Clause 184 — Rate of Landfill Tax

Finance Bill – in the House of Commons at 5:30 pm on 14th May 2003.

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

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

The Chancellor announced in his 1999 Budget that

"To reduce the amount of waste going to landfill, the landfill tax, £10 per tonne in 1999, will in future rise by £1 per tonne per year."—[Hansard, 9 March 1999; Vol. 327, c. 182.]

The increases made this year are the last under the £1 a tonne annual duty escalator. From 2005, the annual duty escalator will increase to £3 a tonne, with a view to reaching a rate of £35 a tonne in the medium to long term.

The United Kingdom has one of the lowest levels of recycling in Europe, with only 11 per cent. of waste recycled—well below that of many European countries, some of which recycle as much as 40 per cent. of household waste. The Government have failed to provide a coherent strategy for sustainable waste management, and we have seen an ad hoc approach, with a tax increase here, a complicated and failing tax credit scheme there and, meanwhile, landfill usage is increasing.

The Government have little hope of complying with the 1999 European landfill directive, under which the amount of biodegradable municipal waste going into landfill sites would be reduced to 75 per cent. of 1995 levels by 2006. The amount of municipal waste sent to landfill sites has increased from 21.9 million tonnes in 1999, to 22.1 million tonnes in 2000–01.

The Environmental Audit Committee recently criticised the Government's strategy, saying:

"The Waste Strategy 2000 is not so much a waste strategy but a strategy for complying with some of the requirement developed in the EU. Even with that interpretation, it has still not proved effective in delivery".

I am afraid that the phrase, "not proven effective in delivery" is rather familiar in virtually all areas of this Government's activity.

The last Conservative Government introduced the landfill tax in 1996—the first tax with an environmental purpose. We understand the need to encourage a comprehensive sustainable waste management system by promoting more recycling and less landfill. The long-term use of landfill is clearly unsustainable, and we believe that the Government should be more effective in promoting the alternatives.

The response to this measure has been mixed. The Engineering Employers Federation commented:

"The current rises in landfill tax are only acceptable if the funds raised are hypothecated directly into improving the waste management infrastructure".

The CBI said that businesses "remain to be convinced" of the need to raise the tax by £3 per tonne per year. Can the Economic Secretary confirm that the £140 million increase in landfill tax revenue scheduled for 2005–06 will go towards promoting sustainable waste management and recycling programmes? Given that the rationale behind increasing landfill tax is to ensure that the UK complies with EU legislation, surely it is vital that that money goes towards increasing recycling and improving markets for recycled materials.

The arguments against the landfill tax increase are that the increasing rate of tax could act as an incentive to move over to other forms of waste disposal, which end up being more damaging to the environment and in some cases illegal. The Environment, Transport and Regional Affairs Committee cited

"two very good arguments for the landfill tax not being increased to a much higher level without other changes taking place".

First, there is a danger that the use of incinerators may increase as landfill becomes a more expensive option, together with the problem of illegal fly tipping. How do the Government plan to avoid simply shifting the problem elsewhere and making things worse? Secondly, the increase in the tax will hit local authorities hardest. The Government's 2002 strategy unit publication, "Waste Not, Want Not" says:

"Of the total revenue sourced from active waste, approximately 46 per cent. is paid by business and the remaining 54 per cent. by local authorities . . . Like business, a rise in landfill tax will provide local authorities with an incentive to fund alternative ways of managing waste disposal".

My concern is that local authorities that cannot claim under the landfill tax credit scheme are struggling hard enough as it is. If the landfill tax trebles over the next eight years, matters will be made worse and the council tax driven still higher.

Finally, the landfill tax credit scheme, which was introduced along with the tax in 1996 and enabled landfill sites to direct part of their landfill tax liability towards funding local environment projects in return for a tax credit, has encountered high administrative costs. Overall, the scheme was deemed to be a success, but the Public Accounts Committee report identified the following problems:

"a lack of overall accountability . . . and a lack of transparency", as well as high overhead costs. Following that, the Government announced reforms in the November pre-Budget report, with the new scheme starting on 1 April, but many waste management groups have expressed concern about the new scheme. Two thirds of the money from the scheme—some £100 million—will go towards public spending to encourage sustainable waste management, but the remaining third will continue to go to local projects. I understand that local waste reduction and recycling campaigns have expressed concerns that they may lose out on funding under the new scheme.

