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5.45 pm
Dr. Vincent Cable (Twickenham): I have been listening to this debate with mounting concern because what was a carefully assembled political consensus in support of environmental taxation appears to be steadily unravelling. It is unravelling in several different ways.
We have heard about the road haulage problem, not merely from Opposition Members, but from the hon. Member for Workington (Mr. Campbell-Savours). We have heard about the problems in respect of petrol duties, especially in rural areas--we have just heard forcefully about that problem in Northern Ireland. In another context, we have seen how the Government have allowed powerful interests within the Confederation of British Industry to drive a coach and horses through their new energy taxation by exempting all the energy-intensive industries. It is a bit like exempting heavy smokers from cigarette duty. We need to ask why that is happening, what can be done to stop it, and what the consequences are.
The Liberal Democrats strongly believe in the principle of environmental taxation, which is an effective way of preserving the environment. It does so in an economically efficient manner, working with the grain of the market. It sends signals to consumers and companies to change their behaviour and their fuels. Those who oppose it have a strong obligation to explain not just how they would replace the revenue, but how they would achieve the environmental objectives. One either abandons the objectives, or one achieves them through regulation. As we heard in the introduction of the Regulations on Small Businesses (Reduction) Bill earlier this afternoon, regulation is a costly way of achieving one's environmental ends. What is the alternative to environmental taxation?
Environmental taxation works. Before this debate, I looked at the model that the Government use--the previous Government also used it--to estimate the impact of taxation changes. I apologise for the technical jargon, but the price elasticity of demand in the model for transport is very high at 0.4. If duties in the transport sector are doubled, within three or four years, usage and pollution are reduced by some 40 per cent., which is a bigger coefficient than for any other part of the economy.
Perhaps the figures need updating--they are certainly not politically driven--but the evidence on which this Government are working, and on which the previous Government worked, suggests that environmental taxation in the transport sector is effective in achieving its objectives.
Mr. Gray:
The hon. Gentleman claims that the increase in fuel duties over the past few years has resulted
Dr. Cable:
The hon. Gentleman is right to say that road traffic has increased, but many factors operate in that respect, including the growth of the economy, which is a counteracting factor. I am sure that the model is technically competent and takes that factor into account. The hon. Gentleman is right to imply that we need constantly to examine the assumption on which we base those calculations, which is why a few years ago, the Treasury Committee asked the Government to report back on the assumptions that they were using. Moreover, I am confident, given the consensus among them, that the technical people who develop those models are correct in believing that environmental taxation works.
So far, we support what the Government have been doing with the escalator. However, we part company with them in our belief that they are letting this political consensus unravel because they are not being careful enough with the politics. We argue strongly that, instead of environmental taxation being used, as it is now, as a milch cow for the Treasury, it should be used in a hypothecated way. The revenues from environmental taxation, particularly of the transport sector, should be more clearly earmarked for public transport and reductions in vehicle excise duty, so that people in the transport sector can see where their tax revenue is going.
Hypothecation is, to some extent, playing tricks with Treasury accounting. It does not raise additional money, but it helps politically to convince people, especially those in rural areas and in the transport industry, that their revenue is being used productively.
Mr. Paterson:
I am intrigued by the hon. Gentleman's faith in the Government model. Already in this debate, we have had two examples in Ireland from hon. Members on both sides of the Committee showing that the effect of the escalator is to drive the Northern Irish haulage industry south of the border. What funds will be available to the Government if duties are paid to the Irish Government and not to the British Government?
Dr. Cable:
If all petrol and diesel duty were disappearing across the Irish frontier, the hon. Gentleman would be right. I think that he would accept that, with all due respect to the real problems of Northern Ireland, this matter is a little marginal to the United Kingdom economy as a whole.
The hon. Gentleman has prompted me to turn to the specific issue of the diesel escalator and how it operates. There is some confusion. The assumption is that the diesel tax issue is purely about road haulage, but it is not. One of the main problems in the transport sector has been the gradual encroachment of diesels in the car market and all the pollution problems associated with that. That is one of the reasons why the Government were right to attack the disparity between the treatment of diesel and petrol. They have done that in the last two Budgets, and thathas corrected an obvious anomaly that made no environmental sense.
The other confusion that has arisen--the discussion of Northern Ireland highlighted this--is that there are two distinct ways in which the competitiveness problem
operates. One of them is the smuggling of fuel as a result of a differential in duty rates across a frontier. That has been described in some detail, and I recognise that it is a legitimate problem. It probably operates across the channel and in Ireland.
However, there is a quite different problem for which different solutions are required, and that is the flagging out issue. I suspect that the problem is real, but exaggerated. We have been told for the past two years, especially by Conservative Members, about the horrendous problems of trying to operate businesses on the continent of Europe and the difficulties of payroll taxes, high business taxes and red tape. It is highly improbable that, on the strength of a relatively small but growing differential in duties on diesel, large numbers of British companies will up their roots and relocate in that highly unfriendly business environment.
None the less, let us take these anecdotes at face value and let us assume that this is a real problem. What has been brought out in passing is that there is a solution. The hon. Member for Workington referred to the Swiss carnet, the Conservatives have suggested the Brit tax and there is the vignette: we are all describing the same idea in slightly different language. If such a system were implemented, it would, in large measure, solve the problem of flagging out--although not so much the problem of cross-border smuggling, which is being addressed.
Mr. Desmond Swayne (New Forest, West):
The hon. Gentleman will recall that the hon. Member for Workington (Mr. Campbell-Savours) had another solution to this problem, which was the harmonisation of taxes. He foresaw that it would be proper to reduce our level of DERV tax to that pertaining on the continent. Does the hon. Gentleman agree with his hon. Friend the Member for Lewes (Mr. Baker)? He said:
Another way of dealing with this problem would be to develop an idea that has already been incorporated in the last two Budgets. The reduction of vehicle excise duties on lorries has been incorporated to a degree, and it could be taken further. A combination of the vignette, a reduction of vehicle excise duties on lorries and whatever voluntary efforts the Europeans make--we cannot persuade them to increase their own duties--would deal these problems.
I suggest that the Europeans would be well advised to raise their own duties because many of the studies that have been done on the transport sector suggest that, even at present rates of the escalator, the social and environmental costs associated with road transport are not being met. A very effective study produced by Oxera, which is an Oxford-based consultancy whose leading consultant was widely used by the previous as well as the
present Government, shows the extent to which the social and environmental consequences of road haulage are still not properly captured in the tax system.
"I think that the Government should concentrate on increasing European Union levels"--
of fuel duty--
"rather than on reducing them here".--[Official Report, 18 March 1999; Vol. 327, c. 1346.]
Dr. Cable:
My hon. Friend the Member for Lewes(Mr. Baker) was right. If there is a move towards harmonisation of duties in this area, it should come from increases in continental Europe.
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