but I agree entirely with my hon. Friend on Eggborough. It is a deeply concerning situation. We are not addressing Department of Energy and Climate Change Ministers tonight, but it is fair to say, having seen the Budget, that DECC is now a wholly owned subsidiary of the Treasury. Perhaps a message will get back to those who are really running DECC.
Our concern about Eggborough is significant. A range of factors affect Eggborough, not all of which are in the Government’s gift. However, they need to be conscious of the potential crunch that is coming. When we had meetings a year or so ago, we were told that Eggborough would probably not close and that it was playing something of a game. That is certainly not what has come to pass. The warnings, which my hon. Friend was making privately a year or so ago, have come to pass. He should have been listened to then as he should be listened to now.
I hope the Government give great weight to the significant dangers if we lose 4% of generating capacity next year, given the crunch that will come in 2016-17. I hope Ministers consider what more can be done to support Eggborough and the brilliant workers, many of whom live in my constituency, who make their living there.
I do not agree with the comments of the hon. Member for Brighton, Pavilion (Caroline Lucas) on solar and onshore wind—she perhaps would not expect me to do so. We have fought off a number of proposed solar farms on grade A agricultural land in my constituency and my constituents cannot be described as being in favour of the solar farms that have appeared. I feel no sorrow for what is happening to onshore wind and solar—my constituency is peppered with hundreds of onshore wind turbines and we will be pleased to see the back of further support for them, given that we have been dumped with far more of them than anybody could have reasonably expected. They continue to be dumped on us.
On biomass, I am concerned about the impact that the measure will have on Drax. I should declare an interest: I live opposite Drax. If I invited you up to my bedroom, Mr Howarth, you would see Drax power station. [Hon. Members: “What?”] It is not going to happen, Mr Howarth, but you could look further and see Eggborough and Ferrybridge. We have a string of power stations that we are proud of. We are proud of the contribution we make to energy supply in this country and of the skilled and well paid jobs that are created by those industries. We are proud of the role we have played in the industrial development of the country, through pits such as Kellingley, which unfortunately is to close, in the neighbouring constituency of my hon. Friend the Member for Selby and Ainsty. We are proud of the contribution that coal-fired generation has made to this country and proud of the contribution we continue to make through biomass and through some coal still at Drax power station.
Drax provides 1,300 jobs for those living in my hon. Friend’s constituency and mine, and in the other constituencies around us in Yorkshire. They depend strongly on Drax, so it is very significant and concerning that, as my hon. Friend pointed out, £450 million was wiped off the value of Drax overnight from a decision that nobody saw coming. As Dorothy Thompson, the chief executive of Drax, said after the Budget:
“We are surprised and disappointed at this retrospective change to a support regime which has been in place since 2001 specifically to encourage green energy and support renewable investment decisions.”
I have met people from Drax countless times, as have a number of other Members. The one thing they have always asked of us during the past few years is stability to secure investment. To remove that stability overnight with a click of the fingers is not good decision making. That is not joined-up government and it does not provide the confidence that investors such as Drax require. I do not need to reiterate the point about the impact on international versus domestic companies. My hon. Friend and others have made it clear that 70% of the income from the exemption currently goes to UK generators. In the case of Drax, the levy exemption certificates are worth about £4 a megawatt-hour, which provides an additional source of income on top of the generating revenues.
Drax has done everything that has been asked of it and more in its conversion to biomass. The power station is part of a network along the Humber in east Yorkshire and north Lincolnshire that has seen significant investment to support the conversion to biomass at Drax. As I have said, 1,300 people are currently employed at Drax. My village is a power-generating village: power is the main source of income for many people, including our neighbours. It is how we make our livings locally. After the conversion to biomass at Drax, and what we hoped for at Eggborough, we were convinced that that would continue. I really hope the Government will pay heed to today’s debate and ensure it will continue.
Drax invested significantly to improve delivery facilities, surveying the investment landscape and concluding it was stable. Some £125 million was invested directly in importing facilities, in particular at the Immingham renewable fuel terminal. One can trudge along my constituency and follow the biomass as it arrives at Immingham in the Cleethorpes constituency and travels by rail through my constituency up to Drax. Some 100 jobs were created during the construction phase at the port and 100 more once the facilities were operational.
We thought the new facilities underlined the Humber’s reputation as the UK’s energy estuary, something that is at the heart of the northern powerhouse. When I was asked by the Chancellor only a year or so ago what the vision was for the Humber, I said that our vision is very clear and simple: to be the UK’s premier energy estuary. That includes the support going into offshore wind. It is not just offshore wind, although it has been much of the focus locally. The point we have always tried to make absolutely clear is that other power generation is at the heart of our economy in our bit of the northern powerhouse. The jobs in place at the moment relate very strongly to biomass and its importation from the United States and elsewhere. Drax’s £700 million conversion project was going to reduce carbon emissions by 80%. That is exactly what we should be aiming for: providing sustainable replacement for coal and generation that is stable in the market and on the grid. That project, alongside the carbon capture and storage project, White Rose, which we have also been keen to emphasise, will support 3,200 jobs. So this is a significant issue for my constituents and those of my hon. Friend the Member for Selby and Ainsty.
Biomass and the future stability of Drax are significant for the whole UK. Drax accounts for 8% of generating capacity, while Eggborough accounts for 4%—of course we are losing Ferrybridge, the third power station in the M62 corridor. When the chief executive of a company that provides 8% of the electricity generated in this country says we are on the wrong side on this issue, we have to listen, and that is what I hope the Government will do. Along with my hon. Friend, who made a fine speech—a better speech than I could on this—I will not support the Government on this issue. I have been unimpressed by other things in the Budget and will vote accordingly next week. I have a lot of sympathy for new clause 2, tabled by the hon. Member for Worsley and Eccles South (Barbara Keeley), and I will lend that my support this evening.
It is a pleasure to see you in the Chair this evening, Mr Howarth.
I am pleased to follow the hon. Member for Brigg and Goole (Andrew Percy), who made an excellent speech in support of the industry in his constituency. I agreed with much of what he said. The hon. Member for Selby and Ainsty (Nigel Adams) made an outstandingly good speech, contextualising the issue and setting it in the framework of the energy market in this country. His was a very helpful contribution.
Just before the summer recess, I became a member of the Treasury Select Committee, and in July we took evidence from the Chancellor, so I took the opportunity to ask him why he had taken this decision on the climate change levy. The first question I asked was:
“Are you a climate change denier?”,
to which he responded:
“I am not sure I accept that phrase as a general term in British politics, but what I will certainly say is that I think climate change is happening, that it is caused by human beings, in part, and that it is not good for our society, going forward.”
This did not seem a very strong endorsement from the greenest Government ever—as they like to think of themselves—so I asked whether he supported the international work and whether he was
“looking for a good, strong commitment in Paris, internationally agreed, on climate change”.
“Yes”, he said. So then I asked about the domestic legal framework:
“Do you wish to see any changes to the legal frameworks that we have in this country? So, the carbon budgets out to 2027, the target to have 15% of our electricity generated through renewables by 2020, or our target to see carbon dioxide emissions reduced by 80% by 2050; are you looking to change any of those frameworks?”
“No”, he said.
As hon. Members have said, the pattern of words and actions do not seem to fit, so I said to the Chancellor:
“Notwithstanding the fact that you are committed to all of those, you have removed the climate change levy exemption for renewables, removed the subsidy for onshore wind, restructured VED, and ended the zero carbon homes commitment”—
since then, of course, he has also changed the solar subsidies as well. The papers the Committee had from HMRC said, with respect to the climate change levy, that there would not be any impact on climate change, so I asked him whether, taking all four measures together, there would be
“any reduction in the rate at which we are reducing our carbon emissions from the measures you have taken”.
“We can go through each one individually, but I think for different reasons they are not effective or good value for money, and I think there are better ways to meet these targets.”
He said we needed to meet the targets, but in a cost-effective way, so I asked him:
“Do you have any forecast or any scenario setting out how you think that the environmental objectives will be achieved on your new policy framework?”
“Yes”, said the Chancellor.
“I am happy to send you some analysis.”
It is now September and we have still not had the analysis promised by the Chancellor in July, so I asked the Select Committee Clerks if they would ring the Treasury to find out where those documents are. I was told that the Treasury could not get them over to us as quickly as we had wanted because they had to be cleared by the Chancellor and he had not cleared them. I thought that was very strange, given that he told me that he had seen the scenarios and the analysis before taking the decision, so I hope very much indeed that the Minister will tell us from the Dispatch Box this evening where the analysis is and why it has not been sent to the Treasury Committee. What we have seen seems to be evasive and possibly cowardly on the part of Treasury Ministers. They should be straight with us and give us the information we need. They knew perfectly well that we were having this debate this evening and that that information would have informed it, and they should have provided it in less than seven weeks.
