Clause 14 — Vehicle Excise Duty: Rates

Finance Bill – in the House of Commons at 6:00 pm on 13th May 2003.

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Question proposed, That the clause stand part of the Bill.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

Clause 14 amends the general rate of vehicle excise duty and the specific rate for private and light goods vehicles with effect from 1 May this year. The Committee need not be detained long on this clause, but there is a point that requires consideration.

The vehicle excise duty on cars and vans increased by £5, which represents the revalorisation rounded to the nearest £5. The increase impacts lower capacity vehicles and lower emission cars by a larger percentage. For example, a car of less than 1,549 cc has seen general VED increase from £105 to £110, an increase of 4.8 per cent., whereas a car of more than 1,549 cc has seen general VED increase from £160 to £165, an increase of 3.1 per cent. I understand, of course, that the differential is due to the £5 rounding.

Not only are both increases above inflation—a fact no doubt noted by drivers up and down the land—but the £5 increase penalises cleaner cars to a greater extent. Recognising that the £5 is the normal rounding, the Red Book that accompanied the Budget stated:

"The Government has reformed vehicle excise duty (VED) to provide incentives for motorists to choose the least polluting vehicles"

—a worthy aim for which there is support across the Chamber, as we look to the environmental responsibilities of our generation towards those who come after us. There is a need to provide incentives to buy less polluting cars, but the £5 increase, which I recognise has been accepted practice, runs contrary to that need and has the greatest impact on the least polluting vehicles. It would be possible to specify a precise number instead of rounding up the level to £5, but I understand the efficiency of having a round number in paying VED when one goes to the post office or wherever else for renewal.

John Dawson, director of the AA Motoring Trust, recently said:

"The news on road tax is disappointing because we had hoped that he"— the Chancellor

"would allow these new bands, which he has only recently set, to bed in with drivers."

While that is a supplementary argument that reflects disappointment on the part of the AA, it reinforces the fact that there is disappointment generally not only that the new bands have not been allowed to bed in with drivers, but that the increase has a discriminatory impact against the least polluting vehicles.

I invite the Minister to accept that one of the ways in which the problem could most easily be addressed is by deploying the easy and rather more normal mathematical approach of rounding down the figure rather than rounding it up. Such an approach would have produced numbers that helped to secure the differential with which the Government are seeking to incentivise people who wish to use the least-polluting vehicles. It would also have been in line with the objectives that the Government have set. As I said, we do not take issue with those concerns—far from it. As Conservatives, we want the best conservation and it is our approach to take our environmental responsibilities seriously. Incentivisation is being reduced because the figure has been rounded up, but the problem would be simply cured by rounding it down.

I do not wish to detain the Committee and I do not expect to divide it, but it is important that the Economic Secretary acknowledges the problem. Perhaps he will also take the opportunity to explain how he will address it in future, if not this year.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

The motor industry is worth some £44 billion a year in this country and it contributes 3.5 per cent. of UK GDP and supports 827,000 jobs. That makes it a pretty important part of our economy. In 1997, the Chancellor took £33.6 billion from motorists. In 2003, he is taking £42.6 billion. We have seen an average annual growth rate of 4 per cent. at a time when inflation is 2.4 per cent.

Vehicle excise duty in this country is still far higher than in our European neighbour countries. Even with a freeze for British hauliers, they could increasingly relocate to the continent to avoid paying our exorbitant duty. The Chancellor needs to take note of the importance of interaction between the tax system and the single market so as not to lose tax take.

The duty is not having much effect in encouraging motorists to buy cleaner cars or in discouraging them from buying polluting ones. Some 80 per cent. of best-selling cars are currently in the two middle categories—B and C. The Toyota Prius and the Honda Insight, which are in the AA category, last year managed 291 and 28 sales respectively. As GreenConsumerGuide.com says, vehicle excise duty

"should be seen as the minor device that it is, not elevated to become the government's flagship green motoring policy".

