David Prosser: An industry that is even less trustworthy than the banks
Ofgem should accept its fair share of the blame for what has gone wrong – it appears tohave got wise to the tricks of the trade only very recently
Tuesday 22 March 2011
It is 16 years almost to the day since trade unionists turned up at British Gas's AGM with a pig named Cedric in order to express their anger about the pay packet of the company's then chief executive, Cedric Brown. In the context of annual rewards worth tens ofmillions of pounds, for which the bankers have been vilified since the financial crisis, the £2m or so Mr Brown earned at the time looks modest. But the parallels between the public outrage over his pay back then and what bankers have been earning more recently are significant, for the energy sector has developed in similar ways to retail banking.
Above all, both banking and home energy are industries that make a lot of noise about competition even though precious little of it has existed. In banking, four large institutions have dominated the high street for as long asanyone can recall – and, really,continue to do so. In home energy, the big six providers have a market share of more than 99 per cent.
It is from this lack of competition – and the fact that bills vary by only a few pounds between the big six suggests there is little competition between them – that consumer detriment springs. Thelatest inquiry into the sector, the conclusions of which were unveiled by Ofgem yesterday, reveals this detriment has become markedly worse over the past 18 months. Broadly, Ofgem's conclusion is that the big six have been exploiting price changes on the wholesale gas market at consumers' expense while attempting to hide what they've been up to behind an ever-more baffling range of tariffs.
It is the sort of behaviour of which the banks would be proud. Just as mortgage lenders used to overcharge loyal customers in order to subsidise eye-catching introductory offers to attract new borrowers, so customers who stay with their existing energy provider for an extended period end up paying more than those lured from rival suppliers by an aggressively priced new tariff. And just as the banks mis-sold customers inappropriate savings and borrowing products, so the mis-selling in the energy sector is still going on.
Indeed, one of the most striking of Ofgem's conclusions is that the energy industry's customers now have even less trust in the big six than they do in the banks. That's quite an achievement.
Now, Ofgem should accept its fair share of the blame for what has gone wrong. It appears to have got real to the tricks of the trade only very recently – not all that long after the Conservatives, while still in opposition, began making noises about its abolition, in fact – though campaigners for consumers, including The Independent, have been complaining about them for many years.
Will the reforms it has proposed finally improve the situation? Not on their own, perhaps, but if they really do encourage significant new players to come into themarket, then maybe. What Ofgem hopes is that a company of the stature of, say, Tesco will bepersuaded to bid for some of the 20 per cent of energy the big six have been told to auction off.
Does that sound familiar? This is the preferred prescription for banking too, where Sir JohnVickers' inquiry is just the latest attempt to break the stranglehold of the big four. Experience tells us that this sort of stuff is easier to talk about than achieve.
The route to a more honest tax system
Is he really going to do it? That the Chancellor of the Exchequer is considering a move towards integrating national insurance and income tax in tomorrow's Budget was first revealed in The Independent last week. Since our report, it has become increasingly clear that this is a policy goal that George Osborne hopes to work towards.
Even leaving aside the dishonesty of the current tax set-up – in which income tax and national insurance raise £150bn and £100bn a year respectively for the same spending pool but the Treasury pretends they are independent taxes – there is an excellent reason for doing so. The administration costs of this twin-track tax system run into tens of millions for employers, as well as Her Majesty's Revenue and Customs itself, and are a total waste of cash. That's leaving aside the millions in tax revenues foregone because of the tax planning opportunities the two systems generate – like, for example, businesses that pay their owners dividends, on which no NI is payable, rather than salaries.
Still, if Mr Osborne really wants to get rid of national insurance, at least for employees, he is going to have to be imaginative as well as courageous.
The latter quality is required because adding the NI people pay on to their income tax bills is going to make for tax rates that range from 30 per cent to 50 per cent. Not only are those figures much higher than many people realise, the difference between top and bottom is much smaller than you might expect given that the income tax rates currently are 20, 30 and 50 per cent.
As for imagination, the Chancellor will need plenty of it to get past the problems created by the abolition of NI. What do you do about the contributions paid by employers – simply maintaining them would mean leaving open many of the loopholes merging the two systems is supposed to close – or the fact that NI is not paid by pensioners? How do you cope with the additional cost of tax reliefs, particularly on pension contributions, that would result from the higher income tax rates? And how do you mollify losers from the changes, such as those who live on savings or investment income, who currently don't pay any NI?
It isn't at all clear what the answers are to some of these difficulties. But Mr Osborne should not lose sight of the prize – a simpler, more honest tax system. It would certainly be an admirable legacy to pass on to future Chancellors – and it might just mean that cuts are not the only thing for which Mr Osborne is remembered.
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