Windfall tax not expected to deter investment in North Sea, say Treasury

The evidence session took place on 12 December, with witnesses:

• James Bowler CB, Permanent Secretary at HM Treasury
• Anna Caffyn, Finance Director at HM Treasury
• Phil Duffy, Director-General for Growth and Productivity at HM Treasury
• Cat Little, Second Permanent Secretary at HM Treasury
• Beth Russell, Second Permanent Secretary at HM Treasury

You can read the full transcript here.

In a wide-ranging session, the MPs and witnesses discussed recent political upheaval, including the departure of several Chancellors and former Permanent Secretary Sir Tom Scholar, public spending and value for money in government departments, as well as several tax issues.

Energy windfall tax

Dame Andrea Leadsom (Conservative) mentioned speculation that several large offshore oil and gas firms were planning to reduce investment in projects in the North Sea in response to the increase in the energy windfall tax. The tax has been increased after Shell and BP reported huge profits. Leadsom questioned whether economic forecasting had made allowances for any future withdrawn investment as a result of the plans as companies see reduced benefits from operating in the region.

Responding, Beth Russell said the Chancellor had met representatives of the industry and the Treasury were “carefully monitoring” the situation. She added: “What ministers have been trying to do with this policy is get the balance right between taxing extraordinary returns—taxing the windfalls— while still maintaining incentives for investment. That is why there is a generous investment allowance in the tax.”

Russell added that the OBR (Office for Budget Responsibility) said it did not expect there to be an impact on investment from either the Energy Profits Levy or the Electricity Generator Levy. She said: “Obviously it is a new tax, and industry does not necessarily react favourably to that. Our existing assessment of the impact on investment is that it is not going to be significant, but we will keep talking and looking at what actually happens.”

Fuel duty

Leadsom also questioned an anticipated 12p increase in fuel duty from April in the OBR’s forecast, saying that this has not happened in the last 12 years and would leave a £6 billion black hole should it be wide of the mark and fuel duty is frozen again.

She said: “That is quite significant at a time when, evidently, wholesale prices are coming down but prices at pumps are not. In effect, you have £6 billion in there that you may or may not have. The last 12 years suggest you will not have it. Therefore, does it not make a mockery of the forecast?”

Russell replied that the forecast is traditionally done in this way and it is a “long-standing assumption” that fuel duty increases by the rate of inflation. This is then updated when the Government make a decision about what the policy will be, which in this case will be in the spring.

She said: “Obviously, we as Treasury officials will be advising on the issues around that, including the costs and the wider economic and other impacts. We will look at how to fund the cost of that alongside other measures. The position is that the default is an RPI increase.”

James Bowler, making his first appearance before the committee since his appointment as Permanent Secretary, added: “On fuel duty, there is an expectation that it will be index linked the next year. On the conversation we are having about energy, there is nothing in the forecast that suggests some of the funding will come back to the taxpayer, and that is because the OBR in particular just takes the policy that they have in front of them on the day and will not speculate about future policy.”

Leadsom suggested the system could be reviewed, perhaps including showing two figures to cover both possibilities. She said: “You will have been aware of the huge furore about the expectation that was in that forecast for fuel duty. The Chancellor had to write to us to make it very clear that was simply a non-decision as yet, but it is very misleading.”

Future tax increases

Another Conservative MP, Danny Kruger, asked if further tax rises may be needed to balance the books if energy prices don’t come down, “given the tight headroom that the Chancellor has allowed himself and the new fiscal rules on borrowing”.

Phil Duffy said the Chancellor was exploring options including moving away from an energy price cap to a fixed discount on the price and the Treasury is in the latter stages of concluding its review of the business energy scheme. There is no scheme from the next financial year onwards, but the Treasury has set out a “route forward” for consumers, which will see a higher price cap.

He said: “On energy, the Chancellor has signalled very clearly in the Autumn Statement and subsequently that our intention is to move away from having an uncapped Treasury liability for the future direction of prices and, therefore, to move to systems that provide greater certainty of our fiscal exposure on energy.

“The Chancellor’s logic is that, faced with the grave situation on the European continent, it is right to incentivise the people who can to become more energy-efficient. He is looking hard at the taskforce idea to think about how we can do that as a whole. That points to a progressive reduction in the public subsidy and to an expectation that more businesses can start to take their own measures to reduce energy consumption across their business in the coming years.”