Select Committee on Trade and Industry Minutes of Evidence

Memorandum submitted by HM Treasury and the Department of Trade and Industry



  1.  The long-term ambition for the next decade is that Britain will have a faster rise in productivity than its main competitors. The UK's productivity gap with countries such as US, France and Germany is substantial. In order to address these weaknesses and help close the productivity gap with other major countries, the Government has set out a clear strategy to meet the productivity challenge focusing on:

    —  Promoting competition

    —  Encouraging enterprise and innovation

    —  Creating the right conditions for investment

    —  Raising the skills base

    —  Improving public sector productivity.

  2.  Clearly the UK's relative economic performance depends on a wide range of factors. Based around the five key drivers of productive performance, the Government has already introduced an extensive set of reforms. And building on the steps already taken, the Pre-Budget Report outlines the next steps in the Government's programme to increase Britain's productivity performance.


Transport costs and competitiveness

  3.  The impact on motor taxation on competitiveness will depend in part on the importance of road transport costs to the entire economy. Road transport costs will depend on many factors, including labour costs, costs of purchasing or leasing vehicles, insurance, as well as expenditure on fuel. Changes in any element of industrial costs relative to those in countries with which we trade can have a bearing on future economic and trade performance.


Expenditure on mineral oils for transport, 1998

  4.  In order to assess the impact of motor fuel taxation on competitiveness, we have calculated the expenditure on transport fuels by business. As is usual in analysis of this kind, data limitations restrict what it is possible to do. The latest systematic information is the 1998 input-output tables which provide a breakdown of industrial expenditure disaggregated across 124 sectors on "coke ovens, oil products and nuclear fuels". This is the latest year for which we have the data that allow the full effect of changes in costs or output in one area to be followed through across the economy.

  This has been adjusted to:

    (i)  deduct expenditure on coke ovens and nuclear fuels[1], and to

    (ii)  deduct expenditure on oils purchased for use within industrial processes rather than as transport fuel.

  5.  Having made those adjustments we find that industry spend on transport fuels in 1998, including aviation fuel inclusive of tax, amounted to £15.7 billion. This represents broadly 1 per cent of the value of output.

Expenditure on road fuels in 1998 and 2000

  6.  To focus the analysis more clearly on the costs of road fuels, we have attempted to exclude other transport industries such as aviation and to assign the value of mineral fuels purchased by the "other land transport" sector[2] to user industries. In addition we have attempted to reflect the impact of increases in price of road fuels since 1998. The results are more up to date but the approximations involved make the numbers less reliable. Looked at overall, spend on road fuels directly amounts to 1.3 per cent of the value of output in the productive industries. Behind this, the overall figure for manufacturing is 1 per cent.


Road fuel taxation

  7.  The approach followed in preparing this Memorandum has been to look at business expenditure on road fuel and how the costs of road fuel compare with the value of output in various sectors. This provides a basis to consider the likely significance of changes in fuel duties on competitiveness in terms of the potential impact on industrial costs.

  8.  Part of the expenditure on road fuel will include expenditure on fuel duties. Fuel duties raised around £22 billion in revenue in 1999-2000. A significant proportion of these taxes will have been paid directly by household purchasers of road fuel. Around half is paid by business on their purchases. VAT is also due on road fuels but this would not affect most businesses which can reclaim their VAT.

  9.  Vehicle excise duty raised £4.8 billion in total in 1999-2000. The vast bulk of this was accounted for by duty paid on cars. Commercial vehicles accounted for only 10 per cent of this. Vehicle excise duty, like fuel duties, also affects the cost structure of road transport and road transport using sectors. Since total expenditure on commercial vehicle excise duty is roughly 5 per cent of that on road fuel duties, the impact of changes in VED are also unlikely to have a noticeable effect on relative unit cost competitiveness overall.


Taxation and competitiveness

  10.  In principle it should be possible to estimate how imports and exports have responded in previous periods to changes in relative costs to get an idea of the impact of illustrative changes in road fuel duties on trade flows and therefore on the value of UK output in various sectors.

  11.  There are a number of difficulties in this case. Stemming from scale, the first is that the cost of spend on road fuel is such a small proportion of the total costs that the impact in practice on trade of a change in a part of road fuel costs is likely to be very small.

