Examination of Witnesses (Questions 40-54)
MR RICHARD
GEORGE, MR
ALASTAIR HANTON
AND MR
KEITH BUCHAN
27 JANUARY 2009
Q40 Joan Walley: Can you explain
by "Treasury deficit"?
Mr Hanton: The cost of not applying
any tax on aviation fuel and not applying Value Added Tax to aviation
passengers is about £10 billion a year. APD contributes about
£2 billion, and aviation duty would have increased that by
about half a billion. It would also, as I say, have taxed air
freight for the first time, freight planes—so we were very
disappointed that this was U-turned on. Of course, we welcome
the fact that APD is being reformed to be more distance related,
but it still remains a small tax. If I remind you that in 1997
the figure of APD was £10 for the short haul, and even with
the new proposals will only go up to £12, we are talking
of a small tax.
Q41 Joan Walley: I understand that
your director has written to the Chancellor about whether or not
anything can be done in the short term to tax air freight. Have
you had any indication back from the Treasury as to whether there
might be any progress?
Mr George: Not as yet. The letter
only went out very late last week.
Q42 Joan Walley: Does that representation
include changes in respect of flights without passengers operating
just to keep the slots?
Mr George: Auctioning slots, for
example, would be a very good way around that, or would just restrict
them, saying, "you are not using this for a genuine passenger
service; you cannot have the slot". We have heard talk about
green slots, which sounds in principle like a good idea but these
have been announced for the third runway, which would be a disaster.
Also there is potential for taxing fuel for domestic flights.
That is not covered by the Chicago Convention. You probably need
to do an equivalence in tax because of the opportunity for suppliers
to get fuel abroad and then transfer fuel over. Certainly there
would be nothing to stop you doing that. They have something like
that in Norway and in America at the moment, and with the Obama
presidency perhaps there will be an opportunity to re-negotiate
the Chicago Convention, which would probably need EU agreement
in the light of the Emissions Trading Scheme being finalised there,
and there are plenty of opportunities to lobby at an international
level. There is really no reason, given the climate change impacts,
that it should be singled out as a special case.
Mr Hanton: The government has
indicated that it is in favour of re-negotiating the Chicago Convention,
enabling countries to impose tax on aviation fuel. We think that
that is an important urgent priority nationally, particularly
given the fact that aviation is much more polluting than the mere
CO2 emission figures would indicate; it is because
of other emissions between two and four times polluting as the
CO2 figures would imply; and the Government uses a
multiplier of two for that, so that is urgent. The other urgent
thing is to begin a process of Value Added Tax imposed on aviation
within the EU at least, and also Value Added Tax imposed on domestic
flights, as is done in most other European countries.
Q43 Joan Walley: You have raised
quite a few suppositions there.
Mr Hanton: Yes.
Q44 Joan Walley: I just wonder again
what indication you have got that there might be some movement
on each of those, including the change of president in the US,
and whether there is any scope for the Chicago Convention to be
re-negotiated.
Mr Hanton: We are only in day
eight of the administration, so it is difficult to know, but if
the world—if the UK is serious about an 80% reduction, and
if the world is serious about reducing CO2 and its
polluting effects, this is an urgency. That is all we are saying.
Q45 Joan Walley: You have almost
answered a previous question I had when you volunteered information
that the changes in the levels of duty that would be paid with
the new short-haul and long flights over 2000 miles et cetera
would in the lowest grade bring about an increase to the Treasury
from £10 to £12. Have you done any research on how these
changes altogether will have any implications for the amount of
annual flights that are made? Do you have any idea how it would
affect some people's travelling habits and use of aviation?
Mr George: I think Keith's point
about the exchange rate is likely to be the biggest deflator of
the aviation market at the moment. If you are moving from $2 to
the pound to considerably less at the moment—I am not sure
what it is today—that will dissuade people from shopping
trips to New York and unessential flights that would otherwise
effectively be a drain on our economy because people are not only
flying abroad and not holidaying here but spending large amounts
of money abroad, and returning, with all the tax, all the duty
and all the profit being absorbed in other countries.
Q46 Joan Walley: That is not the
tax issue, I am talking about the green issue that might come
from the Pre-Budget Report.
