Select Committee on Environmental Audit Sixth Report

The Budget and sustainable development

4. Environmental or "green" tax reform is the process of using the tax system to address the inability of market prices to reflect the consumption of "free" environmental resources (eg clean air, a stable climate etc.) in the production of goods and services. Within months of coming into office, the Government set out a firm commitment to greening the budget in its Statement of Intent on Environmental Taxation.[4] In commenting on the 1999 Budget, we endorsed the widely held view that it represented the "greenest ever" budget.

5. Our report earlier this year on the run up to the 2000 Budget (the Pre-Budget Report 1999) followed up on some specific measures which were under consideration or being implemented—including the Climate Change Levy and possible taxes on aggregates and pesticides. While critical of some aspects, we nevertheless welcomed the fact that the Government was pursuing action in these areas. Budget 2000 confirms and extends various measures set out the previous year—such as the Climate Change Levy and an Aggregates Tax—and introduces measures in a number of new areas as shown in the table below. We fully recognise the positive aspects of what the Government has achieved and the commitments it has made.

Table 1: Budget 1999 and Budget 2000 environmental measures

Already implemented Landfill Tax increases (and £1 escalator until 2004)

A reduced rate of VAT on installation of materials and equipment whose primary function is energy saving

Frozen reduction on road fuel gases

Vehicle excise duty reduction for smaller cars (1100 cc)

Tax exemptions to encourage green commuting
AnnouncedClimate Change Levy and associated measures
                    (from 1 April 2001)

Aggregates Levy                    (from 1 April 2002)

Vehicle excise duty reform
         - existing cars: current lower rate extended (1200 cc)
        - new cars: graduated VED according to CO2 emissions
                    (from 1 March 2001)

Differential in duty in favour of Ultra-Low Sulphur Petrol
                    (from 1 October 2000)

Company car taxation changes based on percentage of purchase price and CO2 emissions
                    (from April 2002)
ConsultationVoluntary measures for addressing impact of pesticides

Water abstraction charging and permit trading

Relief from stamp duty for new development on brownfield sites
ShelvedPesticides tax
DroppedAnnual fuel duty escalator

Water pollution tax

6. However, we still believe that the Government must set out a plan for developing, implementing and evaluating its programme of environmental tax reform. Action to date has amounted to various measures to address specific problems. But, work in progress does not appear yet to reflect all the areas of environmental concern set out in the Government's Sustainable Development Strategy. Nor does it amount to a strategic reform of the tax system to increase incentives to reduce environmental damage. The following sections illustrate where work remains to be done.

"Shifting the burden" and the Statement of Intent on Environmental Taxation

(i) An indicator for environmental tax reform

7. The Treasury's 1997 Statement of Intent on Environmental Taxation committed the Government to "reform the tax system to increase incentives to reduce environmental damage. That will shift the burden of tax from 'goods' [such as capital and employment] to 'bads' [such as environmental damage]; encourage innovation in meeting higher environmental standards; and deliver a more dynamic economy and a cleaner environment, to the benefit of everyone." The question we have posed is how is this commitment to be put into practice, monitored and how is performance to be assessed.

8. The Office for National Statistics (ONS) now publishes each year an indicator for the percentage of tax revenues represented by environmental taxes. This percentage is currently 9.6 per cent (some £30 billion).[5] This indicator would appear to be the obvious way to measure whether the Government was indeed shifting the burden of taxation from 'goods' to 'bads'. However, the Financial Secretary told us that he did not think that the indicator was helpful as it was not clear whether one would want it to increase or decrease and therefore there was no sensible target for which to aim. He did not refer to any progress with the work towards a better measure that his predecessor told us about in 1999.[6]

9. The Financial Secretary's argument is that an increase in the ONS indicator could signify an increase in environmentally damaging activities (rather than greater coverage of green taxes), and that a decrease in the indicator might therefore be equally desirable. We believe this argument misses the point on two scores.

