Memorandum submitted by the Freight Transport
Assocation (FTA) and the National Farmers Union (NFU)
THE CURRENT
PROBLEM
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.
THE OPPORTUNITIES
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.
OUTCOMES
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.
RECOMMENDATIONS
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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