I would also like to ask the Minister whether he can reconcile the impact assessment—which, as the hon. Member for Brighton, Pavilion (Caroline Lucas) pointed out, says that there will be a 1 million-tonnes increase in carbon dioxide emissions from the change to the climate change levy—with the statement by the Chancellor that it would have no impact on our capacity to meet our climate change objectives. Which is it? Or is it that the Chancellor said one thing to us before the Treasury Committee and his officials wrote another thing in the impact assessment, and is that the reason for the delay in our seeing documents we were promised?
I also asked the Chancellor about the fall in the Drax share price, because obviously it is very destabilising. He said:
“Inevitably, when you raise taxes, and we saw this with some of the banking sector, there is the risk of an impact on share prices, but that does not make it the wrong thing to do.”
I thought that was rather a flippant response. I very much got the impression from the exchanges we had with the Chancellor that he was desperate to find some money, that here was some money he had found and that, far from being a long-term economic or environmental plan, this was a simple thing he thought he could do.
The Chancellor again told us that a third of the benefit goes overseas, but that it would be perfectly possible to change the way the climate change levy operates to deal with that without getting rid of the exemption for renewables. If that was the real problem, Treasury Ministers should have asked HMRC to tackle it, not doing what they are doing in clause 45, which, as hon. Members across the Committee have said, will destroy jobs, worsen our chances of meeting our carbon targets, set us up badly for the Paris negotiations and damage investor confidence in this country.
The two questions that the Committee needs to ask when considering this Government proposal are these. Will it will help or hinder the Government in their central task of making sure we have enough power in this country for our future needs? And will it help or hinder what I hope is also the Government’s task, which is to provide value for money and sensibly priced energy, so that we can tackle fuel poverty and have a plentiful supply of reasonably priced energy to fuel the industrial recovery and the general economic recovery that the Government wish to see? My hon. Friends the Members for Selby and Ainsty (Nigel Adams) and for Brigg and Goole (Andrew Percy) made important contributions, but I would like to see whether there is any scope to bring them a bit closer to the Government’s position.
I have made very clear the priorities for myself and my electors. In the situation in which the country finds itself, guaranteeing keeping the lights on and having the power for industry and commerce is a fundamental objective that I take very seriously. I also take seriously the need to ease what Labour used to call “the cost-of-living crisis” to ensure that people have more money to spend for a better lifestyle, so affordable energy is crucial. Those are the priorities I set out for these policies. I think they can be achieved while ensuring that we reduce pollution, which I am very much in favour of. I wish to have sensible environmental policies, but my priorities are security of supply and powering better-paid jobs and more activity, which requires lower energy prices.
I think I am grateful to the right hon. Gentleman for giving way. He, like me, would like to see affordable energy, but given that nuclear power is one of the most unaffordable energies and that we are going to lock ourselves into extremely high prices for nuclear into times to come, will he be consistent in his position? If he does not want unaffordable energy, will he also oppose nuclear energy fees?
I have not seen all the figures on what the contract prices might entail, but I entirely agree that I want affordable energy. The advantage of nuclear energy is that it is reliable energy, and the problem with too much wind energy in the system is that it is very unreliable energy. It is therefore very expensive energy because a full range of back-up power is necessary for when the wind is not blowing. That means investing at twice the cost—investing in the wind energy and then in the back-up energy. With nuclear, only one investment needs to be made. The hon. Lady is quite right that it is crucial to get value for money if it is decided to lock into a nuclear contract.
The right hon. Gentleman may be aware that the interim report of the Competition and Markets Authority pointed out in June that customers on the standard variable tariffs are providing the big six energy companies with an extra £1 billion a year on account of over-charging? If he is concerned about the cost of energy, as I am, does he not agree that it is disgraceful that since that report we have heard nothing from the Government about how they are going to tackle this over-charging of some of the most vulnerable customers paying their electricity and gas bills today?
I have no more time than the right hon. Lady for over-charging vulnerable customers. I, too, look forward to an informed and sensible response to the report she mentioned. I do not think, however, that it is very relevant to the levy and the tax change that we are debating here today. The issue before us is whether this change to the levy will make it more difficult to keep the lights on and more difficult to deliver cheaper energy. I do not think it does, but the Government need to respond to the other crucial issues posed by my hon. Friends the Members for Selby and Ainsty and for Brigg and Goole.
Given that the margins are now extremely tight—in view of the huge reduction in traditional capacity that we have experienced, some people are pessimistic about the next two or three winters—can the Government do more, and do it cheaply and sensibly, at the same time as making the levy change? That should ensure that the great power stations we still have available can be either kept in the system and running to provide more power—preferably base load power, but it may have to be variable power, given how the thing is now run—or at least be kept available on standby. We may have to pay a price for that as part of that guarantee of supply. The three power stations we have heard about from colleagues this evening are part of the possible answer. We need to know that there is a future for traditional stations and that they can be priced into the system while we are in this period of transition, trying to work out what a modern electricity generation system will look like in five or 10 years’ time.
Will not this change in the levy, which is being made so quickly and with so little notice—28 days—make things extremely difficult for generators such as Drax, and will not the likelihood of capacity that is safe for us all be greatly reduced over the next couple of years?
My hon. Friend has made a powerful case in defence of Drax. I hope that discussions are taking place between the Government and Drax about how Drax can continue to make a contribution and the Government’s intention—which I will be supporting this evening—can be preserved. I think it entirely possible to change the levy while also coming up with a solution for Drax.
Many people wondered about the advantage of switching from coal to wood, and about whether that was quite what we wanted to do as part of a so-called decarbonisation strategy. Perhaps there is a better answer, but I return to my original proposition: I want an answer that will keep the lights on and provide the best possible value for money, and I think that there needs to be more discussion between the Energy Department and the big power stations to meet those two aims.
What I liked about the Minister’s opening remarks was his constant stress on the importance of value for money. That must be what drives Government policy. We want the productivity improvements that are now coming through. It is remarkable how, when Labour Members complain about something, that nearly always transforms it for the better. They complained about the cost-of-living crisis, and energy prices collapsed. Then they complained about the lack of productivity growth, and productivity started to take off. We are very grateful to them for those wrong calls, which seem to provide the stimulus that we need in order to create a better world; but if we are to drive productivity forward, providing more and cheaper power is crucial, because many modern processes, particularly in industry, are very energy-intensive.
The danger of some of the policies that have been followed by the European Union and by the last Labour Government is that we price ourselves out of energy-intensive industries—not in a way that spares the planet the carbon dioxide that those processes generate, but in a way that simply drives the businesses to another part of the world. No one should be happy about that. Those who believe that the fundamental priority is cutting carbon dioxide must take a global view; they cannot take a parochial, single-country view. Again, those whose main concern, like mine, is the prosperity and wellbeing of the British people cannot be happy if the decarbonisation policy has worked in one country, but has produced an equal or bigger amount of carbon dioxide somewhere else because the jobs and the industry have simply been transferred. That makes no sense whatsoever.
My hon. Friend the Minister will have my support—and, I am sure, that of many Conservative Members—if this proposal is tested shortly in the Lobbies, but we see it as only one part of a much bigger picture. We believe that if it is to work in removing the anomaly between different types of power and allowing some power from overseas to benefit, we must ensure that other elements of the policy mix are able to deal with the fundamental issues of supply, availability and value for money in the power system.
What the Government must do—and what they are beginning to do in a way that is shocking some Opposition Members—is revisit the huge cat’s cradle of subsidies, environmental tax, environmental tax breaks and rules which are extremely complicated, and which may, indeed, be having perverse consequences. They may be driving carbon dioxide-generating business out of this country while not cutting the global totals; they may be jeopardising our security of supply; they may be making it more difficult to deliver what we wish to do for, in particular, lower-income consumers who find current energy prices very challenging; and they are obviously in danger of undermining important, big, traditional investments in this country that could serve us better for longer if they were not driven out of business by environmental controls emanating from previous Governments and, particularly, from the European Union.
I urge my hon. Friend the Minister to justify the support of our party for this one element by reminding us that it must be part of a bigger picture, and that that bigger picture must be driven by a more rational policy that can deliver both the security of supply and the cheaper energy that the United Kingdom needs.
There have been several very fine speeches in this debate so far. In particular I pay tribute to the hon. Member for Brighton, Pavilion (Caroline Lucas) who made some very telling arguments, but I also pay tribute to two Conservative Members: the hon. Members for Selby and Ainsty (Nigel Adams) and for Brigg and Goole (Andrew Percy). They made very important contributions which I hope the Government will reflect on, and I hope the Minister will show that in his concluding remarks to this debate. I also, however, hope the hon. Member for Brigg and Goole will forgive me if I do not take up his kind offer to visit his bedroom. [Interruption.] I may say I can quite believe that—this is getting rather off-piste.
I want to take up some of the points made by the Minister and the right hon. Member for Wokingham (John Redwood), in particular about the purpose of taxes in this area and about innovation, a word that the Minister mentioned. The right hon. Gentleman also discussed some of the effects this would have on business and I want to talk about that, too. I will come to those matters a little later, and, if I remember, I will also revisit the classic analysis by the famed Professor Porter of Harvard—the Porter hypothesis on environmental regulation and taxes and their impact on innovation.