10. Firstly, and fundamentally, as the Government's aim is a "shift in the burden of taxation" then an increase in the proportion of revenue coming from taxes on 'bads' is surely the only measure of progress or success. Secondly, there is a distinction between assessing the impact of individual green taxes and assessing the progress of environmental tax reform as a whole. In evaluating a specific environmental tax on a pollutant, a decrease in revenue might well indicate success in dealing with the problem. However, many environmental taxes are levied on currently indispensable consumption (energy products, landfill, aggregates and road vehicle usage). The aim is to 'correct' the prices of these goods over the longer term to reflect the environmental damage involved, so making producers and consumers consider less harmful alternatives (and/or create a fund to addressing particular problems). Therefore expectations of significant decreases in these revenues in the short term seems unrealistic. We hope, however, that environmental reform of the tax system will continue and that expectations of new green taxes are not overly optimistic.

11. We are deeply concerned at the Financial Secretary's dismissal of the green tax indicator, let alone a target, in this context, and about the implications of this for implementing the Statement of Intent. The Government must accept that increases in the proportion of revenue coming from environmental taxes is the only indicator of progress in relation to its own stated aim of "shifting the burden of tax from 'goods' to 'bads' ". If the Financial Secretary is suggesting that shifting the burden from 'goods' to 'bads' is not now an aim of the Government, or a meaningful goal at all, then we require a thorough explanation and a new Statement of Intent.

12. Given the social dimension of sustainable development we believe that a complementary measure of taxes on 'bads' should be developed for other taxes aimed at discouraging consumption such as the punitive elements of taxes on tobacco and alcohol.

(ii) The need for a strategic framework

13. A small start has already been made on using fiscal measures to drive long-term changes in price structures and behaviour through an aggregates tax and the Climate Change Levy. But at present we believe that the Government lacks a sufficiently strategic and dynamic approach to driving forward this overall agenda. In its evidence to us, Biffa considered that the Chancellor "had missed a golden opportunity to announce a framework strategy for the next 5 or 10 years. ...In the environmental area, industry is desperately seeking clarification of Government's medium and longer term approach with regard to budgetary and fiscal policies—particularly in terms of their integration with parallel regulatory and DETR-led initiatives such as Integrated Product Policy." Biffa went on to argue that the budget statement was the most obvious context within which to communicate—particularly to industry and commerce—how the cost of pollution externalities are to be passed into society with no threats to inflation or job losses.[7] We endorse the argument that the Government needs to do more to set out a strategic approach to budgetary and fiscal environmental policies and the interaction of these with other initiatives.

14. In some areas, such as greenfield development and agriculture, the Financial Secretary accepted that there was scope for fiscal measures to restructure incentives and alter behaviour. But his comments were tentative and appear to us not to match the scale of the challenge.[8] We consider it essential that the Government sets out clearly how it intends to pursue its programme of environmental tax reform. Major areas where such reform must play a more effective role, for example, include:

    —  new development, where there are significant perverse fiscal incentives in favour of greenfield rather than brownfield sites;

    —  waste, where huge changes in attitudes and behaviour are needed to meet targets in EU directives;

    —  energy, where notwithstanding the Financial Secretary's comments the evidence suggests that current and planned levels of UK investment in renewable energy technologies is much smaller than our competitors;

    —  water, where a failure to implement the polluter pays principle through a pesticides tax is resulting in substantial hidden subsidies for intensive farming as against organic farming for example, and extra costs borne by householders and business through water prices;

    —  transport, where steady increases in the overall cost of car usage need and steady improvements in the availability of real alternatives (better public transport, more energy efficient vehicles and alternative fuels)—must go hand in hand.[9]

(iii) The Code for Fiscal Stability

15. In its Pre-Budget Report in November 1997, the Government announced its intention to implement and adopt a statutory Code for Fiscal Stability. After consultation, the Code was published in the 1998 Budget and subsequently ratified as part of the Finance Act. The Government's objective in doing so was to set out a framework for a fiscal policy which would be stable, accountable, and in the long-term interests of Britain. The Code highlights key principles of fiscal management, including transparency, stability, responsibility, fairness, and efficiency. It describes the role of the various fiscal reports—the Pre-Budget Report, the Financial Statement and Budget Report, and the Economic and Fiscal Strategy Report. It also highlights the fiscal aims and key assumptions used, and requires the National Audit Office to audit any changes to these key assumptions which underpin the fiscal forecasts.

