PRE-BUDGET REPORT
The Government's statements
15. This Government is committed to putting the environment
at the heart of its decision-making. In terms of economic and
fiscal policy, the Government has stated that:
(i) sustainable growth means stable
and environmentally sustainable growth and delivering such growth
is a core feature of economic policy;[6]
(ii) economic development must take place
in a way which is consistent with high standards of environmental
protection and in a way which safeguards the environment for present
and future generations;[7]
and
(iii) the next Finance Bill will be used
to give effect, as far as technically possible, to a code for
fiscal management, one of the five key principles of this code
being 'fairness'.[8]
16. In the Statement of Intent the Government made
particular commitments to:
(i) exploring the scope for using the
tax system - as one instrument, in combination with others like
regulation and voluntary action - to deliver environmental objectives;
and
(ii) over time, aiming to reform the tax
system to increase the incentives to reduce environmental damage.
That will shift the burden of tax from 'goods' to 'bads'.
The Government concluded that environmental taxes
must meet the tests for good taxation and, where these tests have
been met, environmental taxes will be used.
17. We wholeheartedly welcome the Government's
statements committing it to the pursuit of environmental sustainability
and the use of environmental taxation.
Consultation
18. The Pre-Budget Report was published to initiate
a national debate on the economy to inform the 1998 Spring Budget.
We welcome this procedure and note the proposal in the Treasury
document 'Code for Fiscal Stability' for a requirement on governments
to "publish a consultative paper each year, several months
before the Budget providing an update of...progress in meeting
the fiscal rules, and laying out proposals for any significant
changes to policy".[9]
In evidence the Financial Secretary indicated that this would
be the case.[10] We
regard consultation in advance of each Budget as an essential
process and we recommend that this consultation always address
sustainable development objectives. We would expect to contribute
to such consultation on a regular basis.
Code for Fiscal Stability
19. The principle of fairness in the proposed Code
for Fiscal Stability was not well defined in either the Treasury
document on the subject or the Pre-Budget Report. In neither
case does explanation of the principle include any reference to
the environment. The Treasury pointed out that chapter 5 of the
Pre-Budget Report "makes it clear that fairness means, not
least, fairness to future generations and the world in which we
live" and "there are a number of aspects to 'fairness'.
Within this, environmental concerns should be given their due
weight.".[11]
20. We do not think that the position is clear.
If, as we believe it should, the proposed Code is intended to
reflect the Government's commitment to environmental taxation,
it should say so. We conclude that the principle of fairness
in the proposed Code for Fiscal Stability does not adequately
reflect the Government's commitment to sustainable development.
We recommend that any code for fiscal management includes a clear
expression of the Government's commitments to integrate environmental,
social and economic considerations and to reform the tax system
to provide disincentives to causing environmental damage and incentives
to following good environmental practice.
Environmental accounting and information
21. The Statement of Intent, and the further statements
on environmental considerations in the Pre-Budget Report, were
welcomed by the majority of those submitting evidence to the Committee.
However, we agree with witnesses' concern that the rhetoric
on the integration of economic and environmental considerations
was not supported by the provision of any information on the impact
of economic activity on the environment.[12]
22. The Government's statements in the Pre-Budget
Report suggest that the promotion of economic activity should
be circumscribed by high standards of environmental protection
and the necessity to safeguard the environment for future generations.
The Pre-Budget Report presents much economic data intended to
illustrate and clarify aspects of past economic development and
project future trends. But the report makes no attempt to show
the impact of development upon the environment. We note the
Treasury's evidence that "Pre-Budget and Budget Reports will
set out as "as much of the environmental policy background
as is necessary for an understanding of the Government's position
on the tax or other instruments under discussion-Beyond this Treasury
Ministers consider it is properly the business of their colleagues
in the Department of the Environment, Transport and the Regions
to report on the Government's performance and objectives on environmental
issues".[13] We
do not believe this position to be in accord with Government statements
of its policy on integrating economic and environmental considerations.
23. A wealth of information on the environment is
published separately in the annual Digest of Environmental Statistics.
In addition the previous Government sought to illustrate the
pressures on the environment, and the policy responses to those
pressures, in the reports on the UK Strategy for Sustainable Development
presented in the annual This Common Inheritance series.[14]
Further data on the three elements of sustainable development,
economy, environment and social development, were available in
the form of a set of preliminary indicators published in 1996,
"Indicators of Sustainable Development for the United Kingdom".[15]
And finally there is the Office of National Statistics' work
on environmental accounts, which attempt to quantify emissions
of pollution and resource consumption, and identify the responsible
industry, using concepts and classifications from the national
accounts.[16]
24. We recognise that work on indicators that can
measure the impact of economic activity on the environment is
in its infancy compared to that on economic performance alone.