In my maiden speech I referenced that great son of Kirkcaldy, Adam Smith. The father of economics said there were four requirements for effective taxation: equity, certainty, convenience and economy. This Government proposal fails to meet at least two of those; it fails on the ground of equity and completely fails on the ground of certainty, particularly certainty for businesses. I grant, however, that it meets one of Adam Smith’s criterion: that of convenience. It is perhaps too easy a convenience for the Government to raise further taxes.
However, perhaps the greatest criticism of the Government proposals is that they are fundamentally changing the nature and purpose of taxation, particularly environmental taxation. Indeed, in many respects this is an abandonment of environmental taxation as a principle.
Environmental taxation is aimed at changing behaviour, but this has, by eliminating the climate change levy for renewable energy, simply become just another tax for raising money. The Chartered Institute of Taxation has stated:
“Put simply, green taxes should ideally be easy to avoid (by a change in behaviour) but hard to evade.”
By removing the exemption for renewable sources of electricity, the incentive for sustainable and environmental choices by business is diminished considerably. Thus the removal of the CCL exemption for renewables serves to tax good behaviour and change what was an environmental tax into just another revenue-raising tax. It confirms, if confirmation was needed, this Government’s attack on the renewables sector.
There is also a Scottish dimension to this, as those speaking from the Front Benches have said. As the Chartered Institute of Taxation says, this measure potentially affects Scotland more than it affects most of the rest of the UK because of the high degree of development of renewable energy in Scotland. Indeed, the UK Government’s own figures show that 11,000 people are currently employed in the renewable energy sector in Scotland, with another 5,000 in the pipeline. Those jobs are put at hazard by these proposals.
The Scottish Government have set some of the most ambitious environmental objectives and targets in the world, unlike the UK Government. Scotland has become a leading figure in research into, and encouragement of, good environmental practice and behaviour. Removing the climate change levy from renewables is not only anti-environmental but anti those areas such as Scotland that want to practise good environmental behaviour.
It is therefore appropriate to ask the Minister some questions, which I hope he will address in his summing up. Given the importance of the renewables sector to Scotland, have the Government undertaken an impact assessment of the proposed changes in relation to the Scottish economy in general and to the renewables sector in particular? Given the Prime Minister’s famed Respect agenda, which he is fond of quoting in Scotland, I assume that the Government have respected the different objectives being pursued in Scotland. Will the Minister tell me whether he has been engaged in—or will engage in—discussions with the Scottish Government on the impact of this change on the Scottish economy and the Scottish environmental strategy?
These Government proposals have given a new meaning to the term “stealth tax”. At a stroke they are changing a green tax into a simple revenue-raising measure. They are not using taxation to encourage good behaviour, despite the wealth of evidence that taxation can have a positive effect in changing behaviour for the better. I mentioned the Porter hypothesis earlier. Professor Porter hypothesised that, in this area of the environment, good regulation and appropriate taxation encouraged innovation by encouraging businesses to invest in new and better ways of delivering energy.
Another aspect deserving of comment is the fact that this change is being introduced with just 28 days’ notice. If ever a measure went completely against the good practice that Adam Smith called for of providing certainty in a marketplace, this one certainly does. It will create uncertainty for every business connected with the renewable energy sector, and it flies in the face of every form of good practice.
Much has been made of the sudden nature of the change in taxation, and the impact that that will have on the renewables industry. Would the hon. Gentleman accept, however, that many tax changes are made in a Budget and that they sometimes come into effect within a day or perhaps a month without having a disruptive effect? Is he not over-egging the destructive effect of this sudden change?
In relation to business investment, it would be normal practice to undertake considerable consultations. If big changes are proposed to the taxation affecting businesses, there would normally be a process of easing those changes in, to allow the businesses time to do the appropriate planning. There is no possibility of businesses in the renewables sector being able suddenly to change their financial plans for the next five or 10 years following the ridiculously fast introduction of this measure by the Government.
The exemption from the climate change levy has been one part of the support the taxpayer provides to renewable energy; the total package of that support amounts to some £5.1 billon this financial year. The climate change levy exemption was an indirect incentive for renewable energy. There is no denying it has had some success in the past, but by the early 2020s the total amount of renewable energy supplied will be greater than the total demand for electricity from all climate change levy-eligible businesses. The value of the exemption for generators would therefore be negligible by the early 2020s. For that reason, it would not have been a major factor in the long-term decision making of generators.
There were four reasons for removing the exemption.
I thank the Minister for his earlier remarks. Many people in Somerset have expressed their concerns about the direction the Government are taking on this, and my hon. Friend the Member for Somerton and Frome (David Warburton) and I would welcome the opportunity to meet the Minister at a convenient time to raise those concerns, discuss with him the concern in Somerset that this is perhaps a challenge to renewable energy generation in the county and assuage some of those concerns.
I hope I can put my hon. Friend’s mind at rest, to some degree, in the course of the next few minutes, but I will of course also be very happy to meet him and colleagues. I am always happy to meet colleagues to discuss these important matters.
There were four important reasons for ending the climate change levy exemption. The first was that it represented poor value for money, with one third of the benefit going to overseas operators—bringing no benefit to UK climate or renewables targets—and of course much of that generation will also have been receiving subsidy and incentive at home. The hon. Member for Wirral South (Alison McGovern) asked where these estimates come from, and I can tell her that they come from evidence provided to the Government by Ofgem—I am sure she will understand that the detail is commercially sensitive. The hon. Member for Brighton, Pavilion (Caroline Lucas) and my hon. Friend the Member for Brigg and Goole (Andrew Percy) pointed out that if one third of the value goes abroad, by definition two thirds stays at home. I cannot deny that that is mathematically correct, but of course that still represents a heavy leakage rate and it is the one third leakage that makes this exemption poor value for money. Just to be clear, EU law would not allow us to restrict the exemption or preferential treatment to the UK only. [Interruption.] I am sorry—I thought the hon. Member for Wirral South was trying to get in, but she wants me to move on to explain the second reason.
As I say, the exemption was an indirect incentive, and more efficient and effective policies have been put in place through the renewables obligation and contracts for difference schemes. They are worth more, they are direct and they are explicitly grandfathered, carrying more investor worth than a tax break. The third reason was the need to protect climate change levy revenue. The independent OBR forecasts show that without a change, climate change levy revenue would fall from £800 million to £200 million by 2020, and removing the exemption is worth some £3.9 billion over the course of this Parliament.
The fourth reason was to retain the incentive for energy efficiency across all energy use, while, as a side effect, simplifying the administration of the climate change levy, which will continue to add about 5% to 7% to business energy bills. Thus, we are encouraging energy efficiency.
I did want to intervene in the end. The Minister’s central argument seems to be this: this is not the best way to subsidise and, in any event, plenty of other support is available. Yet feed-in tariffs are under review and the Government are already legislating to undermine renewables obligations. We therefore just do not recognise this picture of “plenty more support available”. Will he confirm that the Government still plan to be the “greenest Government ever”? Is that a characterisation that he still sticks to?
In the first part of what the hon. Lady said she was pretty close to the mark. When I say that there is wider support available, I mean that the climate change levy exemption was worth up to £5.54 per megawatt hour, whereas the renewables obligation is worth £40 per megawatt hour, so relatively it is a much more significant financial effect.
New clause 2, which was tabled by the Opposition—[Interruption.] The Front-Bench Members seem unhappy.
I thank the hon. Gentleman for giving way. Can he confirm that the Government are currently consulting on scrapping the feed-in tariff and that they are legislating on cutting the renewables obligation on onshore wind? Will he also answer the question that has been raised about whether they looked into isolating the renewable energy that came through interconnectors to deal with the issue around value for money and whether that imported renewable energy was already benefiting from subsidies elsewhere?
On the right hon. Lady’s last point, that is not the only inefficiency in this scheme, as I was outlining earlier. She is correct about the consultations that are going on and about us fulfilling our manifesto commitment on onshore wind, but that does not mean that we will not continue to be absolutely committed to our environmental objectives. As I go through my remarks, I will talk some more about how we are on course to fulfil those objectives.
New clause 2 put forward by the Opposition would require the Chancellor, six months after the passing of the Finance Bill, to publish a report detailing the impacts of clause 45. Such a report is not necessary in that timeframe. The Chancellor has already presented a report to the Treasury Committee, which was published on 26 August.
I will take the opportunity to respond to some of the points that were made during the course of this debate. My hon. Friend the Member for Selby and Ainsty (Nigel Adams) spoke about Drax. He will understand that I cannot comment about that particular company because of the current judicial proceedings. He also spoke very passionately about his constituents in Eggborough, as did my hon. Friend the Member for Brigg and Goole. Clearly and obviously, it is a very disappointing decision for everybody connected with Eggborough and for those who now face much uncertainty. There is no easy thing to say to someone in that situation.
