Orders of the Day — Advance Petroleum Revenue Tax Bill

Part of the debate – in the House of Commons at 4:18 pm on 1st December 1986.

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Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham 4:18 pm, 1st December 1986

The hon. Gentleman has anticipated a point that I was about to make. However, I agree with and endorse the point that he made. The fall in oil prices is bad news, not just for oil companies, but for the Government.

The Government have worked themselves into the position whereby over the past two financial years they have benefited to the tune of £11 billion and £12 billion from the revenues from the North sea. This year, they will have half, if not less, if prices fall below that estimate. The Government have tended at times to make great play of the fact that they have nevertheless managed to keep the national accounts in order, notwithstanding this sudden reduction in this specific item of revenue.

We might be inclined to say that that is a less worthy and less remarkable achievement when we consider what the Government have done with North sea oil. They have treated it as a capital asset to be realised as quickly as possible and its profits to be spent as quickly as possible. Given that that is the approach, and as the Government have discovered yet another range of capital assets that they are equally prepared to treat in that cavalier manner—the assets of the taxpayer which have been built up over many years—it is not such a miracle that the Government have hastily pushed into the breach another range of capital assets to be sold off of which British Gas is just the largest and most recent example.

The fall in oil prices bodes very badly indeed. We do not need to wait for the first evidence of that; it is felt in the balance of trade—the balance of trade to which the North sea brought a benefit of some £17 billion or £18 billion a year. That is an enormous benefit that no previous Government had ever been able to enjoy. That benefit, however, will be substantially diminished. I do not suggest that the Government have treated that with equanimity. Their calculations are that the rapid deterioration in our trade balance can be kept out of the spotlight for long enough to slip in a general election before it becomes too obvious. That is the Government's tactic for dealing with that problem.

In relation to the other point made by the hon. Member for Rochford there is no doubt that, with an oil price as low as it is—and we cannot be sure of the direction that it will take; it may remain at this level or go a little lower or higher—future exploration and development would be jeopardised for rational and commercial reasons. We are not surprised, and the Government should not he, that the North sea construction industry is badly damaged by these rather grim prospects for exploration. Howard Doris and Scott Lithgow are examples of that. Those are the problems and obvious difficulties, the short-term problems for economic activity especially in Scotland, to which my hon. Friend the Member for Glasgow, Garscadden (Mr. Dewar) will address his remarks at the end of the debate.

The measure that the Minister proposes is addressed, as he rightly and frankly said, to the interests of the small companies. He attempted to suggest that, by giving them this little helping hand, that would ease the problems of the immediate prospects for exploration and development. I rather doubt that. The case for doing that has very little to do with stimulating future exploration and development on any scale that will matter and the Minister will probably concede that that is so. The real case for doing that lies on the simple ground of equity. The Minister is simply helping out the small companies that—as he rightly says—were compelled by earlier legislation to make a forced and interest-free loan to the Government who now find themselves, by virtue of changed conditions, in difficulties with their cash flow. They quite rightly believe that they can make a case based on equity that the Government should do something about returning their money rather more quickly than had been originally planned. That is the real case for the Bill.

In principle, the Opposition do not cavil with that case. However, we will want to pay a little more attention to the way in which that is included in a rather complex mechanism embodied in the Bill. We do not disagree with the idea that the help should be targeted. There is a group of small companies that ought to be beneficiaries of this form of help.

However, my hon. Friend the Member for Merthyr Tydfil and Rhymney (Mr. Rowlands) raised an important point in his intervention in the Minister's speech. The Minister was inclined to say that some of the money might go beyond that group of small British companies that have suffered particularly. However, my hon. Friend asked whether the group that will be affected by the Bill and which is to benefit through the Bill will include all those companies which truly and in fairness should qualify for that help. The Minister did not answer that question.

Some of the problems possibly arise from the operation of the pay-back requirements. I give the Minister notice now—this might be helpful as there is relatively little time before we move from Second Reading to the remaining stages—that the Opposition wish to examine that point. We believe that, by virtue of the pay-back criterion and other measures, the operation of the set of criteria is likely to be arbitrary and capricious. We are not convinced that the companies identified by the mechanism will be those that, on grounds of economic profitability, or lack of profitability, ought to be beneficiaries of the measure.

