House of Commons - Trade and Industry

Select Committee on Trade and Industry Fifth Report

II. INTRODUCTION

7. The impact of motor fuel taxation on the competitiveness of UK industry raises some complex issues. There are obviously sectors of industry where fuel prices have an immediate 'primary' impact, for example, the haulage industry. Companies in that sector may or may not be in a position to pass on any price increases but can do little to reduce their costs. In other cases, the impact of motor fuel prices is less obvious: the effect may be 'secondary' rather than primary. For example, it may result in higher bus or coach fares, higher taxi fares or increased prices to the consumer of perishable goods. Consumers are therefore affected through the national cost of living. For those companies who compete with companies in other taxation regimes, there are evident competitiveness issues.

Fuel duty

8. Fuel prices are determined by two basic factors:

— the costs of exploration and production of crude oil, manufacturing and refining, marketing and distribution and;

— fuel taxation.

UK fuel taxes have two elements: excise duty and VAT. We have concentrated on duty.

Fuel duty escalator

9. Successive governments have used fuel duty as a way of raising revenue and meeting their objectives. In the March 1993 Budget the then Chancellor, Norman Lamont, announced a 10% increase in road fuel excise duties. He went on to say that it was the Government's intention to increase duties on average by at least 3% a year in real terms in future Budgets. This policy is known as the fuel duty escalator. In the 1994 Budget, Kenneth Clarke increased fuel duties by 3p per litre and announced that all road fuel duties would be increased on average by at least 5% in real terms in future Budgets. In his July 1997 Budget, the present Chancellor Gordon Brown announced that "existing taxes, including our excise duties, must also advance the Government's environmental objectives" so "road fuel duties will increase by an extra 1% every year over and above the annual 5% real rate of increase established by the previous Government".[22]

10. In his Pre-Budget Statement to the House on 9 November 1999, the Chancellor announced that the fuel escalator would not apply in future budgets. He stated that the escalator had been needed in the past to reduce the £28bn deficit as new measures were put in place to protect the environment. From then on, "if there are any real term rises in road fuel duties, they will be lower and the revenues will go straight to a ring-fenced fund for the modernisation of roads and public transport".[23] In his March 2000 Budget, the Chancellor announced that "beyond the automatic inflation rise of 2p per litre, there will be no real-term rise in road fuel duties".[24] Fuel duty receipts are forecast in the Pre-Budget Report 2000 to be £23.2 billion in 2000-01, compared to £19.5 billion in 1997-98.[25]

FUEL PRICES

11. The Financial Secretary told us "if you look at what has happened to petrol prices over the last couple of years, there has been of the order of about an 18p a litre increase in that period, of which only about 2p is as a result of duty, the rest has been as a result of the crude changes".[26] The following table shows the tax element in fuel prices over the last nine years.

Premium unleaded petrol[27]

Pence per litre

Mid month	Typical Retail Price	Pre-tax price (a)	Duty	VAT	Total tax amount	Total tax % of price
Jan 1992	43.43	14.55	22.41	6.47	28.88.	66.5%
Jan 1993	47.13	16.69	23.42	7.02	30.44	64.6%
Jan 1994	50.83	14.94	28.32	7.57	35.89	70.6%
Jan 1995	53.44	14.16	31.32	7.96	39.28	73.5%
Jan 1996	55.93	13.30	34.30	8.33	42.63	76.2%
Jan 1997	61.09	15.13	36.86	9.10	45.96	75.2%
Jan 1998	63.13	13.45	40.28	9.40	49.68	78.7%
Jan 1999	62.87	9.52	43.99	9.36	53.35	84.9%
Jan 2000	75.38	16.94	47.21	11.23	58.44	77.5%
Jan 2001	76.91 (b)	16.94	48.82	11.45	60.27	78.4%

Note: (a) Includes raw material and refining costs, distribution charges and traders' margins. (b) Provisional

In the short term, the pre-tax price fluctuates as a result of changes in the price of crude oil, but over the last decade the steady increase in the real price of motor fuel at the pumps has been entirely and intentionally the result of Government taxation policies.

FUEL TAXATION

12. Current levels of fuel taxation are higher in the UK than in other European countries. The Transport & General Workers' Union (T&G) supplied figures that put fuel taxes in the UK as the highest in Europe, 20% higher than in France. At April 2000 prices, fuel duties as a percentage of price in the UK were 70.3% per litre of petrol, 74.8% of unleaded petrol, and 73.6% of diesel.[28] Total Fina Elf calculated that for petrol the UK duty difference ranges from 135% to 280% of the other European countries. For road diesel the difference is between 210% and 330% of the other countries.[29] The RHA said that the European average price for a 1,000 litre tank of diesel is £540; in the UK it is £810.[30]