Importantly, the value provided by the climate change levy exemption was relatively minor when compared with the other elements of Government support that are available for renewable energy. Most generators were expecting the exemption to have a negligible value for them by 2020, so it would not typically be a large factor in their long-term investment decisions.
We are not in a position to be able to change the approach. My hon. Friend asks about the timing. The exemption would have cost around £40 million a month to maintain. Without our change, more than £150 million of support would have gone to overseas renewable generation in 2015-16, and that figure would have risen to £300 million by 2020-21. My hon. Friend asked why not follow the same timings as the exemptions for combined heat and power, but those are on a very different scale and the timing was in the context of the coming of the carbon price floor, which would support CHPs. As I said earlier, more efficient and effective schemes have come about to support renewables through the renewables obligation and contracts for difference.
The hon. Member for Kirkcaldy and Cowdenbeath (Roger Mullin) spoke about the particular impact of the measure in Scotland, but I can confirm that Scotland receives a high level of renewables support from the UK Government. In the first contracts for difference auctions, 11 out of the 25 contracts were awarded to Scottish projects, and 30% of the support provided by the renewables obligation is for schemes in Scotland. That support, as I have said, is much more significant than that offered by the CCL renewables exemption.
The hon. Member for Brighton, Pavilion asked about the Government’s green credentials, a point that came up again in an intervention. I repeat that the Government take our environmental responsibilities extremely seriously and we are absolutely committed to meeting our climate change commitments, but as cost-effectively as possible. We are making good progress, with emissions down 30% since 1990, and we are on track for 30% of electricity supply to be from renewables by 2020. At the same time, we want to help consumers, keep energy bills down and keep British business competitive. It is vital that we take careful account of the costs of our policies so that we are not imposing unnecessary burdens on households and businesses, making household bills unaffordable or putting the UK at a competitive disadvantage.
The Minister has made the case that he wants to be able to reduce householders’ bills, so will he ring-fence the extra revenue generated by applying the climate change levy to renewables and put it into energy efficiency for some of the poorest households in this country?
I wish we were living in a world where money that was saved was suddenly free and available to be used to do things. As the hon. Lady knows, the Government have a whole range of programmes to support our objectives to tackle climate change and we will continue to do that.
I stress again that new clause 2 is not necessary. The impact of ending the exemption from the climate change levy for renewable electricity has been published by the Government. Clause 45 will not impact the UK’s ability to meet its climate change goals, will not affect renewable generators’ long-term investment plans and will not increase household energy bills, but it will provide better value for money for UK taxpayers. I commend the clause to the House and urge the Opposition not to press new clause 2.
Question put, That the clause stand part of the Bill.
Clause 45 ordered to stand part of the Bill.
New Clause 2
Report on the removal of the Climate Change Levy exemption
“(1) No later than 6 months following the passing of this Act the Chancellor of the Exchequer shall publish a report into the effect of the removal of the Climate Change Levy exemption on renewable energy generators.
(2) That report must include information about:
(a) The effect that the removal of the exemption has had on existing generators
(b) The effect that the removal of the exemption has had on projects which were in the planning process
(c) The cumulative effect on investor confidence in renewable energy of this change in the context of wider government policy on renewable energy; and
(d) The effect of these changes on the United Kingdom’s ability to meet its climate change targets and commitments.”—(Alison McGovern.)
Brought up, and read the First time.
Question put, That the clause be read a Second time.
Bank levy rates for 2016 to 2021
Question proposed, That the clause stand part of the Bill.
With this it will be convenient to consider the following:
Clause 17 stand part.
That schedule 2 be the Second schedule to the Bill.
Amendment 3, in schedule 3, page 74, line 4, leave out “8%” and insert “the relevant percentage”.
This amendment would replace the 8% rate of surcharge in the Bill with a new rate to be set in regulations.
Amendment 4, page 74, line 7, at end insert—
‘(1A) For the purposes of subsection (1), the “relevant percentage” is a percentage of the company’s surcharge profits for the period, not exceeding 8%, which the Treasury shall specify in regulations; and such regulations may specify different percentages in respect of different levels of surcharge profits.
(1B) Regulations under subsection (1A)—
(a) shall be made by statutory instrument, and
(b) may not be made unless a draft has been laid before and approved by resolution of the House of Commons.”.
This amendment would require the Treasury to set the level of the surcharge in regulations, and would allow for different tiers of surcharge. The regulations would be subject to approval by the House of Commons.
That schedule 3 be the Third schedule to the Bill.
New clause 1—Impact of changes to the bank levy rate and of the banking companies surcharge—
“(1) The Chancellor of the Exchequer shall, within three months of the passing of this Act, undertake a review of the overall impact of the changes made by sections 16 and 17 of, and schedules 2 and 3 to, this Act, on:
(a) the structure of bank balance sheets;
(b) the long-term tax revenue from the banking sector; and
(c) competition and diversity within the banking sector.
(2) The Chancellor of the Exchequer must lay a copy of the review before both Houses of Parliament.”.
What a pleasure it is to serve under your Chairmanship this evening, Ms Engel.
Clauses 16 and 17 and schedules 2 and 3 make changes to the banking tax regime. They will ensure that banks continue to make a fair contribution to the economic recovery in a way that does not harm the UK as a global financial centre or affect banks’ ability to support the economic recovery.
It might be helpful if I set out the background to the Government’s approach to taxing the banking sector. In his first Budget in 2010, my right hon. Friend the Chancellor announced the introduction of the bank levy, an entirely new tax on banks’ balance sheets, equity and liabilities. The levy had two objectives. First, at a time when banking profits were low, it was designed to ensure that banks made a fair contribution to the taxman to reflect the risks that they pose to the UK economy —risks that were made very clear in the extraordinary events of 2008. Secondly, the levy was designed to complement the developing regulatory regime by providing incentives for banks to reduce the size of their balance sheets and support their activities with more stable forms of funding.
Measured against those objectives, the bank levy has undoubtedly been successful. It raised more than £8 billion across the last Parliament and is forecast to raise a further £17 billion by 2021. It has played a key role in increasing the stability of the UK banking sector, with banks now holding more capital against their assets and being less reliant on short-term risky funding. It has helped to satisfy the UK’s resolution financing obligations under the EU bank recovery and resolution directive, thus supporting the more orderly resolution of banks in crisis. Despite those successes, the Chancellor has been consistent about the need for balance in ensuring that banks pay a fair contribution, while ensuring that this supports the UK as a global financial centre and banks’ ability to support the wider economy.
The Government believe that, as the sector returns to profit, a change is required to maintain that balance. The reforms in the clauses achieve that over the coming Parliament and beyond. The first change is a gradual reduction of the bank levy. Clause 16 reduces the bank levy rate to 0.18% from 1 January 2016 and sets out further reductions to the main rate over the following five years, resulting in a rate of 0.1% from January 2021. The Government have committed to exclude non-UK subsidiaries from the bank levy charge from January 2021, a change we are committed to legislate for in this Parliament.
Clause 17 introduces a surcharge on banking sector profit from January 2016. That is a new 8% tax on the corporation tax profits of regulated banking entities within banking groups. It will apply to profits that exceed £25 million across a group, disregarding the losses that banks have carried forward from periods before the surcharge’s introduction. The first £25 million will benefit from the reductions in the main rate of corporation tax—from 20% today to 19% and then to 18%—included elsewhere in the Bill, giving the UK the lowest rate of corporation tax in the G20. It means that the overall rate of corporation tax will be slightly lower for banks than it was in 2010.
The OBR forecasts that the surcharge will raise £6.5 billion from the sector by 2021. That revenue more than offsets the cost of reductions to the bank levy rate. It means that banks will pay an additional £2 billion in tax over the period, increasing banks’ total additional contributions beyond £23 billion.
Like many hon. Members, I am sure the Minister has had many letters from small banks and the building societies about the fact that the surcharge will be imposed on them. The Building Societies Association says that it expects it will cost them £630 million over the lifetime of the Parliament, which would be sufficient to fund at least £4 billion in new mortgage lending. That means 15,000 or 20,000 new homes. The effect of including building societies is therefore to make it more difficult for 15,000 or 20,000 families to have a new home. Will the Minister consider whether that is a good idea?
I hope the hon. Lady recognises that the rate paid by building societies and smaller banks will be lower than it was at any time when she and the Labour party were in government. In fact, the measure brings the corporation tax rate to a level lower than when the Conservatives took power in 2010. In addition, 90% of building societies will be exempt from the charge because the first £25 million is exempt from the surcharge.
At the same time, we believe that the changes in clauses 16 and 17 will create a fairer, more competitive and more sustainable basis for taxing the UK banking sector. By rebalancing banks’ contributions towards a tax on profits, future charges will be more aligned with profit and capital accumulation. That reduces the risk of tax affecting banks’ decisions on where to invest and helps to ensure that tax does not impact banks’ ability to lend to businesses and individuals.
