Memorandum submitted by HM Treasury and
the Department of Trade and Industry
SECTION A
Competitiveness
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:
— 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.
SECTION B
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.
SECTION C
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.
SECTION D
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.
SECTION E
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.
SECTION F
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.
SECTION G
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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