Nevertheless, taking the Pre-Budget Report as an example,
it is difficult to reconcile the status of environmentally
sustainable growth as a 'core feature' of the Government's economic
policy with the absence of any illustration of environmental trends
that have a clear link to economic activity. Even a discussion
of efforts to develop such measures would be welcome and would
have sat comfortably alongside other innovations which were given
space in the Chancellor's report such as resource budgeting and
accounting, the National Asset Register, whole of government accounts
and UK generational accounts.[17]
25. We understand that the indicators for sustainable
development are being revised, in conjunction with consultation
on a new UK strategy for sustainable development. One of the
Government's aims is to identify a core set of indicators for
sustainable development out of the 120 or so currently identified.[18]
We recommend that, as a minimum, the core set of sustainable
development indicators be included in key economic documents such
as the Pre-Budget Report and the Financial Statement and Budget
Report in future.
Strategy
26. Some of our witnesses felt that the Pre-Budget
Report demonstrated little progress on environmental measures
from the situation in July.[19]
The Financial Secretary warned that: "I understand people's
frustration, that they do not feel we are going fast enough, but...this
is a vitally important agenda as we all understand and we cannot
afford to make mistakes".[20]
27. We were concerned that the Pre-Budget Report
did not contain any evidence of a strategic approach in line with
the Statement of Intent. We also noted the Financial Secretary's
scepticism over the 'double dividend' and the Treasury's supplementary
evidence that it "considers the use of revenues raised by
environmental taxation to be a separate issue to the justification,
on environmental grounds. It should not be assumed that the introduction
of any environmental taxes would be on a revenue neutral basis".
The CBI Green Taxes Working Group also said that problems of
environmental degradation and those of cost barriers to employing
people should be treated separately. The Treasury's supplementary
evidence on this point appears to demonstrate a retreat from the
ideas expressed in the Statement of Intent.
28. We would welcome a transparent attempt to define
the problem and identify a strategy for addressing it. In this
task we would emphasise the importance of identifying and quantifying
the 'goods' and 'bads' under discussion and the relative tax burdens
which currently apply to them. Also important is evidence of
price elasticity in these areas. This will demonstrate the potential
for taxes to influence choices and behaviour and indicate where
complementary measures are needed to support any proposed change
of tax. We would include in any strategic approach the need to
examine the provision of environmentally damaging subsidies.
One estimate of the scale of these subsidies was provided by the
Centre for Social and Economic Research on the Global Environment
and was in excess of £20,000 million per annum (i.e. over
40 times greater than landfill tax revenue).[21]
Finally we would emphasise the need to review the current provision
of incentives for businesses to invest in environmental technologies
and the encouragement of research and development in such technologies.
We will return to these latter topics in examining the conclusions
of the Government's Comprehensive Spending Review.
29. The Financial Secretary told us that the Government
was "actively taking forward the environmental tax agenda"
and that the "Treasury was leading from the front".[22]
She also stated the importance of the 'rigorous analysis' that
Treasury brought to bear on proposals. The Minister described
the Treasury's agenda for the tax system as including, in addition
to the measures set out in the Pre-Budget Report, the forthcoming
identification of the UK's legally binding obligations under the
Kyoto Protocol on climate change; and the review of the national
air quality standards by the Department of the Environment, Transport
and the Regions in collaboration with the Treasury.[23]
We note the possibility of further calls on the tax system to
deliver environmental objectives coming out of the current reviews
of transport and housing policies. On the question of existing
incentives and disincentives, as opposed to new proposals, the
Financial Secretary told us: "this is a vast area of work.
On the principle of the Government's objectives for the tax system,
as laid out by the Chancellor, it naturally follows that over
time the Government is scrutinising the system in terms of whether
it does what we want it to".[24]
30. We welcome the Minister's commitment and statement
of analytical rigour in pursuing the environmental taxation agenda.
The policies referred to above, in addition to the commitment
to reduce CO2 emissions by 20 per cent on 1990 levels
by 2010 (by which time the economy may have grown by 50 per cent),
pose a significant demand on the Treasury for action. However,
we do not feel that the requirements of specific policies should
rule out, or defer, looking at the tax base in the strategic way
that the Statement of Intent appeared to be suggesting. Indeed
given the scale of the implications for the tax system of the
Government's commitment to environmental protection and sustainable
development we believe that the need for work on a long term strategic
approach is both vital and urgent.