Do the Government remember the pledges that they made in "Waste Strategy 2000", proposing to use the landfill tax credit scheme to help deliver an increase in recycling, particularly of household waste? Are WasteAware and other such schemes not recycling projects? We would contend that "Waste Strategy 2000" is in a shambles. It has failed in its piecemeal approach to sustainable waste management. According to the European Environment Agency, to meet the requirements of the landfill directive alone, the UK must divert 27 million tonnes of biodegradable municipal waste away from landfill sites. The UK will therefore need to deliver the equivalent of one new management facility, capable of processing 40,000 tonnes of waste, per week, for the next 14 years.

We have a huge problem, and the EU targets are unrealistic. Instead of working together towards the short-term goal of meeting those EU targets, the Government should embrace a long-term programme to promote recycling, the use of biodegradable materials and sustainable management systems. We would not rule out the use of economic instruments, but we remain unconvinced that increases in the landfill tax will create a sustainable waste policy and promote recycling programmes.

Like most of the Government's environment policies, the tax stems from a panic to meet the targets laid down by Europe and from the primary motivation of raising revenue. I remind the Economic Secretary of the fridge mountains, the problem of abandoned cars and the disastrous climate change levy, all of which are a result of rushed and ill-thought-out legislation. They fail to take account of the bigger picture or to address the long-term environment issues and deliver the objectives that were claimed.

We urge the Government to reconsider their policy. They should not base the tax increases on fiscal and short-term considerations, but consider them in the light of an effective long-term waste policy.

Photo of Mr Simon Thomas Mr Simon Thomas Plaid Cymru, Ceredigion

I support the clause. Despite pertinent points made by Mr. Flight, I am not sure what Conservative policy is on waste minimisation, waste reduction and recycling. However, he was right that the landfill tax is one of the longest running pieces of environmental taxation in the UK. Its relevance to the waste mountain is important, so it is vital to spend a couple of minutes examining why we need a landfill tax, the rate at which it should be set and whether it will help us to meet the Government's aims and the wider European aims to which we have all subscribed.

The landfill tax is one of the few taxes that businesses recently asked the Government to raise, and at a greater rate than proposed in the Bill. Although the hon. Member for Arundel and South Downs prayed in aid the CBI, the Economic Secretary will be aware that the waste companies wanted an accelerated increase in the economic drivers towards waste minimisation and a reduction in landfill in favour of recycling. In fact, they were a little disappointed that the Bill did not impose a greater level to reach the Government's eventual target of £35 per tonne for the landfill tax.

Those companies see clearly that we will not meet our recycling obligations and our more important European obligations to reduce the amount of waste that we send to landfill without a much stronger driver in the economic market. I would have expected the Conservatives at least to be in favour of strong economic drivers, because that is how markets work. Sometimes it is necessary to regulate markets so that they take the right direction for the greater aims of the public good.

I want the Economic Secretary to address some of the concerns of the Environmental Audit Committee, on which I serve and which recently produced a report on waste. As the hon. Member for Arundel and South Downs rightly reminded the House, that report makes it clear that the Committee thinks that the Government's approach is a knee-jerk reaction to the demands of the European Union. We did not think that their approach was anti-European. The reality is that the Government reacted to demands for which they had not properly prepared. They had not properly engaged with the EU legislation and had not thought through how it would work domestically. As a result, they have been forced to rely on a landfill tax and very little else to achieve their waste minimisation and recycling aims.

In that context, we have the unhappy news from MEPs who have served on the European Parliament's environment committee that the Government are already missing their EU targets and will fail miserably in implementing EU legislation. I hope that the Economic Secretary can give us assurances tonight that that will not happen and that the landfill tax, increasing at a set rate of progression, will achieve the aims of the 2000 waste strategy throughout the United Kingdom, not just England. The obligation to represent the UK in negotiations on EU targets involves not just Westminster but the devolved Administrations.

