Thursday, 4 September 2008

Gordon Brown Speech: Tilting at Windfalls

"Fortune is guiding our affairs better than we ourselves could have wished. Do you see over yonder, friend Sancho, thirty or forty hulking giants? I intend to do battle with them and slay them. With their spoils we shall begin to be rich for this is a righteous war and the removal of so foul a brood from off the face of the earth is a service God will bless."

So said Gordon 'Quixote' Brown just last week. Tax the energy companies for windfall monies to distribute to client voters. Win the approval of the Labour backbenches; slay the media and Conservative enemies.

But tonight in his speech to the Scottish CBI Gordon did no such thing. Whilst saying that all will be fine, he also declared there will be a strong economy under his watch.

What he did not say is that he has no energy policy, he can't tax windfall profits that don't really exist as he has already taxed the oil companies to the point at which they stopped exploring the North sea for more oil. per chance next week then a real policy, to announce new nuclear and coal builds? Somehow I feel we will be disappointed.

Whilst I am happy that only small measures are to be made, all his previous sweeping policies have been disastrous, it shows the lack of ability of the Government to control or respond to events.

We are up the creek, we have no paddle and there are still forty giants over there....


Unsworth said...

The Economy (our Economy) is Brown's Rocinante.

A clapped out old nag.

Anonymous said...

What about the windfall obtained by those who sold their houses btween 1997 and quite recently; why doesn't Gordon and the Moronanauts advocate taxing their windfall?

patently said...

Err ... he did. It's called 4% Stamp Duty.

Bill Quango MP said...

Beat me to it!

rwendland said...

A while ago I analysed British Gas Residential's operating margins (profit/revenue) since 2001 - extracting the division's numbers for Centrica's accounts. There did seem to be a large blip in profitability when gas price volatility hit in 2007:

Year Operating-margin
2001 0.4%
2002 4.2%
2003 2.6%
2004 4.1%
2005 1.5%
2006 1.3% (2001-2006 average = 2.35%)
2007 8.8%
2008H1 4.3%

British Gas Residential division of Centrica does not include the gas production divisions, just residential distribution and customer handling - a simple utility which even rents the distribution pipes, with little capital deployed or high risk. You have to admit the 2007 8.8% operating margin was very high for such a basic utility.

I don't know if British Gas competitors also took higher profits during the period of price turbulence. But there might well be a case here that they all took advantage - so should have a windfall tax applied.

British Gas Residential's 2007 operating profits (£571 million) represents £35.60 profit per customer (gas and/or electricity - £407 average annual bill). You could argue they made £25 excess profit per customer - not huge but not insignificant. British Gas Residential seems to have retained smaller than average customers, probably a lot of the least well off.

CityUnslicker said...

very interesting stuff there rwendland

Anonymous said...

"Err ... he did. It's called 4% Stamp Duty."

4 %? Why not 96 %? He should apply it now and make it retrospective to April 1997.

patently said...

>> 4 %? Why not 96 %?

Hey, why not? Who needs a housing market after all? :o)

And while we're at it, we don't really need an economy either, so why not raise income tax to 96% too?

Tell you what - the day that Labour MPs voluntarily pay a 96% tax rate on their MPs earnings, I'll agree to it becoming law. And then emigrate.

Nick Drew said...

Mr W - good analysis, but I am sorry to tell you it is undermined by Centrica's considerable ability to switch reported profits between divisions, more or less at will.

In recent years there have, for example, been some apparently humungous losses in their industrial division which, given the universal pricing approach in industrial gas & electricity sales (= perfect pass-through of wholesale costs, very transparent to all concerned) cannot be taken at face value, and almost certainly reflect what might equally be considered wholesale / trading losses

the taxman doesn't care about how profits are apportioned (outside of the North Sea production arena where a different tax regime applies), and since prices are no longer regulated, neither does Ofgem

so there's a lot of 'discretion' being exercised in the reporting

Anonymous said...

"he can't tax windfall profits that don't really exist as he has already taxed the oil companies to the point at which they stopped exploring the North sea for more oil."

Can somone clarify what tax rates apply to the oil companies. Is it really so high they are no longer exploring for more oil? If so whats thw evidence to say this?

rwendland said...

ND: If Centrica engage in transfer pricing they have only themselves to blame if they get windfall taxed because of it! Centrica have had these division numbers in their annual report for years, and they shouldn't be deceiving their shareholders on division profitability. Anyway I thought executive and others bonuses were often driven by division profits, so there would be an internal motivation to be truthful on these numbers.

Also Local Government Association research into this shows the "big six" energy suppliers increased dividends by 19% in 2007, suggesting this Residential sector increase in profits isn't simply a transfer from other divisions. (Strangely The Telegraph version of this LGA story seems to have been deleted from their website!)

Anon: The marginal gas extraction extraction tax is 70% or 75% I believe. HMRC info suggests 70% ("Current marginal rates of tax are ... PRT, CT and SC - 70%")
but I've seen 75% mentioned in the press.

CityUnslicker said...

Thanks RWE for the oil tax stuff.

re the 19% what people are missing is that this is £250 million. Not a sum that is really going to get the Government excited. When they tax for £1 billion then the companies will go mental, as will their share prices...

rwendland said...

Anon: Seems I got the gas extraction tax a bit wrong for gas fields developed since 1993.

Marginal tax rate on new UK gas/oil fields (since 1993) is 50% while the marginal tax rate on fields paying PRT (pre-1993) is 75%, according to this 2006 DTI info.

Don't know which administration introduced this split taxation rate - it seems to go way back.

Nick Drew said...

Mr W - the dividend point is fair, the bonus point is not (they'll pay bonus on any basis they please - no need for it to be aligned with published accounts ...)

the various offshore tax regimes are too complex to summarise, both in detail and in origins; govts of all colours have tinkered with them endlessly

of interest:

- there was a determined effort by the Tories to make PRT a return-on-capital tax - but it became so complex it disappeared up its own fundament

- Geoffrey Howe introduced the first energy windfall tax - Special Petroleum Duty, or SPD, in 1980 (from memory), in response to the huge oil price increases of 1979

- at around the same time, and for entirely separate reasons, the Tories forced what was then the British Gas Corp to increase its residential gas prices (which were too low to encourage the next generation of North Sea gas production: not a single exploration well was drilled in the gas areas in 1978/9/80); but then introduced another windfall tax - on BGC - called the Gas Levy; because on their long-running purchases from already-producing fields, they were still going to be getting the benefit of ridiculously low prices struck in the 1960's

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