Mr Buchan: I think it is important
to separate out the international flights where the exchange rate
mechanism is terribly important, and the domestic flights issue
which is often overlooked because it is quite small in terms of
its carbon emissions, but is very important in terms of its capacity,
because if you take take-off and landing into account, it's about
30% of all take-off and landings in the UK; so in terms of capacity,
domestic flights are incredibly important. Also, the actual cruise
bit tends to be a bit shorter; then the take-off and landing emissions
are quite serious. It is very odd that we have a situation that
if you take a coach or drive between London and Leeds or Liverpool
or Edinburgh, you have to pay fuel duty, but if you fly you do
not, and yet the emissions are doing, as Alistair said, about
twice the damage to the climate. It does strike us that there
is a complete discontinuity here and there is something wrong,
even in liberal economic terms; there is a market distortion caused
by not having a proper taxation framework. That is something we
could address. There are various options for doing it. You can
use the VAT route or the fuel duty route, and everyone knows what
they are! That needs to be done. I think that the current recession
did cause the Government to withdraw and come back from the position
of a major reform of APD and possibly looking at domestic, because
they are very concerned about disrupting the domestic airport
situation. Some of the airports are fairly marginal and I think
if you look at places like Norwich, which has just lost its main
international operator, and lost 20% of its passengers in about
three months, I think there is going to be some restructuring
in terms of local airports. I think the prospect of that kind
of scared the Government away from making the reforms that are
necessary, but those reforms do need to come. If you look at the
competition between rail and domestic air, the Civil Aviation
Authority is quite open about it; they have predicted—and
we are now seeing—transfer from domestic flights to rail
where they are available.
Q47 Joan Walley: How much have or
should those calculations feature in the overall framework within
which the assessment is made in respect of the third runway at
Heathrow Airport?
Mr Buchan: The central case does
not actually include the Pre-Budget Report changes because of
the very odd way that the economic case treats taxes. If you put
air passenger duty up, the benefits go up. I have to say I am
not entirely convinced that that is an accurate picture because
it would mean that the more and more you put the tax up, the more
benefits you get, and I think at some point there should be some
kind of break from that. I do think that in terms of the overall
tax treatment, that needs to be sorted out. There needs to be
a proper extraction of the way that is being dealt with before
we can have a really sensible debate about what the genuine economic
case is for a Heathrow third runway. I am sorry, I have strayed
slightly from your question.
Q48 Chairman: Just on the question
of VAT on flights within Europe, how do you think that would interact
with the inclusion of aviation in the ETS?
Mr Hanton: It would be additional
to. We need all the instruments that we can get for containing
the growth of aviation on grounds of the climate and on the grounds,
as far as the UK is concerned, balance of payments; so let us
have both.
Q49 Chairman: In practical terms,
it is almost certain that the amount of flying will be the maximum
permitted under the ETS, is it not; and so just charging a bit
more does not make any difference to the amount of flying that
takes place?
Mr Hanton: It will discourage
it. It will be less likely to come up to a maximum.
Q50 Mr Chaytor: Can I come back to
Vehicle Excise Duty, because you defended the Government's position
in the Pre-Budget Report to soften the increases originally proposed
on the existing vehicles and sticking with the original increases
for new vehicles. But my recollection of the evidence we have
received from the motor industry was that as a proportion of total
annual sales, new vehicles were about 2% of total sales. Given
the impact of the recession and the collapse of new vehicle sales
in the last few months, by focusing overly on a substantial tax
on new vehicles, how many years will it take to have an impact,
because presumably now it is not just 98% of vehicles in the second-hand
market—it must be higher than that as the new vehicle market
has collapsed.
Mr Buchan: Yes, I think the new
vehicle at its peak, say 12 to 18 months ago, was about 2 million
vehicles a year[3]
and total vehicle parts about 29-30 million vehicles—that
is in terms of private vehicles and company cars taken together.
That replacement rate has gone down by half. In the longer term,
structurally the new car tax has to be right. In the short term
the VED merely taxes you for owning a vehicle, so in fact it is
just saying, "you have got the vehicle; if it uses a bit
more fuel you will have to pay more just to keep it standing there";
whereas the fuel duty, which is the other aspect of this, means
that there is a direct incentive to drive that car more economically,
which is a very great possibility and can save you 10 to 15%,
and in fact we do see that. We have some data on the effect of
fuel duty since the escalator was introduced in the nineties and
we can see a division between people buying—about half are
getting more efficient cars, and driving what they have got more
efficiently the other half is driving less. It is roughly split.
I think that is the right way to go. I think you are right, obviously,
that that replacement rate will be slow, but even with that replacement
rate one needs to have the right incentive. If it was VED and
you get people going into the showroom and saying, "my annual
duty is ... " it does not impinge so directly on the decision
as saying if it goes the wrong side of the desired average, "it
will cost you £900" which is the top rate.
Q51 Mr Chaytor: Surely the other point
is that leaving aside the change in new vehicle sales, the majority
of households in Britain never buy a new vehicle; they get their
cars entirely through the second hand market, so you have a huge
number of people who are just not affected, so behaviour would
have no reason to change if they never buy new vehicles, and therefore,
are never faced with the differential tax spend. This is the point
I find hard to understand—how you are so relaxed about the
tax not being used to influence the second-hand market because
that is where most people buy their cars, and as time goes on
even more people are going to buy through the second-hand market!