The motoring industry needs stability, so the Government must commit to having a stable regime over a long period if cleaner fuel incentives are to have any effect. Currently, only 10 per cent. of cars on sale qualify for the new category, and they are unpopular as they suffer from relatively high prices in respect of the performance of comparable cars. The Chancellor has refused to say what will happen beyond 2004. I suggest that that is inadequate for an industry that is understandably suspicious of this Government. In effect, the Government expect the car industry to respond in line with their changes to the rate of tax every year, but car production has to be phased over many years. That is why, once again, the Government's green credentials are being battered.

Photo of John Gummer John Gummer Conservative, Suffolk Coastal

I declare an interest, in the sense that I try to help a number of companies to improve their environmental performance.

I merely wish to say to the Minister that my hon. Friend Mr. Djanogly made a crucial point about the need for a system that enables the car industry to know where it stands and encourages it to provide more continuously the green answers that are required. In that, as in several other areas, the Government have not provided a sufficiently clear and long-term policy that will encourage people to undertake the necessary investment. If fine-tuning takes place every year, but there is no permanent long-term system, we will not achieve the environmental ends that are desired by hon. Members on both sides of the House—although there are not many of them on one side to join in with the discussion.

I hope that the Minister will give an undertaking that the Chancellor will take this issue seriously, overcome the demands of the Treasury moguls who always dislike the idea of such long-term planning, and ensure that the industry knows that for a significant number of years we will have a policy that increasingly makes the purchase of vehicles that are least likely to pollute a valuable and continual offering to the public.

Photo of John Baron John Baron Conservative, Billericay

I welcome you to the Chair, Sir Michael.

Clause 14 increases vehicle excise duty by £5 for every car and van, although the rate of duty for lorry and motorcycle drivers has been frozen. The imposition of that tax, which will affect the majority of road users, is very wrong. Coming on the back of the already crippling cost of petrol in this country, this tax rise is symptomatic of the fact that this Government are at war with motorists and are failing in their commitments to invest in our roads. A combination of sky-high taxes and rising crude oil prices means that the car has already become the most expensive item in the household budget, hitting hard-working individuals, families and pensioners in the process.

Our fuel tax is the highest in Europe. The average UK retail price of diesel is more than 20p per litre higher than any other EU country, and under Labour the price of petrol has increased by nearly £1 a gallon. The combination of those costs has had profound implications for motorists. The total tax take, as my hon. Friend the Member for Huntingdon suggested, has gone up by nearly 50 per cent. since 1997, to an estimated £43 billion in 2002. The average annual petrol and diesel bill is about £250 a year higher under this Government.

While costs soar and the Government continue to treat the road user as a convenient way of imposing taxation by stealth, drivers are not experiencing any benefits in turn. The Government have failed to meet their road-building programmes. They have cut road spending and cancelled vital road improvements. Highways Agency figures show that not one inch of new bypass was built anywhere in the UK during 2001. Certainly, in my constituency of Billericay and the surrounding district we are seeing very little by way of road improvements. The consequence of that failure has been a continued increase in congestion. The statistics are damning. Since 1998, average journey times have risen by 16 per cent. Since 1997, motorway congestion is up by 250 per cent. Those are Government figures. On top of that, the Government recently announced that their pledge to reduce road congestion by 5 per cent. by 2010 is unlikely to be met. Instead, they suggest that the best they are likely to achieve is a situation in which congestion in 2010 is no worse than it is now.

In short, the Government are abusing the motorist. The highest fuel taxes in the western world pay for the worst maintained roads in the EU. In south Essex, people are experiencing little benefit from all the taxation. Indeed, the reverse is true. The Government should listen to the legitimate anxieties of motorists throughout the country. Costs are unacceptably high and the latest increase will only make matters worse. 6.15 pm

Photo of John Horam John Horam Conservative, Orpington

I support the points of my right hon. Friend Mr. Gummer and of my hon. Friend Mr. Djanogly, who stressed the need for a long-term strategic approach to taxing motor vehicles. At one stage in the past, we had almost all-party support for the fuel duty escalator. My right hon. and learned Friend Mr. Clarke instituted that when he was Chancellor and the current Chancellor continued the policy until it was aborted at the time of the famous fuel protests. We all understand why that happened. The policy was pushed too far in an extreme way and the Government undoubtedly learned some lessons.