16. In our Fourth Report, 1997-98, we commented on the lack of any clear reference to the environment in the Code and concluded that the principle of fairness in the Code did not adequately reflect the Government's commitment to sustainable development. Since then, environmental and sustainable development issues have assumed much greater importance. Given Government's commitments on the integration of economic and environmental considerations it is surprising for the Treasury to argue that the function of a Code for fiscal management can be purely economic.[10] Indeed, the Government has partially acknowledged our concerns by responding to our recommendations to include within Budget reports more consideration of the environmental impact of proposed measures. It is inconsistent for this development not to be reflected in the strategic Code which underpins these reports. We therefore consider that the Government should revise the Code for Fiscal Stability, which contains the principles for fiscal management, to incorporate its commitment to sustainable development.

Environmental appraisal of budgetary measures

17. In previous reports the Committee has expressed its concern about the lack of an overall appraisal of the environmental effect of budgetary measures. We acknowledge some progress in this area and on balance we welcome the greater weight now given to particular environmental measures within a dedicated chapter in Budget reports. However, this chapter may also represent the 'coralling' of environmental concerns. It deals only with measures which are obviously environmental in their objectives and the impact of which can be, in Mr Timms' words, "sensibly" quantified (though we note that in 7 out of 12 cases in Table 6.2 impacts are in fact not quantified).[11]

18. The Financial Secretary set out one of the Government's main priorities as the promotion of growth.[12] The Budget Report contains extensive discussion of the need to stimulate competition and enterprise, and to reduce the productivity gap, assessed in terms of labour, between the UK and other countries such as the United States. It includes measures such as the reduction of corporation tax rates, major reforms to capital gains tax, and a £1 billion target umbrella fund to finance enterprise growth. Whilst we welcome such initiatives, it is clear that the pursuit of GDP growth will have a significant impact, albeit difficult to quantify, on environmental pressures. At present, neither the Budget nor the Pre-Budget Reports contain any serious discussion or evaluation of the likely environmental impacts of these "mainstream" budgetary objectives.

19. We were concerned at the Financial Secretary's statement that the Government wanted to continue to promote growth but to do it "in a sustainable way",[13] as the issue is indeed how this can be achieved and assessed. The UK Round Table for Sustainable Development has recently highlighted the fact that growth is currently being pursued in a non-sustainable way and that some of the "traffic light" indicators in the DETR's Quality of Life Counts have been wrongly characterised as green instead of orange or red.[14] We hope that Mr Timms' comments do not indicate complacency in view of the seriousness of the issues involved. Indeed, Mr Nick Raynsford MP, the Minister for Housing, Planning, and Construction, recently stated in a related context that "to pretend that there is an easy way of reconciling the potentially conflicting pressures [of environment and development] is facile."[15]

20. We consider that the way forward must involve integrating into the main parts of Budget Reports more consideration of implications for environmental, alongside social and economic, impacts. A start has been made in terms of two important developments during 1999—the publication by the DETR of Quality of Life Counts, and by the ONS of environmental accounts as part of the Blue Book.[16] If these documents are to become more than 'interesting but peripheral', the analyses they contain must act as drivers for budgetary and fiscal processes. The budgetary reporting system should form the context in which policy trade-offs between the various components of sustainable development are openly discussed and set out, together with the likely impact on indicators and environmental accounts—links between economic growth and demands for energy, aggregates, transport services and housing are all key examples. We expect much more discussion of environmental impacts alongside social and financial issues in the earlier "mainstream" parts of Budget Reports, and of the implications of Budget measures for—at the very least—the 'headline' set of sustainable development indicators.