Finally, to emphasise the point made by the hon. Member for Arundel and South Downs, the landfill tax may encourage less sustainable methods of waste disposal, and I am particularly concerned that there may be an increase in incineration. That is no reason to argue against the landfill tax. Indeed, it is a reason to argue for an incineration tax or the correct regulation of incineration to ensure that such an increase does not happen. However, I am concerned that we may rely on a single economic instrument that is not designed to encourage recycling or waste minimisation but to stop waste going into landfill. Are we sure that the market and people responsible for the disposal of waste will make the necessary jump?

We cannot dispose of things in landfill and cannot go ahead with the co-disposal of hazardous waste in landfill, but have we ensured that local authorities and waste disposal companies will take the opportunity to achieve waste reduction, minimisation and recycling? Have we ensured that the landfill tax will prevent the use of other methods of disposal such as incineration? That is not yet clear in the Government's approach to the issue. An economic driver such as the landfill tax is undoubtedly the correct approach, but the Government have not yet thought through its impact on the market—it is a suck-it-and-see approach. I am concerned that many local authorities are already missing their recycling targets, as has been admitted in evidence to the Environmental Audit Committee. We would be in an even worse position if we missed the target set by the European Union. I hope that the Economic Secretary can give guarantees that the Bill will bring about what other areas of government aim to achieve—greater use of recycling, less waste going to landfill and a reduction in the waste produced in the first place.

Photo of George Osborne George Osborne Opposition Whip (Commons) 5:45 pm, 14th May 2003

As my hon. Friend Mr. Flight pointed out, clause 184 points the way to substantial increases in the landfill tax. The clause proposes that it should increase by £1 this year, £1 next year and, from 2005–06, by £3 a year so that, according to the Government, it will be levied at £35 a tonne. That is a substantial increase on the original tax introduced by the Conservative Government in 1996, which was just £3 a tonne. Before the clause passes into law, we should reflect on the original assumptions behind the decisions made by the then Chancellor, my right hon. and learned Friend Mr. Clarke, when introducing the tax.

The first assumption was that the landfill tax would be offset by a compensatory reduction in employers' national insurance. Indeed, in his 1994 Budget, my right hon. and learned Friend said:

"I am determined not to impose additional costs on businesses overall . . . I want to raise tax on polluters to make further cuts in the tax on jobs."—[Hansard, 29 November 1994; Vol. 250, c. 1098.]

There is a striking contrast with this year's Budget. Instead of a compensatory reduction in employers' national insurance, there are substantial increases. Mr. Thomas did not give the landfill tax the credit that it is due. It is not just one of the oldest environmental taxes, it was the first tax with an explicit environmental purpose. The assumption—pretty radical at the time—was that a landfill operator could offset any contributions that it made to an environmental charity or voluntary group against its liability for landfill tax up to a specified limit. Indeed, it could claim tax credits for 90 per cent. of its contributions to charities and voluntary groups up to a total of 20 per cent. of its overall landfill tax bill in any one year. The nature of those environmental bodies was spelt out—they were non-profit-making bodies, they were not controlled by central or local government and they were often local schemes. They were administered by Entrust, a central Government regulator.

Since landfill tax was introduced and the landfill tax credit scheme came into operation, more than £400 million has been contributed to environmental bodies, including, in 2000–01, the most recent figures that I have seen, £109 million to those charities. Substantial sums have been given to very small local groups, which has been a huge boon to such groups and charities. It has enabled them to be set up and has done an enormous amount of good locally in, I would guess, every constituency.

There is a philosophical point here. This is about strengthening civil society. It is about Burke's "little platoons", and about supporting voluntary groups, local charities and so on. As a member of the Public Accounts Committee, I am the first to accept that there have been problems with the scheme. The Committee looked into the matter, and I have its report. There were problems with the lack of oversight, accountability, transparency and so on. It is all spelt out in the Committee's report. However, the problems lay with the Government, the regulator and the way in which the scheme operated, not with the principle of the scheme. That is why I am sad that, instead of trying to fix the problems and stick with the principle, the Government have largely decided to abandon the principle altogether. That is a tragedy, not least because the Government recognised in their pre-Budget report what a good thing the scheme has been. The report stated:

"The Government recognises that the Landfill Tax Credit Scheme (LTCS) has supported many worthwhile community and environment projects that have improved the quality of the environment at the local level . . . The scheme has also been successful in generating local community involvement in such projects."