However, the downside of the experience is that there has been no subsequent strategy, simply a series of ad hoc adjustments. I accept that many go in the right direction and try to prevent people from buying cars that have higher emissions. That is admirable, but the policy has not been strong enough or clear enough to enable the consumer, let alone the industry, to work out a long-term strategy.

As my hon. Friend Mr. Baron said, the Government's transport policy is a mess. If anything is worse than the policy on motor cars, it is that on transport in general. The original plans that the Deputy Prime Minister made when he was in charge of such matters have clearly been shot to ribbons, and nothing as coherent has been proposed subsequently. The Government have the opportunity to tackle the matter through taxation. They expressed their aspirations to act on that in their recent document, "Taxation and the Environment". They have done some good things, but they should adopt a much stronger and more strategic approach to the issue.

Photo of John Healey John Healey The Economic Secretary to the Treasury

The clause introduces a new rate of vehicle excise duty for cars and vans from 1 May. Rates for most car and van owners will increase in line with inflation, rounded up to the nearest £5. That follows past practice when increasing VED rates in line with inflation. Consequently, no motorist will pay more than £5 more.

The clause also introduces a new lower triple-A VED band for the least polluting cars: those with carbon dioxide emissions of 100g per kilometre or less. Motorists with cars in that band will be able to pay up to £110 less than motorists who pay the highest rate of VED. That further improves the incentives to choose less polluting cars.

I acknowledge the point of Mr. O'Brien, although I do not accept that it is a problem in the way he describes. The Government have carefully targeted motorists who use fuel-efficient cars for reductions in car VED. The changes in clause 14 mean that there is a minimum difference of £90 between the top and lower bands in the new system. Since 1997, the average car VED bill has fallen by £24 in real terms and £8 in cash terms. Those are reductions of 16 per cent. and 5 per cent. respectively.

Mr. Djanogly, Mr. Gummer and Mr. Horam, who chairs the Environmental Audit Committee, all stressed the need for stability and a long-term approach to trying to influence purchasing decisions and thereby the beneficial impact on the environment that we want to achieve. May I say to all three Members that, in making policy in this area, we are mindful of the need for stability? That is one of the reasons why we announced the levels of company car tax a full three years in advance, so that purchasing decisions, lead times and predictability could be as advantageous as possible.

The new band demonstrates that, in this area of VED, we are also taking a long-term approach to encourage the use of cleaner vehicles. The hon. Member for Orpington and the right hon. Member for Suffolk, Coastal will know that, in the Government's powering future vehicles strategy last year, we set ourselves the target of seeing 10 per cent. of new cars sold having carbon dioxide emissions of 100g per kilometre or less by 2012; that is the very rate that we are now setting in the triple-A band.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

As I explained in my speech, last year only 350-odd cars in the new band were sold. Clearly, this has not caught on in a massive way. Can the Minister give the House an assurance that the Government are now taking the issue of supporting the environmental cause in relation to cars slightly more seriously than he has described so far?

Photo of John Healey John Healey The Economic Secretary to the Treasury

I think the hon. Gentleman is making my point for me. This structure for VED is not designed to reflect current purchasing decisions and choices. It is designed to build incentives for the longer term, and to encourage more people to buy and use more fuel-efficient cars in the longer term.

We have begun an evaluation of the CO2-based VED system, which is due to be completed by the autumn. It will focus on the impact that the new system is having on consumer choices, as well as on the impact on the environment. It will also take into account the concerns that we have heard from the industry. On that basis, I commend the clause to the House.

Question put and agreed to.

Clause 14 ordered to stand part of the Bill.