Select Committee on Trade and Industry Minutes of Evidence

Memorandum submitted by the Freight Transport Assocation (FTA) and the National Farmers Union (NFU)


  1.  The FTA and NFU have long been concerned that high taxes on road fuels in the UK are damaging the competitiveness of UK industry. The current high cost of fuel exacerbates our difficulties and our advice in this document is designed to alleviate a situation which impacts greatly on business generally, transport operators, farmers and growers.

  2.  Many parts of the economy, such as agriculture and manufacturing, are heavily dependent on transport and operate in highly internationalised markets—both within the EU and globally. Such industries are price-takers, and if they cannot produce and deliver at the prevailing international prices then they cannot compete.

  3.  Competitive pressures in such markets have meant that manufacturers' export prices have fallen by 2.2 per cent in the last two years, while non labour input costs have risen by 15.1 per cent (source: ONS). This means that costs must be constantly cut to maintain competitiveness.

  4.  In such a context an almost one-third increase in fuel duties over the last three years has been very difficult to absorb. As part of a general increase in business taxation of £5 billion per year since 1997, this poses a major challenge to UK competitiveness in general. This is the real-world context in which business works, and fiscal policy must reflect such realities.

  5.  The UK logistics industry is one of the world's most innovative and fiercely competitive. However, with diesel duty at two and a half times the EU average, the ability of parts of the industry to continue competing against foreign based operators is being compromised.

  6.  For some companies needing to ship their goods it may be possible to avoid the UK's high road user taxes by using foreign-based hauliers. However, for many firms such cabotage may not be available and the high taxes on UK road haulage are unavoidable. This is particularly so in peripheral or rural areas outside the South East and major transport corridors, or in some industrial sectors, where it is not practicable to be served by foreign hauliers.

  7.  We are conscious that there is also considerable expenditure by companies on fuel for cars for business, much of which is petrol. Around £3.3 billion per year of duty is levied on fuel for company cars every year, more than 80 per cent of which is duties on petrol (source: ACFO).

  8.  The effects of high fuel duties are illustrated particularly acutely in Northern Ireland. Here fuel sales have fallen by around 40 per cent in the past few years as a result of both legitimate and illegal importing of fuel from the Republic. This is estimated to be costing the Treasury over £300 million a year in lost duty (source: The Legitimate Oil Pressure Group and Maxol.

  9.  Environmental concerns are one of the justifications given for high duty on fuel and vehicles, and some have suggested that reversing this policy could have negative environmental consequences. However, simply relying on fuel duties is a poor way of tackling problems such as congestion and pollution.

  10.  Many of the environmental impacts are affected by location (congestion is most prevalent in urban areas or by time of day—peak and off-peak). Indeed there is little evidence that high fuel duties have significantly reduced problems such as congestion. Furthermore, demand for fuel is relatively price inelastic, especially so far as it applies to goods traffic.

  11.  For the global warming gas carbon dioxide, the Government estimates that the fuel duty escalator will have delivered around seven per cent of the total reductions in emissions over the course of its Climate Change Programme. However, technological developments can deliver greater savings in CO2 emissions. The voluntary agreements between the EU and vehicle manufacturers will contribute 15 per cent of the total savings over this same period (source: SMMT).

  12.  It is also important to recognise that while some of the external costs of road use are increasing, others are decreasing. Better vehicle design over the past 10 years has contributed to a reduction in accidents involved trucks by 20 per cent. Over the same period investment in new truck technology has reduced toxic emissions such as carbon monoxide and particulates by up to 80 per cent.

  13.  Neither of these developments have come about as a result of high taxes. Indeed, properly targeted tax cuts can be just as effective an environmental incentive as tax increases, but with less damage to the economy.


  14.  Despite the problems outlined above there is now a real opportunity to make a positive change. There have been some welcome developments in recent Government policy. The last Budget scrapped the automatic fuel duty escalator and provided cuts in VED rates for certain classes of lorries, which along with the decision to allow the introduction of 44t lorries will help the competitiveness of UK business.

  15.  Also welcome was the Government's announcement of a £180 billion infrastructure investment plan. Including measures aimed at supporting the distribution sector this will, over the longer term, reduced costs if measures to increase and make better use of infrastructure capacity are introduced and targets for reducing congestion are met.

  16.  However, these in themselves are not enough to offset the overall loss of competitiveness to UK business in the light of the large differential between UK fuel duty rates and those in the rest of Europe.

  17.  The FTA and NFU do not wish to see unsustainable or unaffordable cuts in taxation. However, it is clear that the current fiscal situation allows room for some reduction in taxes without threatening the Government's overall fiscal position.