By aligning banks’ contributions with their activities in the UK, the changes recognise and reduce the impact of tax on UK banks’ ability to compete in overseas markets. They help to reflect the impact of regulatory reforms, which have reduced the risk of those overseas operations to the UK economy.
I shall draw my brief remarks to a close. The Government firmly believe that banks should make a fair contribution to the economic recovery. However, that contribution must be balanced with the need to maintain the competitiveness of the UK and to support lending to the wider economy. The changes in the clauses provide a better balance between those two objectives, and do so while providing long-term certainty and stability to the sector, and short-term revenue to the taxman. I therefore hope that clauses 16 and 17 and schedules 2 and 3 stand part of the Bill.
I, too, will make some brief remarks. I rise to speak to the Opposition’s new clause 1, which relates to clauses 16 and 17, concerning the Government’s changes to the bank levy rate for 2016 to 2021 and the introduction of a new surcharge of 8% on bank profits.
Before I begin my remarks and before I forget to ask the Minister, Members will be aware that the changes the Government are introducing are quite controversial in some quarters. Building societies have been expressing deep concern. However, I think I just heard the Minister say that 90% of building societies will not be affected by the changes because of the threshold. Will the Minister tell me, either in her remarks later or in an intervention now, whether she means 90% by number of institutions or 90% by size of building societies in total? The statistic does not reflect the concern that building societies have expressed in recent weeks. I will await her answer whenever she sees fit to give it to me.
Taken together, the clauses will completely reshape the structure of bank taxation in the UK, as the Government move from a tax on bank balance sheets towards a tax on bank profits. Alongside the impact on the banking sector itself, the clauses also have significant implications on tax receipts for the Exchequer. It is our belief that the changes have the potential to damage the competitiveness and diversity of our banking sector. New clause 1 calls for an urgent review to establish the impact of the new measures. Before coming on to the detail of new clause 1, I will briefly examine the case for a reduction in the bank levy in more detail.
When the bank levy was introduced at the start of the previous Parliament, the Chancellor made it very clear there were two separate objectives behind the policy. First, it was designed as a revenue raiser, with the Chancellor targeting an income of £2.5 billion each year from receipts of the levy. The second objective was to cause banks to change the structure of their balance sheets. This was explained by the then Exchequer Secretary, the hon. Member for South West Hertfordshire (Mr Gauke), who said the levy was
“intended to encourage banks to move to less risky funding profiles, and…reflective of economic risk”.—[Official Report, 12 July 2010; Vol. 513, c. 733.]
He went on to dismiss the idea of a tax on bank profits, as it would not create the same kind of behavioural effects as the levy.
In and of themselves, either of those goals was perfectly reasonable and was supported across the House. However, it quickly became obvious that the two goals were incoherent in practice, because as banks changed their balance sheets the revenue from the levy went down. This caused the Government to raise the levy again and again, with a total of nine rises in just five years. Now, having marched the banks to the top of the hill, the Chancellor plans to march them back all the way down again with cuts to the levy every year, finishing with a rate of 0.1% by the end of the Parliament. After 10 years of this Chancellor, we will have had a total of 13 different bank levy rates—what a mess.
The Chancellor claimed in his Budget statement that the bank levy needs to be reduced because the levy has worked. That is an interesting theory given that the revenue target, one of his policy objectives, has been missed consistently. The main question for the Minister is this: if the Government believed that increasing the bank levy had a positive behavioural effect on the banks, does the Minister believe that reducing the level will have a similar effect in the opposite direction? I thought I understood the Minister to say that she did believe there would be some behavioural effects of the change. Perhaps she might say a bit more about that.
The OBR’s economic and fiscal outlook shows that the future revenue projections are based on the assumption that banks will continue to reduce their balance sheets. Will the Minister explain, for the purposes of clarity, on what basis that assumption has been made? If anything, the new policy framework seems to be incentivising banks to grow their balance sheets, especially outside the UK—that seemed to be what the Minister indicated just now in terms of competitiveness outside the UK—and to reduce their profits. Why is this the incentive structure the Government want to adopt? It is completely at odds with the stated policy objectives of the past five years and bears little relation to wider economic objects. Are the Government not breaking their principle that banks should be taxed according to the economic risk they pose to the economy, as the Minister mentioned?
The reduction in the levy of course has serious revenue implications for the Exchequer. Under the old system, there was always a revenue target of £2.5 billion. As I mentioned, this target was frequently missed, but at least we had an idea of how much the Government were planning to raise. Will the Minister confirm that for this Parliament the idea that there should be a revenue target has been completely abandoned? It is now the rate that is fixed, rather than the expected income. Will she explain the rationale behind this decision?
To make up for the lost revenue from the levy, the Government are introducing a new surcharge on banks’ profits, which is forecast to raise about £1.2 billion every year across the Parliament. When combined with the gradual decline in revenue from the bank levy, the result is a projected increase in revenue of about £2 billion across the Parliament. Clearly, this increase is welcome in the short term, but I have some questions about its sustainability over the long term. The Government’s revenue costings for the banking sector do not take into account the planned cuts in the corporation tax rate, so will the Minister inform the House precisely how much this cut will be worth to the banking sector over the Parliament?
The bigger issue, though, is what happens after 2020. The Government have signalled their intention to reduce the scope of the bank levy from 2021 so that it applies only to UK balance sheets, as the Minister said. This would greatly reduce the revenue that the levy brings in, especially from big global banks. Will she please set out the rationale behind this decision and explain what effect this change would have on revenue from the banking sector further into the future? Are the Government not simply storing up problems in order to appease big global banks?
There are further worries that the introduction of the surcharge will encourage some banks to adopt more complicated organisational structures in order to avoid paying the surcharge on their non-banking profits. Alongside any revenue implications of such behaviour, surely it would make regulation of the sector more difficult and make it harder to quantify potential risks to our economy posed by the activities of some banks. I really think this is a serious matter, and I would like to know if the Government have considered it.
The Minister will be aware of new research from Ernst and Young casting doubt on the OBR forecast of revenue from the surcharge. The research finds that revenue will be nearly double the £6 billion projected over the Parliament. I would not wish to second guess Ernst and Young, but would the Minister comment on the research and say whether the Government plan to review their position? All this uncertainty strengthens the case for our review.
More important than almost any other consideration is competition. Our main objection to the Government’s new policy is the effect on competition in the banking sector. I am sure there is agreement across the whole House that a competitive banking sector is vital to the long-term health of our economy—the City Minister has been touring the country praising new challenger banks in recent weeks, and well they deserve that praise—but the truth is that the changes in clauses 16 and 17 will directly harm small challenger banks and building societies, which need to grow to provide competition to the bigger players.
The big banks are compensated for the new surcharge by the fall in the levy, whereas the small banks that did not pay the levy are simply smacked with a new tax. The Government are effectively spreading the taxation over the whole banking sector, reversing the previous position that only the biggest and riskiest banks should pay more. The reality is that the people worst affected by these measures are exactly the people the Government claim they are trying to help. The situation is particularly damaging when it comes to mutuals, because their main way of raising capital to expand or for new lending is through retained profits. They cannot simply sell shares, as other banks can—that is what it means to be a mutual.
A tax on profits is clearly particularly damaging for mutuals—it is obvious. The simple point is that building societies are legally different from banks, thanks to the Building Societies Act 1986, which limits how they can raise money and who they can lend to. The Government must surely know that, yet the new surcharge will add an estimated £630 million to the tax bill of mutuals over the course of this Parliament, according to the Building Societies Association.
As has been said by my hon. Friend the Member for City of Durham (Dr Blackman-Woods)—who is not in her place—that money would not otherwise have gone to shareholders, but would have been used for expansion or new mortgage lending. For example, Nationwide has said that the extra £300 million that it will pay through the surcharge could have financed £10 billion of domestic mortgage lending. As Paul Johnson of the Institute for Fiscal Studies said before the Treasury Committee in July, this tax would reduce the capacity of some banks and building societies to lend. Analysts from Morgan Stanley have warned that it may lead to the re-pricing of domestic loans, which would push up the cost of consumer borrowing.
We are left with the frankly perverse situation where small building societies would be paying the surcharge but large loss-making banks would not. As Stuart Adam of the IFS has said:
“It doesn’t look like it’s well targeted either at those that got the biggest bail-outs in the crisis, or those that pose the highest risk in the future.”
The point is that the charges are not only obviously unfair, but bad for the economy as a whole, because of the effect on competition in the sector. That is particularly bad news for consumers, who benefit from a competitive banking market to give them choice and who need smaller banks to provide a viable alternative to the established names. Yet it seems that the Government have constructed an entire policy in order to appease large global banks, with little thought for the ramifications on the rest of the sector. Can the Minister explain why the Government have not done more to reduce the impact of their surcharge on challenger banks and mutuals? Does she accept that building societies are legally and structurally different from banks and should therefore be treated differently? Has she considered the case for excluding building societies from the surcharge? If she has not, I would ask her to do so.