21. We also consider that there is further scope for the development of indicators and targets for the environmental impact of policies. A key example is afforded by the interesting analyses in Chapter 5 of the Quality of Life Counts of the extent to which energy consumption has been decoupled from economic growth. The Government could readily develop an indicator and target for this, and the likely impact and focus of mainstream budget proposals should be discussed in this context. For example the recent report on energy policy from the Royal Commission on Environmental Pollution (RCEP) has recommended that the UK reduce carbon emissions by 60 per cent on 1990 levels by 2050.[17] Given the scale of the environmental challenges facing the UK, we urge the Government to set longer term goals and annual targets by which we can measure our progress year by year.

22. In its response to our Eighth Report, 1998-99, on the 1999 Budget, the Government stated that it "would expect to publish an ex post evaluation of its existing environmental tax measures on an annual basis, to complement the appraisal data for proposed new or amended measures which are already included in the Budget."[18] We consider that it should develop tables 6.1 and 6.2 of the Budget Report so as to build up a data series of outturns and estimates on an annual basis along similar lines to the year on year financial data given in departmental annual reports.[19] This should include greater clarity where policy shifts affect forecasts of environmental benefit (up or down). We were unimpressed with the Government's response to our original criticism that the form of Budget 2000's appraisal failed to make clear, for instance, that the estimated environmental benefits from fuel duties had halved since the Budget Report 1999 as a result of shelving the escalator.[20] We further note that this approach was in contrast to the way in which the increasing environmental benefits of the Climate Change Levy were set out.[21]

4   See the annex to the Report for the original Statement (first published in July 1997) alongside 'elaboration' from the Chancellor's 1999 Pre-Budget Report.  Back

5   United Kingdom National Accounts (The Blue Book), 1999 edition, page 278 table 12.6. Back

6   QQ 6 & 7. See also our Eighth Report, 1998-99, HC 326, page 17, QQ 81 & 82. Back

7   Ev p34 Back

8   QQ 26 & 51. See also Government comments on the response to Lord Rogers' report Towards an urban renaissance, and stamp duty relief on brownfield development (Budget 2000: Prudent for a Purpose, HM Treasury, March 2000, pp 119-120). Back

9   For new development, cf QQ 25 & 26; for waste, cf QQ 85 & 86; for energy, see Energy - the Changing Climate, Royal Commission on Environmental Pollution, 22nd report, Cm 4749, p192ff; for water, cf Q51; and for transport, see chapter 5 of Quality of Life Counts (DETR, December 1999) which contains an analysis of the price of car transport in real terms. Back

10   Q10 Back

11   Q3. See also Budget 2000: Prudent for a Purpose, HM Treasury, March 2000, page 125. Back

12   Q5 Back

13   Q5 Back

14   UK Round Table on Sustainable Development, "Indicators of Sustainable Development", May 2000. Back

15   The comment was made in the House during a debate on the Government's targets for new house-building in the south-east of England. See Official Report, 20 June 2000, col 224. Back

16   Quality of Life Counts, DETR December 1999, chapter 5. United Kingdom National Accounts (The Blue Book), 1999 edition, Office for National Statistics, Part 5, pp 265-278. Back

17   Energy - the Changing Climate, Royal Commission on Environmental Pollution, 22nd report, Cm 4749, June 2000. Back

18   EAC Fourth Report, page xlvii. Back

19   See, for example, The Government's Expenditure Plans 2000-20001, Department of Trade and Industry, Cm 4611, Annex A, page 185ff. Back

20   Government response, appended to this report, paragraphs 48-49 & 64-65. Paragraphs 6.46ff of Budget 2000: Prudent for a Purpose, paragraphs 6.46ff, contains no discussion of the environmental impact of the shelving of the fuel duty escalator. This contrasts with the discussion at paragraphs 6.37 to 6.39 of changes in carbon savings from the Climate Change Levy. Back

21   Budget 2000: Prudent for a Purpose, HM Treasury, March 2000, paragraphs 6.37ff. Back

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