Commentary: Labour's windfall tax is a bad apple

Labour's suggestion of a windfall 'tax' - it prefers the less aggressive 'dividend' - on privatised utilities is more populist than practical.

BT, British Gas and the water companies are easy targets. They make vast profits, their chairmen earn huge salaries and their services are less than perfect. BT's profits at pounds 3bn a year easily dwarf those of Britain's most successful companies, such as Glaxo and Sainsbury. But that is not a good enough reason for a special tax.

Consumers have little to complain about. In most cases prices have risen by far less than inflation - and are now falling, thanks to controls imposed by the regulators. That the companies have also been able to increase profits and dividends shows just how inefficiently they were run before. There was in most cases far more fat than outsiders realised.

The water sector is, however, an exception. Consumers are paying dearly for the privilege of clean water after years of neglect. They should ask themselves if they think the cost worthwhile.

If Labour's target is the unpopular utilities then it would be better off asking regulators - who act as surrogate competition - to take a tougher line.

Ofgas has been harder on British Gas than the other regulators have been on their charges. And it looks as if its efforts will result in the company's break-up and, possibly, more competition.

It is better that regulators should squeeze the companies than Parliament should try to define excess profits. We might all agree that a rate of return of 25 per cent is excessive for a low-risk business. But what about 15 per cent?

How do you define a rate of return? Labour declined to give its definition yesterday and had few examples to hand to back up its claim that returns were higher here than in Europe or America. It is one thing to say the Baby Bells in the US make 12 per cent or half the return that BT makes, and another to compare the French water companies with those in the UK which are squeezing decades of investment into a few years.

If Labour's aim is to raise revenue then it should think again. Retrospective taxes - including the windfall tax on the banks introduced by the Conservatives in 1981 - are intrinsically unfair. They should never be used, however unpopular the target. Businessmen must be able to plan for the future without fear of arbitrary taxes. Investors, too, would have cause for complaint given the basis on which they bought their shares.

In any case the Government - of whatever colour - would be daft to knock these companies sideways with a windfall tax. Given its shareholdings in, for example, BT and the electricity companies, it would be self-defeating to reduce the value of its own assets.