Even a number of the Government’s own MPs are making that argument, including the Chair of the Treasury Committee, the right hon. Member for Chichester (Mr Tyrie), who is not in his place, who has warned the Chancellor of unintended consequences, and the hon. Member for Wyre Forest (Mark Garnier), who is in his place, who has said that building societies should be excluded. Does the Minister accept these very well made arguments and will she commit to holding a review into the impact of the changes on competitiveness in the banking sector? I do not think anyone in the House, of whatever party, thinks that we need less competition in the banking sector. At the very least, having a review is an obvious course of action.
Our new clause 1 calls for a review of a number of separate areas. The first area concerns the implications for bank balance sheets, because the bank levy was targeted in order to de-risk balance sheets and thereby reduce the potential threat to the UK economy. The Government must now explain why reducing the levy will not encourage more risky behaviour from banks. The review must also make clear what effect the change will have on long-term revenue from the banking sector. The Government must also make clear how big the tax cut is that they are offering the big global banks after 2021 and what impact that will have on the sustainability of the tax base in future. Finally, there must be a proper examination of the effect of the new surcharge on competitiveness, for the reasons I have set out.
Speaking at an event organised by TheCityUK recently, the City Minister said that these changes represented a
“sustainable, fair and competitive long-term plan”.
However, the Government have undermined sustainability by creating perverse incentives and reducing the long-term tax base. They have undermined fairness by giving a big tax cut to a small number of global banks while increasing taxes for new challengers. Most importantly, they have undermined competition by choking off the growth of building societies and smaller banks. This is not a long-term plan to build a better banking sector; it looks like a quick fix to appease the likes of HSBC and Standard Chartered. It is a plan that has been criticised by the British Bankers Association, the Building Societies Association, the IFS, the Chair of the Treasury Committee and the Government’s own Back Benchers. The Minister does not have to take it from me, the Opposition spokesperson; she should take it from her own Back Benchers. The Government must take this opportunity to think again. I urge all parts of the Committee to support our new clause.
It is a pleasure to follow the hon. Member for Wirral South (Alison McGovern), who mentioned me several times in her speech. In the broadest sense, I agree entirely with what the Government are doing, but I have one or two reservations, to which she alluded.
It is worth looking back to why the bank levy was brought in and to what it was a response. It was, of course, a response to the bank bonus tax introduced by the previous Government, which was brought in, in turn, to try to get some money back for taxpayers from when the banks were bailed out. I think that it is the right thing to do. Banks should help to pay back the taxpayer, but the bonus tax was never going to work. The banks were always going to get around it one way or another. Many suggestions were put out by newspapers and banks, but the one that summed up the banks’ approach best for me was a Matt cartoon in The Daily Telegraph. A trader was pictured sitting in front of his boss in a bank; the boss turned around and said, “I’m afraid you are not going to get a bonus this year, but we are going to buy your tie off you for three million quid.” That was the sort of approach that the banks were going to take.
It was therefore right for the Government to bring in a levy that could not be got around. Of course that was the right thing to do, and the intention was to raise enough money from the levy to make up the shortfall that would follow from getting rid of the bonus tax, which was around £2.1 billion to £2.2 billion. The levy was an unavoidable tax. It started out at nine basis points, rising on nine occasions to 25 basis points. That resulted from the reduction of balance sheets and from the slight change in the shape of the deposits profile—moving away from the deposits profile that would attract the levy.
It is worth bearing in mind what Douglas Flint said when he came before the Treasury Select Committee in January 2011. I asked him for his view about the future of HSBC in the UK and whether it would keep its domicile. The hon. Member for Wirral South mentioned Standard Chartered and HSBC in her speech. Douglas Flint said that the domicile was reviewed once every three years and that 2011 would be the year in which that happened. When he came before us again in January 2012 and I asked him what he was going to do, he said he was going to defer it.
It became apparent that the shareholders at HSBC, one of the best and biggest banks in the world—and, indeed, one of the most stable—were very upset about paying quite a hefty levy, which only got bigger, on their international earnings. The same applied to Standard Chartered, which had very little earnings within the UK. None the less, in responding to shareholder pressure—the shareholders were asking, of course, for an opportunity to get more return for their money—those chief executives were saying, “Don’t worry; we will ride this out and the bank levy will eventually disappear at some point.”
After five years of that, the pressure from shareholders was becoming very intense. If Standard Chartered and HSBC had left the country, the bank levy would have had to rise from 24 basis points to more like 35 basis points in order to maintain the £2 billion or so in revenue. Paying 50 basis points would be a very significant taxation on deposit levels within banks. Inevitably, then, if Standard Chartered and HSBC had left, the whole bank levy would have spun out of control and eventually wound itself into a knot that would have been completely unsustainable. That is why the Government had to do something about it.
Before I move on, it is worth looking at what the banks were getting as a result of paying the levy. The first thing—in justifying the levy to shareholders this is an important point—is that the banks were paying back the taxpayer who had bailed them out with a lot of money. The taxpayer required some sort of levy to get some of the revenue back. The second important point is that the bank levy could almost be seen as a type of insurance premium charged against the banks for having what is known as “the implicit guarantee”—the guarantee that, should the banks fall over as two of them did in 2007-08, the Government would stand behind them and pick them up.
However, the provisions of the Financial Sector (Banking Reform) Act 2013 were introduced in order to try to get to the stage where the banks would no longer need to be supported in the event of a collapse—that there would be an elegant collapse; there would be bail-in bonds and ring-fences around the important parts of the banks, so that never again would the Government step behind the banks. The banks would be allowed to collapse without causing contagion through the banking system. That is an incredibly important change.
The argument about the bank levy being an insurance premium would eventually diminish to nothing with the finalisation of the fairly expensive Banking Reform Act in 2019. As for paying money back to the taxpayer, we are in the process of doing so by means of the sales of RBS, Lloyds, Northern Rock Asset Management, and the various other assets that were bought. At some point, we shall be able to draw up a final P&L to establish whether we—the UK taxpayers who bailed those banks out—have got our money back.
The bank levy was becoming obsolete in some respects, and even more difficult to justify to shareholders of the big international banks that do not have to pay it because they have moved their domiciles offshore. It is worth bearing in mind that HSBC moved from 1 Queen’s Road Central in Hong Kong to the United Kingdom only 15 or 20 years ago, so this is not a difficult thing for it to do. Spiritually, it does not have a long history in the UK, and it can easily move back.
It is right for the Government to get rid of the bank levy, and I am very pleased to note that it will be reduced by 2020, but it had to be replaced by something, and, again, we must ask what the banks are getting for their money. The levy can be justified on the basis that we provide, as a society and as a country, a very benign and stable economy, which the banks can use to their advantage to make money.
It is not entirely unreasonable for institutions that are trading in the purest form of capital, which is cash, to be able to take advantage of that economy and make money out of it. They have a social function to perform: they have to distribute money from where it is accumulated to where it is needed, which is a very democratic process. They also have to do complicated things such as modifying maturity on deposits to loans, which is a very difficult business. None the less, we provide one of the best regulatory environments in the world. It is expensive, admittedly, but it is very good. We have a sound economy, we are getting back on our feet, and, relative to the rest of world, we can be very proud of what we have achieved. It is justifiable for the banks to pay something as a contribution to that. However, I have reservations, and I therefore ask the Minister to carry out an ongoing review of what is happening with the new bank tax, starting with the banks themselves.
It is right that the banks that will be affected are predominantly the larger ones. People talk about challenger banks. The British Bankers’ Association has about 250 members. There are a lot of banks in the UK, and 47 of them can be considered to be challenger banks. Some are as small as Kingdom bank, which has a balance sheet of just £50 million; others, such as Metro bank, are doing very well.
Most of those banks will not be affected because their profit does not exceed £25 million, but in some instances, to which the hon. Member for Wirral South (Alison McGovern) alluded, non-bank profits could be brought into this tax regime. However, I do not think it is a bad thing if some non-bank profits are moved into separate divisions within a bank. If there is a wealth manager function within the bank, for example, is it such a bad thing for that element to be separated from the bank in what effectively amounts to a protective ring-fencing, so one side can be protected from the other? I do not think there is anything too bad about that, as long as the bank is not destabilised. Of course, the regulator will have a look at that.
The vast majority of banks will not be affected. Challenger banks will be able to try and build up their profits, and when at some point those profits exceed £25 million, they will start paying the surcharge. It will be worth seeing how many banks pay it in the future, but it should be borne in mind that their legal structure enables those banks to raise capital through equity transactions. They can sell extra shares, which is how they can build their capital so they can meet the challenge of building market share against the bigger banks.
The mutuals, however, are a different animal. There seems to be some confusion over quite how many of them are being affected, but it is certainly a small number. I thought it was only two, but it could be as many as five. Mutuals cannot go to an equity market to raise capital—I do not agree with the argument that this is taking money out of the lending market, although I suppose that is probably a fact—but they are still better off than they otherwise would have been in 2010 with corporation tax at that level.