31. One suggestion we heard to address this lacuna
was for Treasury to establish an advisory body such as a green
tax commission[25] to
assist in the identification and implementation of environmental
tax reforms. Such bodies are made up of representatives of a
broad range of interests: individual Government departments, business
and industry, academia, non-governmental organisations, consumers
and other stakeholders. This range of representation institutionalises
important elements in the process such as consultation and consensus-building
as well as reflecting commitments to openness and transparency.
The Treasury demonstrated some resistance to this idea on the
grounds that like bodies in other countries have frequently worked
inappropriately towards a "targeted level of change in the
balance of taxation"[26].
It appears to us that, while the key feature is its broad constitution,
the precise remit of such a body is for Government to decide.
A number of helpful suggestions were put to us in evidence.[27]
32. We believe that there could be a useful role
for an external advisory body to explore the potential use of
environmental taxation in more detail, and to help build wider
knowledge, understanding and consensus about all the issues at
stake. Such a body might assemble relevant evidence about externalities,
elasticities and potential influences on behaviour. It could also
explore effects and impacts on competitiveness and social equity.
In addition to examining the arguments for potential new environmental
taxes it could also advise on monitoring the impact, effectiveness
and efficiency of existing environmental taxes and environmentally
damaging subsidies and assess the experience of other countries
in this area. We therefore recommend that the Government should
establish an advisory body on environmental taxation. Such a body
could take the form of a standing green tax commission as recommended
in our evidence and this would be our preference. Alternatively,
it might be established as an ad hoc body to conduct a baseline
review of the tax system and the scope for a strategic shift towards
the taxation of environmental 'bads' and the provision of incentives
for good environmental practices. In this instance longer term
monitoring arrangements could be the subject of further consideration
in the light of the initial work.
Auditing performance
An indicator
33. We would regard the development by the Treasury
of an indicator to demonstrate the shift in the burden of taxation
from 'goods' to 'bads' as a logical step following the Statement
of Intent. In the absence of an indicator being identified and
agreed between Government and other interested parties, such as
this Committee, it will be impossible to audit progress and discuss
it in a meaningful way. An agreed indicator would at least set
a benchmark against which such progress could be assessed. We
note the Treasury's evidence regarding the 'considerable' definitional
difficulties involved in classifying environmental taxes. We
asked the Treasury what percentage of revenue yield is currently
from 'bads' and what proportions have applied over the last five
years and a table of OECD statistics was included in Treasury's
submission (as set out below).[28]
Year |
1990
|
1992 |
1993
|
1994 |
1995
|
% revenue yield
% of GDP
|
7.5
2.7
|
7.9
2.8
|
8.2
2.8
|
8.4
2.9
|
8.5
3.0
|
Note: Table considers revenues raised from: hydrocarbon
oils, gas levy, NFFO, car tax (until 1993), air passenger duty
(from 1994) and vehicle excise duty. Data are for calendar years.
Source: "Revenue Statistics, 1997 Edition",
OECD.
The OECD figures appear to represent a reasonable
basis for the development of an indicator over the medium-term,
and an acceptable proxy for such an indicator in the short-term.
We accept the methodological difficulties in defining taxes
on environmental 'bads' but conclude that ultimately this is a
matter for political decision. We recommend that the Government
identify its list of environmental taxes and the proportion of
total tax revenue contributed by these taxes and publish this
figure as an indicator of taxation on environmental 'bads'.
A target
34. The Treasury said that setting targets for the
shift of the burden of taxation from 'goods' to 'bads' would not
meet the principles of good taxation and that there was no "compelling
reason to single out environmental taxes for treatment in this
way".[29] We agree
that working to an overall target should not detract from the
careful consideration, appraisal and rigorous analysis of individual
proposals. This is as true for taxation matters as it is for
other policy areas. We would argue that it is the Government
who have rightly singled out environmental taxation for special
treatment with the Statement of Intent. It is this statement
that suggests to the Committee that while, as Treasury wrote[30],
there might be no "'correct' burden of tax-identifiable
in advance-that should be raised by environmental taxes",
the Government has concluded that the current burden is incorrect.
35. We recognise the difficulties in identifying
the ideal proportion of the UK's total tax revenue that should
be coming from environmental 'bads' . We believe however, that
incremental movement in this proportion from its current level
is a reasonable objective and one that is amenable to the development
of a target. We therefore recommend that consideration be
given to the setting of a target for a progressive increase in
the proportion of revenue yield from environmental taxes thereby
creating the potential for reductions in the taxation of 'goods'.