We shall raise those matters in later stages of the Bill. I revert now to the fundamental contextual point which underlies the Bill—the recognition that the fall in oil prices is bad economic news. It is not surprising that the Chancellor has at times been tempted to argue that, far from creating problems, the lower oil price is a bonus, given the mess that he made with high oil prices. High oil prices were supposed to be the economic salvation of this country. As production reached its peak and the price rose, it was expected to provide substantial revenues to the Government—not to be squandered on unemployment, as they have been, but to make room for tax cuts to stimulate the economy through lower personal taxation. Those revenues have been and have now substantially gone but the tax burden for the ordinary person has risen rather than diminished—so much for North sea oil as a means of implementing tax cuts.

We were then told that North sea oil would be a means to regenerate British industry and the economy not just through the direct economic activity arising from its production but because, as one of the very few energy rich advanced industrial countries, we should not be constrained by the high price of energy and the comparative shortage of energy reserves. North sea oil would also relieve us of the traditional balance of payments constraint which in the past, we believed, had stopped us reaching the levels of growth achieved by our competitors. North sea oil would allow us to make full use of all our domestic resources and balance our trade at the same time. That is what we were told, but we never got anywhere near that.

The Minister may be tempted to point out the marvellous surpluses that we have had in recent years as evidence that North sea oil did the trick, but a moment's reflection will tell him that that is misleading because they were nowhere near full employment economy surpluses. With full employment, the surpluses would never have arisen because North sea oil and all the benefits of the balance of trade would have been fully engaged in paying for the imports that full employment would have sucked in. We still have a balance of payments crisis looming, record borrowings and spendings from reserves, real interest rates at record levels and 4 million unemployed. North sea oil has done nothing to alter those problems.

Why did it all go wrong? The answer is as simple as the question, and it is entirely in line with the Government's other mistakes in economic policy. I believe that the Government would now concede that their monetarist policies were all a terrible mistake. Indeed, I believe that the Chancellor may even now be contemplating paying no attention whatever to sterling M3, although it was to have been the great monthly guide to how economic policy should unfold. Just as he made simple, obvious and predictable mistakes in monetary policy, he made a naive and simple mistake as to how North sea oil and its benefits should be used for the economy. Put at its simplest, Ministers yielded to what might be described as a "lump of output" fallacy. They believed that there was a particular national output and that if a new source of wealth such as North sea oil was introduced it would inevitably displace some other element in national production. That was clearly nonsense.

The whole theory and practice with resources such as North sea oil in other countries has been that in most respects they are net additions to the national wealth, not only adding something themselves but enabling the rest of the economy to grow faster by releasing it from constraints. That has been true in Holland and especially in Norway, where manufacturing output has risen sharply and unemployment is below 2 per cent. Those examples immediately give the lie to the proposition apparently accepted by the Government for the past seven years—that high unemployment and dwindling manufacturing capacity were somehow inevitable simply because we had North sea oil.

It is worth considering the mechanism of that error. The Government assumed that a rise in the exchange rate was inevitable as a result of North sea oil and that a rising exchange rate, buoyed up by tight monetary conditions, would be of benefit to us. The consequence of that simple error, which very few people would defend today but which was very much in line with the international monetarist school that dominated the Treasury and much of Whitehall at the time, was that we were encouraged to take the benefit of North sea oil in greater purchasing power for our currency and to use that greater purchasing power to buy more goods—other people's goods, because our own could no longer be sold competitively. In other words, we took the benefit of North sea oil by sucking in vast quantities of imported manufactured consumer goods. We then had to close down our own capacity because we could not compete in the market. As a result of that, and stemming from the original simple mistake, unemployment rose and the cost of unemployment provided a natural but most undesirable home for North sea oil revenues.

That is how the unfortunate circle was squared. That is how North sea oil came to be used to pay for unemployment. Contrary to all that had been predicted, hoped for and expected—the belief that North sea oil would regenerate the economy and provide faster growth with more opportunities and more jobs—the Government, through sheer incompetence and the simplest of all economic mistakes, found that North sea oil generated unemployment and the revenues and benefits gained from it had to be used to pay for that.