  12.  The use of elasticities showing the response of trade to changes in costs that have been estimated on the basis of more substantial cost changes in overall costs can also be misleading. For instance firms may choose or be obliged to absorb modest increases in their costs, or they may seek to pass them down to their suppliers with varying degrees of success, again depending on competitive pressures.

  13.  It is also often unrealistic to isolate changes in one element of taxation impacting on industrial costs without looking at the wider picture. In this case we ought to identify what changes may be necessary elsewhere to offset a change in motor fuel taxation, the impact of other taxes on other elements of transport costs, what consequences these might have for industrial costs, and what might be done to make good the achievement of environmental objectives should any changes make a significant impact in this direction as well.

  14.  As to the impact on overall relative cost competitiveness, changes in motoring taxes are likely to be swamped by wider changes that influence relative costs such as shifts in productivity and earnings; and by developments in product and factor markets affecting the sectors themselves.


Government's approach to environmental taxation

  15.  The Government stressed the importance of competitiveness in the Statement on Intent on Environmental taxation, when it was published in 1997. The Government aims to target public spending where it will bring the greatest benefits and raise revenue in ways which cause the least distortion. But taxation also sends clear signals about the economic activities which the Government wants to encourage. Over time the Government aims to shift the burden of tax from "goods" such as labour and capital to "bads" such as pollution.

  16.  In line with the Government's Statement of Intent on Environmental taxation any environmental tax should meet the tests of good taxation;

    —  polluters should face the true cost which their actions impose on society;

    —  the social consequences of environmental action must be acceptable;

    —  economic instruments must deliver real environmental gains cost effectively;

    —  environmental policies must be based on sound economic evidence;

    —  environmental policies must not threaten the competitiveness of UK business.


Recent changes in motor fuel taxation

  17.  The Government believes that the environmental benefits of higher fuel prices must be balanced with the Government social and economic objectives. Recognising the continued high price of oil since the Budget the Government announced that the duty on fuels will be frozen in the next Budget. And if oil prices remain high then duty rates may be frozen again.

  18.  In order to improve local air quality, the Government intends to further encourage the use of low sulphur fuels. It announced in the Pre-Budget Report that it intends to reduce the duty on ultra low sulphur petrol by a further 2p a litre, widening the duty differential between unleaded petrol and ultra low sulphur petrol to 3p a litre in total. This cut would be conditional on oil companies making this fuel widely available.

  19.  In these circumstances and taking account of the role of diesel in determining the transport costs of British business, the Government believes that it would be appropriate to ensure that the level of duty on ultra low sulphur diesel matches that on ultra low sulphur petrol, and so would cut duty by 3p a litre.

  20.  In addition to the changes in duty, the Government also announced a series of measures to modernise the haulage industry, as an efficient haulage industry will help UK industry become more competitive.

  21.  Therefore the Government intends to reform lorry vehicle excise duty next year reducing the rates and restructuring the system. In total lorry VED will be reduced by around £300 million, a cut of over 50 per cent. And the Government intends to implement transitional arrangements. Up to £265 million will be available for this financial year to rebate VED fees.

  22.  The Government is also considering introducing some form of user charge such as a vignette for all lorries using British roads. It intends that no UK haulier will be adversely affected by this new charge. This will end the situation that UK hauliers face road charges when they work in many EU countries but foreign hauliers pay nothing for the damage they do to UK roads.

  23.  In addition, to encourage UK hauliers to drive newer cleaner less damaging lorries, the Government intends to launch ring fenced fund of £100 million to offer further incentives or allowances for scrapping older more polluting lorries or encouraging cleaner lorries and technology. The Government will also review training in the industry.

  26.  Combined with the general freeze and proposed cut to duty on ultra-low sulphur diesel, the total value of the package will be worth £3/4 billion to the haulage industry, the equivalent of an 8p cut in duty.

14 December 2000

1   Approximations here should not be crucial. Such expenditure accounts for only about 5 per cent of the overall spend. Back

2   Road freight in vehicles over 3.5 tonnes is included in the "other land transport" sector. There are other activities, including inter-city coaches, within this sector, but purchases by road freight account for 80 per cent of the value of inputs purchased across "other land transport" as a whole. Back

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