Progress on this target should be reported in each Budget assessment.
Environmental appraisal and a Green Book
36. The Government is committed to integrating environmental
considerations into all of its decision-making and publishing
more information thereon. In 1996 the then shadow spokesperson
for the environment, Joan Ruddock, MP, told the House that "each
year [Labour] will publish a 'Green Book' alongside the Chancellor's
Red Book, setting out the environmental implications of Government
policy."[31] In
July 1997 the Financial Secretary undertook to fulfill that promise
"from the first full Budget".[32]
In evidence to this Committee the Financial Secretary emphasised
the Treasury's support for increased environmental appraisal of
policy and told us that Treasury departments were now required
to "answer the environment assessment question" for
Budget proposals.[33]
She said that Treasury was working with other departments to
encourage them to do likewise.[34]
With regard to the performance of other departments in environmental
appraisal, we note the high priority assigned to these matters
by the Deputy Prime Minister and his evidence to us, on the Greening
Government initiative, concerning the various structures aimed
at ensuring that the 'environmental assessment questions' are
asked and answered throughout Government.[35]
37. The Treasury described to us the current intentions
with regard to a Green Book in the following terms: "the
Government is committed to taking into account environmental impacts
in considering policy options. It is intended that future Financial
Statement and Budget Reports will incorporate an assessment of
the environmental impact of the Budget...The appraisal of Budget
measure-in the process of policy formation-should include consideration
of environmental impact. The assessment that will form part of
the next Budget... is likely to cover measures where the environmental
impact is significant."[36]
In our view it is essential for the Government to publish
an assessment of the environmental impact of the Budget and we
regard the key features of such an assessment to be:
- the identification of both positive and negative
impacts;
- the quantification of impacts; and
- the provision of a clear statement regarding
when and how actual impacts will be assessed.
We regard Treasury's current intentions as falling
short of the original proposals.
38. We recognise the scale of the task involved in
scrutinising existing incentives and disincentives (as opposed
to working from the appraisals of new proposals). However, correcting
existing imperfections appears to us to be as important as ensuring
that new measures do not add to the problem. The Government is
unlikely to suffer from a shortage of suggestions and developing
this approach may be a further task for a green tax commission.
The fruits of this scrutiny, where relevant to the environmental
objectives of the tax system, should then be fed in to the annual
Budget assessments over time so as to build up a more comprehensive
picture of the signals being given out by the tax system with
regard to environmental protection and sustainable development.
6
Statement of Intent on Environmental Taxation, Financial Secretary
to HM Treasury (2 July 1997), hereafter 'the Statement of Intent'. Back
7
Pre-Budget Report, HM Treasury (Cm 3804), p7 Back
8
Code for Fiscal Stability, Treasury, November 1997, p7 Back
9
Op. Cit., p6 Back
10
Q5 Back
11
Ev p3, paragraph 24 Back
12
See for example Ev pp25 & 58 Back
13
Ev p105, paragraphs 3 & 4 Back
14
Op. Cit., 1997, Cm. 3556 Back
15
Op. Cit., March 1996, ISBN 011753174 X Back
16
Ev p105, paragraphs 5-10 Back
17
Pre-Budget Report, pp 17 & 23-26 Back
18
Opportunities for Change, Consultation paper on a revised UK strategy
for sustainable development, paragraph 16. Back
19
See for example Ev p19 Back
20
Q7 Back
21
Ev p100 Back
22
Q1 Back
23
Q7 Back
24
Q37 Back
25
Q48 Back
26
Ev pp2 & 3 Back
27
Ev pp17, 21-3 and 101-2 Back
28
Treasury said that the table shows total revenue raised from a
number of taxes with at least an environmental element as a proportion
of GDP. Because of the difficulty of classifying tax revenues
as deriving from 'bads', the list may not be exhaustive. For
example, the yield from VAT, which is levied on hydrocarbon oils
for example, has not been included. Landfill tax, which began
in 1996, is not covered [see Ev p 3]. Back
29
Ev p3, paragraph 20 Back
30
Ibid Back
31
HC Deb, 4 December 1996, col 991 Back
32
HC Deb, 10 July 1997, col 1062 Back
33
Q3 Back
34
Ibid Back
35
HC No. 517-i (1997-98) Back
36
Ev p4, paragraphs 26 & 27 Back
| 
