Charge to Windfall Tax

Part of Orders of the Day — Finance Bill – in the House of Commons at 4:45 pm on 15 July 1997.

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Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford 4:45, 15 July 1997

I have no memory of any such thing, and I do not believe that any such thing took place during my time in the House. I know the hon. Gentleman well and I have a high regard for him as a parliamentarian, but I have much less regard for him as a historian as a result of the clanger that he dropped earlier, to which I drew attention at the time in an intervention which he graciously allowed me to make during his speech.

Therefore, I have little confidence that that suggested levy is anything other than a figment of his imagination—a hard-pressed imagination, I suspect, because I sense the embarrassment among Labour Members as I say, frankly, that it is not good enough to come before the House and justify otherwise unjustifiable measures on the basis that one's opponents did almost as badly in the past. A Government who had any kind of self-respect would wish to justify their measures on their merits, and that they have spectacularly failed to do.

I now return to some of the important aspects of clause 1 on which I touched earlier—its arbitrariness and unfairness. The windfall tax will impact on the current generation of shareholders, not on the generation of shareholders who supposedly—supposedly—enjoyed the putative windfall gains described in the Bill.

That point has been commented on already. It is clear that anyone who bought into the companies subsequently, without realising that the Labour party planned a windfall levy, will have suffered considerably, and those shareholders who sold out before the imposition of the windfall tax, or before the markets began to discount its likely imposition, will not have suffered at all.

5.15 pm

Let us consider the specific human reality behind this. Who are the shareholders who, for the most part, have been the most loyal and longest-term shareholders? I should say straight away for the avoidance of any doubt that to a small degree I am one of them. I applied in my name and those of my children for a number of these privatisation issues. I thoroughly disagree with the hon. Member for Workington: the privatisation of those companies was a brilliant idea. The great success of those companies since privatisation and their emergence in many cases as multinationals with an international position in their sectors, thoroughly justifies that.

The statistics produced by the stock exchange bear out my experience that the shareholders who have been most loyal to those companies, the longest-term shareholders, have been the small shareholders, many on small and below average incomes, who applied for a few hundred pounds worth of shares way back in the late 1980s or early 1990s when the companies were privatised. They are the shareholders who tended to hold on to their shares and they will now suffer from the retrospective levy. They will be the losers from the windfall tax.

It is fair comment, on the basis of anyone's experience of the financial markets, that on the whole the smaller the holding, and probably the less sophisticated the investor, the lower the rate of turnover in the portfolio. In many cases, small shareholders do not have a portfolio. They have one or two shareholdings to which they stick. They do not churn their portfolios every week or month. They do not get up in the morning and look at their Reuters screen or their Topic screen and decide to buy or sell such and such a share, switch between deutschmark and yen or hedge their position by selling the index, or something of that kind. It is the sophisticated shareholders who do that. It is unlikely that they would have a single shareholding in their portfolios for six, seven or eight years. Such shareholders have most probably sold out. Few of them will have exactly the same shares that they bought at an initial flotation.

The extraordinary effect of this most unpleasant levy—unpleasant because it is retrospective and arbitrary—has been to impact on the small shareholder. We all have in our constituencies small shareholders, often people who have been investing for their retirement or retired people, pensioners with just a few hundred pounds in privatisation shares, who have held the shares from the beginning who now find that they are suffering. In contrast, the sophisticated professional investor got out a long time ago and can wave goodbye to the windfall tax. That is a pretty perverse and unpleasant consequence of the tax. It may not have occurred to the Labour Government, but if it has I hope that it is a consideration that will stick in their gullets.

My hon. Friend the Member for East Yorkshire (Mr. Townend) referred to another perverse aspect of the windfall tax: the discriminatory effect not just between one class of shareholder and another but between one company and another. I listened with great attention to my hon. Friend's speech. He had obviously done a lot of homework, because he quoted facts and figures about the sales and profits and market capitalisations of Yorkshire Electricity and East Midlands Electricity during the relevant period.