Mr Buchan: Sure, but there are
two responses to that. One is that we still have a company car
purchase, which is still very, very important, and that has been
very much reformed and is still being reformed and other reforms
are in preparation. That has had the effect of reducing the average
size of company cars that are purchased significantly. In other
words, it has worked. However, it partly worked by pushing some
people out of the company car perk into looking at other ways
of things like company loans, mileage allowance, which also could
be addressed. Those purchases are now private purchases but some
are related to company finance, for example. Those purchases will
undoubtedly be influenced by a change in the actual purchase price
of the vehicle because some of that will have to be funded by
the private individual. The mileage allowances are now more or
less—you do not get more mileage allowance according to
the fuel consumption, so we have got rid of that aspect of it.
I think that will therefore influence those new car purchasers,
even though they are semi-private as well as company. It is getting
at those that are semi-private, and the modest number of people
who can afford a new car. Then the VED is even less important.
That is my response.
Q52 Chairman: The Pre-Budget Report
raised the fuel duty by 2p in the context of a 20p fall per litre
in pump prices because of the fall in oil prices. The 2p rise
is of course offset by the cut in VAT. What do you make of the
coherence of the Government's use of fuel duty as a policy?
Mr Hanton: We would say that it
is necessary that fuel duty goes up progressively to offset the
reduction of motoring costs because of technological improvements—so
this is necessary. The Government has intermittently increased
the charge, but not enough to compensate for technological improvements
and thus keep motoring costs stable in real terms. On the assumption,
which we hope will be true, that the charge will not be reduced
when VAT goes up again to 17.5%, it is faltering steps along the
road of gradually increasing fuel duty, but inadequate steps.
Q53 Chairman: It is your view that
those steps could be taken regardless of the underlying oil price!
Mr Hanton: Yes.
Q54 Chairman: What has been the effect
of the rise in oil prices and more recently of the recession on
carbon emissions from road transport?
Mr George: We know that the AA
reported, and the DfT confirmed this, that at least the second
and third quarters reflected a roughly 2% decrease in vehicle
traffic, and the AA survey of its members also reported that people
were thinking about how they travelled, switching to public transport
where possible. Stagecoach reported that their passengers had
gone up. I do not think we have got the data yet as to CO2
but we could assume therefore that there was a 2% decrease in
road transport CO2 as a result. It probably is not
quite as correlated as that! Certainly over the next year or so
we will be able to get that data together. We did see for the
first time people having motoring costs on a better parity or
more even playing field to public transport fares, which have
been rising. To give the comparison, the RAC report looking back
on 20 years—80% decrease in real terms in the cost of motoring.
At the same time rail fares went up 55% in real terms and buses
63%. Even with the high oil prices in the summer you still saw,
if not a decrease[4]
in cost of motoring only a levelling off, while you saw bus operators
putting up fares because they were paying the oil prices as well.
Until we can tackle that disparity we will not see long-term reductions
in CO2 emissions. I suppose the fluctuation in the
oil market is not something we can rely on as a means of CO2
reduction. It may achieve some benefits, but at the same time
it made it difficult for the government to introduce the 2p fuel
duty increase as well as the changes in VED because the focus
of the media and the public at large was very much on the high
cost of motoring. The price of motoring is high, and of course
year on year,[5]
but when you get such a sharp increase it feels that it is very
high and that makes it very hard to bring in the kind of taxation
measures we need. It also opened up a very interesting discussion
around this such as the fair fuel stabiliser the Conservative
Party proposed, or the Scottish National Party's stabiliser. Neither
of those is the solution but at least people are talking about
measures and about the impact of the idea of long-term high oil
prices. Of course, the recession has rapidly brought that back
down again and has probably undone all the benefits we had in
the summer as motoring became 20p cheaper in the price of fuel.
When you are getting that decrease at the pump, which is where
most people experience the cost of motoring—if you only
buy a car every few years and pay VED once a year and you buy
petrol once or twice a week, whether people go out of their way
to drive further I do not know, but certainly when prices are
high they will drive less.
Chairman: Thank you very much. We are
out of time this morning. Thank you for coming in; it has been
a useful session.
3 Note by Witness: The amount of vehicles were,
in fact, 2.5 million, not 2 million. Back
4
Note by Witness: Even with the high oil prices in the summer,
you still saw an increase, not a decrease, in cost of motoring,
then a levelling off. Back
5
Note by Witness: The cost of motoring is not high, and of course
falls year on year. During the session the witness referred to
motoring as being high, which was incorrect. Back
|