The biggest problem for the mutual companies is that, in trying to build their assets, they have to build their equity base, which can be done only through retained profits. We therefore must be cautious about taxing them a little more and slowing the rate at which they can build retained profits. Having said that, the biggest building society, Nationwide, has created a new hybrid bond that can bring cash into its balance sheet, proving that there are alternatives.
I am genuinely happy to support clauses 16 and 17 for all the reasons I have discussed, but I say to the Minister that there may be unintended consequences. While I do not necessarily think we need an immediate review, given that this is going to be coming in over a number of years and changes will take a bit of time, the Treasury should have a look at the effect particularly on mutuals and the smaller challenger banks that possibly have non-banking earnings and are making profits of around the £25 million mark, to see whether this has a negative effect on them.
I wish to speak to SNP amendments 3 and 4, and let me say three things at the outset. First, I am seeking to curry favour by making my remarks fairly short, as we have had a long two days; I hope that is appreciated. Secondly, our amendment gives the Government the opportunity to change their approach to setting the 8% surcharge by introducing it in a tiered manner. This would have the benefit of removing a cliff-edge and replacing it with a more manageable approach. However, and thirdly, we do recognise that our amendment may not be the only way of achieving a more sensible introduction of the surcharge, and therefore we are keen to hear the Minister’s response.
What is the fundamental issue? A number of fine comments have already been made about building societies, the problems of retained profits and the like, so I shall mention some other matters. Our concern is primarily centred on the impact this Bill will have on challenger banks and the adverse consequences it will have on competition and diversity and in respect of entry barriers for prospective new challengers.
As Carlos Suarez Duarte, vice-president at rating agency Moody’s, said,
“profitable challenger banks will be the most affected by the new charge on profits,”
while changes to the bank levy
“will be positive for UK banks with large overseas operations such as HSBC and Standard Chartered.”
About 30 banks are subject to the current levy, but the new 8% additional tax on profits will affect any challenger bank with profits of more than £25 million, expanding the scope of bank taxes to potentially around 200 institutions, The Daily Telegraph estimates.
I and my colleagues have little issue with the surcharge applying to institutions that have posed a systemic risk to the sector, but the smaller banks have not posed such a danger. Indeed, the coming of the era of the challenger banks is seen by many as part of the solution to the problems posed by having too few, too powerful institutions. Challengers are not part of the problem in this regard; they could be part of the solution.
Indeed, the surcharge as currently proposed will have perverse effects on the Government’s own banking strategy. The Chancellor vowed only a couple of months ago to boost retail banking competition by proposing at least 15 new licences over the next few years, but as Nigel Terrington, chief executive of Paragon Group, which recently launched its own bank, said:
“This surcharge took everyone by surprise and does seem to be contrary to the stated government policy of wanting to increase competition.”
Indeed, as he has also commented:
“It feels like they’ve replaced a punishment tax on the larger banks with a charge on all of us. What did we do wrong—I thought we were part of the solution, not the problem?”
In effect, this surcharge will prove a barrier to encouraging new entrants. Indeed, the tax will hit small profitable domestic banks particularly hard, which completely goes against previous Government efforts to lower the barriers to entry for new lenders, which we welcomed. Anne Boden, the founder of Starling, has previously praised the Government strongly on more than one occasion, but she has recently been quoted as saying in relation to the new surcharge:
“It is not just a constraint on the development of smaller banks, but, more importantly, not in the best interests of consumers.”
Many of the challenger banks’ consumers and customers will be small and medium-sized enterprises. As a former owner and director of a number of SMEs myself, I know from bitter experience how difficult it can be, particularly in the early years of trading, to access banking support. That is why, in my life before entering this place, I was supportive of the move to enable the establishment of more challenger banks willing to deal more effectively with the needs of the SME sector. That is particularly important in the Scottish economy, which is heavily reliant on SMEs.
Analysts, including Gary Greenwood of Shore capital, have been highly critical. He, like others, has argued that the surcharge as currently planned will be counterproductive, and that it will inhibit the ability of smaller banks to grow and compete as effective challengers. He states:
“Banks can lever up their equity by 10 to 20 times, so for every £1 of tax you take off them, you rip £10 to £20 of lending capacity out of the market. It is crazy.”
Crazy indeed. By harming lending and therefore investment, particularly by SMEs, this will also have the effect of creating a further problem for achieving higher levels of productivity in the economy. We need more investment, not less; more lending, not less.
The Government’s explanations of why this burden should be placed so heavily on small profitable domestic banks are unconvincing. It is hard to find any analyst who sees this as helpful for competition, diversity or entry. I hope the Minister will reflect on these arguments, and perhaps address the following questions. Have the Government undertaken a detailed analysis of the likely effect on SME lending in the four countries of the UK, and if so will they publish it? Have the Government changed their policy on the need for effective banking competition? I look forward to hearing their response, and hope that it is strong and purposeful enough to satisfy our concerns.
I very much support the Government’s proposals, and I particularly welcome the balance that they intend to strike between ensuring that banks make a fair contribution and giving greater recognition to the role that they play in providing jobs and powering growth. I also welcome the fantastic critique given by my hon. Friend the Member for Wyre Forest (Mark Garnier), which has resulted in my putting half my speech into the bin. It would not have been half as eloquent as his.
The hon. Member for Wirral South (Alison McGovern) mentioned the behavioural implications of the proposed change. Scottish National party Members have also touched on that subject and asked whether challenger banks were being punished via their profits. I do not believe that tax itself, either on profits or on the balance sheet, will stop risky transactions. Indeed, the European Union transaction tax would mean that a bank would pay tax at the outset and would then be free to enter into a potentially catastrophic transaction at a flat fee. In comparison, the UK’s approach has been to require banks to set aside capital, with a requirement for more to be set aside against riskier transactions. That is not a tax; it is capital being set aside. By separating the balance sheet of retail banks from the riskier investment banks, the investment bank does not have the capital to enter into that potentially catastrophic transaction in the first place. Measures taken by this Government—and, to be fair, by the prior Government, too—have helped the UK buffer itself well following the crisis of 2008.
I do not know whether the hon. Gentleman misunderstood or whether I misunderstand him, but the particular concern in relation to profits is the impact on mutuals, which, by definition, have little access to capital and use their profits to grow capital for lending. That is the effect there is concern about. Does he think the proposed tax would be good for mutuals?
The point made earlier was that this measure helps the likes of HSBC and Standard Chartered, so I took the new clause to be about more than just mutuals, with it being about an unfair benefit being added to certain banks. I am trying to highlight that tax is not necessarily the means to control riskier transactions. Reference was made to those banks, which is why I was extending the point. With an allowance of £25 million set in place, the smaller institutions will be buffered to a certain extent. In addition, I do not believe it is essential that we start treating different institutions differently. Of course some pay less tax because they have fewer profits.
I am wondering whether my hon. Friend is as surprised as I am that Labour Members have discovered that tax on profit is harmful. Will he join me in welcoming their discovery that tax can actually do harm? Does he believe it represents a new direction of travel for Labour?
My hon. Friend puts the point much better than I could have. I commend the Committee for this section of this debate, because it is where it is at its most thoughtful and most articulate—perhaps because it is at the close of business.
The by-product of the regime to which I made reference is that foreign investment banks have moved their head offices from London to their home nations but not necessarily their jobs. That means that UK taxpayers are not liable for bank failure in the same way as they would have been previously. The point I wish to articulate is we should not just think of tax as the means to control the behaviour of banks; we should look at the regulation, and the separation of investment banks and retail banks. That has been a success.
As we move into the newer regime and as banks, to use their own rating, would be on “negative watch”, it is right that they pay an increased premium for the risk that still exists. We should absolutely be on our guard in that respect. It is also right that we treat them as another corporation—with corporation tax but with the tax in addition on profits. To address the point made in an intervention, I do believe that there are buffers within, but I also do not think it requires an amendment to state that the Treasury must undertake a periodical review, because the Treasury will of course do that on a daily and weekly basis. Given the support that this Government have given to allow challenger banks to be set up, the Treasury will of course ensure that the help is provided and that this is on watch throughout.
I welcome this change of approach, and believe the time has moved on from when we have a bank levy towards when we have an ordinary tax on profits. On that basis, I very much support the Government’s line.
I will be brief, Mr Howarth. I just wanted to respond to some of the points made by my colleague the hon. Member for Wyre Forest (Mark Garnier). Nobody from my side of the House disputes that the bank levy was in need of reform. Indeed, he made it sound far too well organised and manufactured; it was ad hoc, arbitrary and unpredictable, and it definitely needed to be replaced by something more predictable. Therefore, we are in no way rejecting the notion of moving to a surcharge on profits, which could be an effective way of raising the funds from the banks and, in a sense, of surcharging them for the social service that we provide through the Treasury in protecting them.