OVERALL LEVELS OF TAXATION

13. The Government has argued that it is misleading to consider fuel taxation levels without considering overall taxation levels. According to Lord Macdonald of Tradeston the Government is concerned that "the burden of taxation as a whole is approximately the same for ourselves and our European competitors".[31] The Financial Secretary told us in oral evidence "the overall tax burden for hauliers and others in the UK but hauliers in particular is not very significantly different from the overall burden by hauliers in other countries".[32] The Institute for European Environmental Policy told us that whilst fuel duties were the highest in Europe, "the differential in prices was much less when compared to levels of national GDP".[33] They went on to say that there are areas where the UK has tax and cost advantages over other EU Member States: for example, employment and corporation taxes are lower, administration costs are relatively low, and the UK has comparably few toll bridges and tunnels.[34] OECD figures indicate that, in terms of the overall taxation burden, the UK compares favourably with most of Europe. In the UK, taxation levels as a proportion of GDP are around 40% compared with 58% in Sweden, 50% in France and 44% in Germany.[35]

14. In oral evidence, Professor Douglas McWilliams of the RHA conceded "these OECD figures are absolutely correct and it is perfectly true that the overall tax burden in the UK is low by European standards".[36] However, he went on to say that it is the marginal tax burden that is important, not the total tax burden. Mrs Karen Leeming of the RHA remarked that while certain elements of taxation are lower in other countries "fuel tax often represents 30%, it is a bigger element, so that is where we think the uncompetitiveness is coming from".[37] Mr James Hookham of the FTA did not accept that British competitiveness increased if the whole picture of taxation were taken into account.[38] The Federation of Small Businesses described the Government's argument as "disingenuous", as most small businesses are unincorporated and do not benefit from the low rates of corporation tax.[39] It is undoubtably the case that levels of fuel taxation are higher in the UK than in other countries, whether or not that is balanced by lower corporate tax rates, cheaper motoring infrastructure costs and lower social costs.

PRICE OF CRUDE OIL

15. In its early years, the impact of the fuel escalator on prices was lessened by the fact that the cost of crude oil was generally fairly stable or falling. However, during 1999 the cost of crude oil increased substantially. Prices rose further from around $25 per barrel in March 2000 to above $30 per barrel in September 2000.[40] According to Shell, crude oil prices were at their highest levels (both in nominal and real terms) since the Gulf War almost a decade ago.[41] The spot crude oil price fell towards the end of 2000 and, by early January 2001, prices were under $24 per barrel.[42] By early February 2001 they had risen slightly to around $26 per barrel.

PUMP PRICES

16. Changes in pump prices could reasonably be expected to follow wholesale price trends. However, there have been considerable delays between a fall in the price of crude oil and a comparable fall in prices at the pump. This is at least partially the producers. They do not seem anxious to make the first move to lower prices. In the first days of January 2001, wholesale prices were roughly down to where they were at the start of 2000, but petrol pump prices were about 5p per litre higher.[43] The Minister told us "we will certainly encourage everybody to be very vigilant about what exactly is happening in the petrol and diesel markets, so that if there are reduced world oil prices then the customer should benefit at the filling station".[44] It is a widely shared perception that pump prices are quick to rise but slow to fall.

Government objectives

17. The principal objective of fuel taxation is to ensure that motorists should bear the full costs of driving—not only wear and tear and congestion on the roads, but also the wider environmental costs. Over time, the Government aims to shift the burden of tax from 'goods' such as labour and capital to 'bads' such as pollution.[45] In line with the Government's Statement of Intent on Environmental taxation published in 1997, any environmental tax should met the tests of good taxation:

— 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 advice;

— environmental policies must not threaten the competitiveness of UK business".[46]

18. The Government have stated that "fuel duties have played an important role in helping the UK meet its Kyoto target for reductions in greenhouse gas emissions". Increased fuel duties between 1996 and 1999 are estimated to produce carbon savings of between 1 and 2.5 million tonnes by 2010.[47] The Financial Secretary told us that he was "confident that the amount of fuel being consumed is less than it would have been if fuel duty had been lower".[48] We requested further information on the tools used to measure the impact of the fuel duty escalator: for example, whether it seeks a reduction in the volume of fuel consumed, or the mileage travelled for a constant volume. The Minister of Energy referred to steps taken to encourage more economical driving habits by lorry drivers. In supplementary evidence to us, the Government said "the estimated size of the reduction in demand resulting from a specific increase in price depends on a number of factors. Different modelling approaches using different data are likely to produce different values for the extent of this impact."[49] This response does not supply any further elucidation. It is still unclear how the Government is measuring its success at meeting its objectives; the Environmental Audit Committee's recent Report criticises the Government on precisely these grounds.[50] If it has no valid means of measurement, the Government should hardly be surprised if people conclude that revenue is a rather more important element than the environment in fuel taxation.