Anyone with even a passing acquaintance with those companies knows that there was a considerable contrast, in that East Midlands Electricity engaged in a diversification programme, going into activities that were not regulated, not in any sense monopolistic activities or activities which could possibly be justified as being targeted by a windfall levy, and it got it wrong, while Yorkshire Electricity on the whole got it right. That is an extraordinary state of affairs, because we now find that the tax will penalise those who got it right, and will let off, in relative terms, much more lightly those who got it wrong.

Here we are back to the old socialist principles that have been around ever since the Labour party existed—clobber success and reward failure. What kind of a principle is that? It is a principle, in the name of redistribution or in the name of God knows what, which can lead only to the progressive decline of the economy. People will be deterred from making a higher risk, higher reward investment, because if they get it right they will lose the proceeds through a discriminatory and retrospective tax—which the windfall levy undoubtedly is—and if they get it wrong they will lose their money anyway. So why invest, and why take any risk?

Any economy that applies that appalling principle will pay a high price. We paid a high price when the Labour party was previously in power. The Labour party in the 1970s ran the economy on the principle that the successful should be penalised and punished and the weak should subsidised. We recall those dreadful subsidies for loss-making nationalised industries. That formula produced, in aggregate, an increasingly weak British economy across the board. We paid a high price then, and that principle is again being applied in the proposed windfall tax. That tax will be a severe impediment to companies that have done an extraordinarily good job for the British economy. Its economic consequences are of considerable concern.

I make no apology for dealing with some of the human and philosophical aspects of this matter, including the precedent effect of the tax. I do not believe that man lives by bread alone: economics is not everything. It is right to consider first issues of principle and the impact on the lives of human beings. The impact on people's savings has an effect on their sense of independence and security, particularly in old age.

Nevertheless, we must consider the economic consequences. Here is another classic illusion in Labour thinking. They seem to believe that they have discovered two invisible taxes. They are taxes in that they raise revenue, but are not taxes in that they do not do any economic damage. The Labour party believes that they do not do any political damage either. Those two measures are the abolition of dividend tax credits and the imposition of a windfall tax.

No doubt the Government have congratulated themselves by saying, "Isn't this extremely clever of us? We have found the touchstone that turns everything to gold. We have found the holy grail. We have found a form of tax that does not damage the economy or our political standing." They are completely wrong about that. There is no such thing as a tax that does no damage to individuals or to the economy. Any Government proposing to levy any form of tax should consider carefully what damage it does and try to target it so that the damage is minimised.

We cannot accept this thoroughly dishonest attempt to pretend that some taxes do no economic damage and can be levied with impunity on the British public and on the British economy. The windfall tax will damage the British economy because it will damage the privatised utilities. They are now extremely successful companies, whereas when they were nationalised many of them had to be subsidised and almost all of them were under-invested and showed up badly in international league tables of productivity, profitability, environmental standards and consumer service.

Sir Alan, you and I are old enough to recall the days when utilities were nationalised and the tremendous difficulties we had getting a telephone or a gas pipe repaired. Their service was bad, but they are now astonishingly successful. British Telecom has become one of the leading telecommunications companies in the world. British Gas has become a major player in the world, and our electricity generators have become major players and investors in many parts of the world.

It is a proud record. The considerable price reductions—up to 40 per cent.—are an extraordinary example of productivity gains being passed to the consumer. That could happen only in a privatised system. In a producer-oriented, nationalised economy, productivity gains are not made available to the consumer.

Productivity gains have been passed to the consumer, and there have been enormous improvements in service. Many companies have made enormous international investments, so they have a stream of international earnings. That is a great advantage to them, because it reduces the volatility of their earnings, and to the country, because it contributes to our overseas earnings.

We are now singling out those companies for a windfall tax. If a company's after-tax profits are reduced, the propensity of that company to invest is also reduced. The Paymaster General, who was bold enough—perhaps thoughtless enough—to put his name to the tax and to come and defend it at the Dispatch Box, ran a distinguished British manufacturing company. He is looking askance, and does not want to look me in the eye. He knows perfectly well that, if the return from prospective investment is reduced, the propensity to invest is also reduced. If he wants to argue with that fundamental principle of economics and financial theory I should be delighted to give way to him. He is looking at his tie or at his feet. He is looking away from me, because he does not want to intervene. He knows that he cannot quarrel with that point.