I do not go as far as the hon. Gentleman in relation to what I would describe as the gentle blackmail from HSBC and Standard Chartered Bank. If anyone looks at the turmoil in the Asian markets and in China at the moment, they will not think that it was a good moment for a bank to shift their headquarters from London to Hong Kong.
Let us accept that there will be a change. Our view is that we need a mechanism that allows the Treasury to use statutory instruments to vary the rate and the application of the surcharge as it evolves and as we learn whether it is impacting adversely on some banks, building societies and mutuals. That is all we are saying. We are trying to find common ground with the Chancellor. We are moving in the same direction, but the Government are rushing the application. They are making it too uniform and are choosing arbitrarily a rate of surcharge that is simply designed to reproduce the current level of tax yield. That is a bad way of approaching how we manage the surcharge on the banks.
I suppose the essence of the argument—this is really where I want to go—is that there are differences between the challenger banks and the larger banks. Those differences are not just based on their level of profit. It is quite clear that it is proportionately more expensive for the smaller banks to provide the capital to support the credit risk in their loans once it is weighted against their risky assets. We know that from the work that has been done by the Competition and Markets Authority, and I would prefer to take its view rather than the special pleading from the banks—even the special pleading from the challenger banks.
The Competition and Markets Authority has looked at the expense to the different scale of banks in providing the capital to support their credit risk. It has come up with figures that say that on a typical £100,000 loan to a small business, a challenger bank, or a bank of that scale, has to put aside roughly £8,000 per £100,000 loan, compared with about £6,000 from one of the very large banks. The mathematical reason for that is quite simple; it is not rocket science. The smaller bank with the smaller balance sheet is carrying proportionately more systemic risk on each loan. When a small bank loses a customer or has a non-performing loan, it is quite costly to it given the scale of its balance sheet. Therefore, when we start doing the risk-weighted analysis, it will have to put more capital by; it will cost it more. It is economies of scale. Big banks have economies of scale. A specific non-performing loan to a small business is a relatively small risk to the larger bank, so the cost to it will be small. It follows on from the matters of big and small economies of scale. Nevertheless, they act as a barrier to the smaller banks being able to grow.
If we impose a uniform profits surcharge on all the banks, there is a higher real burden on the smaller banks. I would like the Treasury to take that into account as we move along, and have the powers to be able swiftly to shift the rates. I was trying not to be prescriptive in laying down how we would set different levels for different kinds of banks; I wanted a system to evolve. I want the Treasury to have the powers to do that so that if it does prove to be more costly for the challenger banks and to be taking more from their profits and their ability to raise capital, we might think about different kinds of banding, and that would be up to the Treasury to consider. We are simply saying that the smaller banks have different cost structures and therefore different risk elements, which means that imposing a single levy on profits across all the banks, big and small, is a bit too arbitrary and a bit too ad hoc. In other words, it brings us back to the sort of problems that we had with the original bank levy.
It has been a great pleasure to have my Opposition shadow, the hon. Member for Wirral South (Alison McGovern), in the Chamber today making the points that she has. I sincerely hope that next week she will continue to be my Opposition shadow, because it is clear that she takes her role very seriously. I know that she supported the hon. Member for Leicester South when it came to nominating the leader of her party, so I hope that her point of view prevails when it comes to the announcement on Saturday.
You are quite right, Mr Howarth. What I wanted to say was that one would not believe from the remarks that the hon. Member for Wirral South made at the beginning of the debate that the banking system had fallen into massive failure, meaning that this Chancellor had to take steps in 2010 to sort out the country’s banking system and the deficit. Listening to the hon. Lady this evening, one would have thought that banks were then paying less tax than they are today but in fact, after the changes in clauses 16 and 17, the banking sector will pay the lowest rate of bank tax in the G7.
One would also not believe from the remarks we heard at the beginning of the debate that over the 13 years for which the hon. Lady’s party was in power there was no increase in competition in banking. There were more than 20 inquiries into banking competitiveness, but they were obviously unsuccessful. The hon. Lady asked a number of questions, and although I do not want to detain the House for long with this entertaining discussion I want to respond to some of the points raised in the debate.
I was asked a couple of times about building societies, and I said that 90% of building societies would be unaffected by these changes. Obviously, the vast majority of building societies do not make a profit of more than £25 million a year, so the sector will benefit from the reduction in corporation tax over the life of this Parliament down to 18% by 2020.
Absolutely, and it is 90% of all building societies. Clearly, a handful of building societies are big enough to be able to pay the additional levy contained in these clauses and, even after the surcharge, they will still be paying a lower rate of corporation tax than they were paying under the previous Labour Government. With the hon. Lady’s conversion to lower taxes, she should be welcoming and celebrating the fact that the Budget announces these long-term changes.
The hon. Lady also asked whether the numbers in the Red Book take into account the corporation tax changes, and indeed they do. She asked about revenues after 2020-21 and I am delighted that she recognises that it will be the Conservative party that will be making those decisions after the next general election. She asked about the Ernst and Young forecast in today’s papers, and even she got the giggles when she raised the forecast, which is really quite laughable. It takes into account only one side of the equation in terms of the potential rise in the take from bank corporation tax.
The hon. Lady asked about competition, and I have mentioned the competition track record of her party when in power, but it is helpful to be able to talk about the range of things my party did in the last Parliament to improve bank competition. It is a strong focus of this Government. I am glad that the SNP spokesman, the hon. Member for Kirkcaldy and Cowdenbeath (Roger Mullin), mentioned the ambition to have 15 new banks receive a banking licence. I understand that there are a large number in the pipeline. Indeed, one new bank has already got its licence this year.
The additional steps we have taken to increase bank competition include giving the Financial Conduct Authority and the Prudential Regulation Authority a strong focus on competition; creating the new Payment Systems Regulator to ensure that the challenger banks gain access to the payment systems on fair terms; and introducing a seven-day current account switching service, which is about to have its second anniversary—over 2 million people have now used that simplified switching service. Of course, the Small Business, Enterprise and Employment Act 2015 requires big banks to refer to other organisations any small and medium-sized enterprises that it might have turned down for finance. We are taking a range of steps to improve banking competition.
The hon. Member for Kirkcaldy and Cowdenbeath asked whether the tax regime supports the challenger banks. Of course it does, because the rate of corporation tax will fall to 18% by the end of this Parliament, which means an extremely attractive rate on the first £25 million of profits, and the vast majority of challenger banks will fall into that category. By the end of this Parliament, and taking into account the surcharge, the combined rate for a bank that makes £200 million in profits, for example, will be 25%. That will be a very competitive rate, and it balances the need for revenues to the Exchequer with the need for capital formation in the banking system.
I know that the Minister is trying to rattle through this quickly, but I have a question. We can all trade previous Governments’ records—I could draw attention to the impact on mutuals and building societies generally in 1986—but let us talk about the future. Clearly these changes will have an impact on building societies, which offer consumers a unique proposition because of their structure. Will she commit this evening to ensuring that the changes she is making will not harm the mutual banking sector?
Again, I am surprised that the hon. Lady seems to want me to keep mentioning the rate of corporation tax, because it is now lower for building societies than it was when her party was in power—it seems an extraordinary line of attack. Yes, a handful of building societies are large enough to pay the surcharge, but 90% of them—by number—will not only be unaffected by the change, but will benefit. Capital formation and the ability to retain earnings within the mutuals will improve as a result of the corporation tax reductions that we are introducing, which she opposed in the manifesto she stood on at the general election.
In conclusion—I will be quick, because I know that the Committee wants to express an opinion—I commend clauses 16 and 17 and schedules 2 and 3 to the Committee, and I respectfully request that the hon. Members for Wirral South and for Kirkcaldy and Cowdenbeath do not to press amendments 3 and 4 and new clause 1.
Question put and agreed to.
Clause 16 accordingly ordered to stand part of the Bill.
Clause 17 ordered to stand part of the Bill.
Schedule 2 agreed to.
Banking companies: surcharge
Amendment proposed: 3, page 74, line 4, leave out “8%” and insert “the relevant percentage”.—(Roger Mullin.)
Question put, That the amendment be made.
Schedule 3 agreed to.
New Clause 1
Impact of changes to the bank levy rate and of the banking companies surcharge
‘(1) The Chancellor of the Exchequer shall, within three months of the passing of this Act, undertake a review of the overall impact of the changes made by sections 16 and 17 of, and schedules 2 and 3 to, this Act, on:
(a) the structure of bank balance sheets;
(b) the long-term tax revenue from the banking sector; and
(c) competition and diversity within the banking sector.
(2) The Chancellor of the Exchequer must lay a copy of the review before both Houses of Parliament.’—(Alison McGovern.)
Brought up, and read the First time.
Question put, That the clause be read a Second time.
The Deputy Speaker resumed the Chair.
Bill (Clauses 16, 17, 43 and 45, and Schedules 2 and 3) reported, without amendment, and ordered to lie on the Table.