  18.  Tax revenues have been unexpectedly strong, relative to output, since the March Budget. Tax revenue could well exceed projections this year by over £5 billion, excluding the impact of higher oil prices. It may not be prudent to cut taxes by the whole of this total, but a total tax reduction of £2-3 billion should be affordable. This would not imperil the achievement of the fiscal rules in the longer term. Nor in the short-term do we believe this would add to inflationary pressure. At least £1.5 billion of the total affordable should be allocated to reducing transport taxation.

  19.  We support efforts to reduce pollution and environmental damage—in the long-term economic sustainability requires environmental sustainability. The UK is on target to meet its international commitments on carbon dioxide emissions. Likewise developments in vehicle and engine technology will continue to contribute to reductions in emissions that damage local air quality. It should be feasible to explore other ways to meet environmental objectives that are both efficient and effective if we are not to damage the UK's competitiveness.

  20.  Any changes in the taxation regime for road users could have potential knock-on effects on other transport modes. In particular, measures to reduce the tax burden on road transport must be done in such a way that they do not undermine the competitiveness of railfreight. Keeping the costs of both high is not an option if we want the UK economy to prosper.

  21.  Cutting the tax burden on roads must therefore be accompanied by serious efforts to increase the competitiveness of rail freight. The rail freight industry, working with others such as the SSRA and Railtrack, must continue to build on its recent improvements in levels of customer service and efficiencies. Government can also assist in maintaining rail freight's competitive position by committing itself to an early delivery of the investment earmarked for rail freight in the 10 year plan.


  22.  We believe the Chancellor should use the forthcoming Pre-Budget Report to take the immediate steps to build on the initial progress made in the March Budget and to initiate a more comprehensive look at ways of delivering a more efficient transport tax regime. Alongside other transport policy measures it should be possible to:

  In the short term:

    —  Tackle the unfair competitive disadvantage for UK transport operators.

    —  Produce a better environmental outcome while simultaneously reducing business costs and improving competitiveness.

    —  Reduce tax leakage and smuggling.

    —  Include measures to ensure railfreight costs could also fall.

  In the long term:

    —  Be economically and politically sustainable.

    —  Provide a basis for fundamental reform of road user taxation.


  23.  The current arrangements for taxing road users are inadequate. They are a blunt way of encouraging efficient use of the road network and delivering environmental improvements. There is a poor link between the taxes which road users pay and the quality of service they receive from the resulting investment in transport.

  24.  The likely introduction of congestion charging and workplace parking levies only threatens to complicate this situation further. The Government should commit now to carry out a thorough review of the way in which road users are taxed and charged, with a view to introducing reforms that better deliver economic and environmental aims.

  25.  In the short term, the high level of tax rates levied on the UK transport industry is currently undermining its competitive position compared with European operators and putting upward pressure on costs for UK business as a whole. There is a pressing need for more immediate changes in transport taxation which seek to close the gap of 5 per cent to 10 per cent in total haulage operating costs.

  26.  The Government could seek to close the competitiveness gap by tax cuts—through a reduction in diesel fuel duty for commercial vehicle operators, a fresh approach for charging foreign operators, reductions in VED and incentives for the purchase of new vehicles. The mechanism for differentiating diesel duty for HGVs needs to be decided by Government in consultation with business. Options include "blue diesel", a smart fuel card system or rebates through the tax system.

  27.  In addition, cuts in motoring taxation would also benefit businesses which operate light goods vehicles and whose employees use cars in the course of work. Targeted measures which helped rural motorists would also be desirable from the point of view of social inclusion but in practice may be difficult to implement.

  28.  The Government should announce a review of the present fiscal planning assumption that road fuel duties and VED are indexed to inflation year by year. This could become less tenable if it resulted in a rising proportion of the fuel price being taken by taxation, and it also risks a return to a competitiveness gap for the costs of transport to UK plc. In the March 2001 Budget, the decision on indexation should take into account any change necessary to the oil price assumption for 2001-02.

  29.  The current problems caused by high fuel taxation must be urgently addressed by the Government putting in place measures which would at the earliest possible opportunity produce:

    —  a 15 ppl reduction in fuel duty for heavy goods vehicles (ie vehicles over 3,500 kgs permissible maximum weight)—cost £1,190 million;

    —  a cut in VED for light goods vehicles and private cars, based on environmental criteria, ranging from £10-£30 per vehicle—cost £310 million;

    —  introduction of a UK Vignette, with compensating VED reductions for UK operators—no net cost. Total £1,500 million.

18 October 2000

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