If we are not here to support such schemes, what are we here for? As I said, it is sad that the Government are largely abandoning the scheme.

That has caused enormous concern in groups in my constituency and in constituencies across the country. The Economic Secretary is proposing, in effect, to remove two thirds of the funding of the scheme—funding raised directly by clause 184—and to put that money into general public expenditure, although he says that it will be hypothecated to environmental management and so on within centrally managed expenditure. Nevertheless, £60 million or more, which is currently given to the charitable and voluntary groups, will go straight into the Treasury coffers.

When I wrote to the Minister about the matter, as no doubt did other right hon. and hon. Members, he replied on 22 January and, I think, gave the game away. He wrote:

"This change reflects the Government's conclusion that public spending will be a more effective way of providing strategic direction to sustainable waste management."

That tells us all we need to know about the Government. They think that Whitehall knows best. They think that their public spending is a more effective way of delivering change on the ground.

The charities and environmental groups that have written to me do not accept that, nor do the groups that will lose out most—those involved in activities such as research, development, education and information, all of which are vital, as the hon. Member for Ceredigion said, to a change in attitude in our country towards these issues.

I shall briefly further detain the House, although I know that the nationalists are keen to get on to their whisky clauses. Waste Watch has written to me and probably to many hon. Members. It runs the Cheshire Schools Waste Action club, which, it points out

"is a successful education project, which increases awareness of waste issues and supports schools in taking action to reduce their waste outputs. Projects have achieved between a 30–80 per cent. reduction of waste within schools."

Schoolchildren will take that learning with them for the rest of their life. Waste Watch comments:

"We will lose the opportunity to enable staff and children in Cheshire schools to reduce their waste."

The Cheshire Landscape Trust has brought to my attention a number of serious concerns, and I should be interested to hear the Minister's response. The trust points out that

"by moving some £100 million from the private to the public sector, to fund waste management projects, the public sector could lose the substantial amount of matched funding, which is currently running between £400 and £700 million."

Again, that should be the sort of thing that we want to encourage. Surely, we want to encourage local groups to work with local businesses and to bring in money through match funding. According to the Cheshire Landscape Trust, that will be lost. It asks,

"how will local communities, universities and other research establishments who are currently undertaking Research and Development projects access funding for sustainable waste management projects in the future?"

It goes on to express another very serious concern, noting:

"One estimate puts the number of job losses due to this transfer of funds away from Environmental Bodies to be 5000. This includes jobs created on and through projects as well as employees working for Distributive Environmental Bodies. For this trust, the proposed changes would put us in a very difficult position with possible job losses."

Finally, I wish to refer to an organisation that no right-thinking Member of Parliament could ignore—the Cheshire Federation of Women's Institutes. The Prime Minister learned to his cost what happens when one puts the women's institutes' backs up. The federation makes the point:

"The transfer of funds away from Environmental Bodies, many of which bring local knowledge to the allocation of the funds, means that local involvement and community participation will be lost."

It asked me to bring those concerns to the attention of the Government and the House.

These are very serious matters. We are talking about good-minded people who give their time voluntarily in our constituencies to work for local environmental groups and improve our local environment for everyone. Those groups will lose out to the tune of tens of millions of pounds.

Photo of Alan Whitehead Alan Whitehead Labour, Southampton, Test

The hon. Gentleman speaks as though the entire amount that is currently gained in tax forgone will suddenly disappear. Does he accept that, even under the proposals, most of the money that currently goes into the scheme will remain? The money to which he refers relates to the increase and is not taken away from the present amount. Does that not mitigate his case that the money is disappearing from the groups that he is talking about?

Photo of George Osborne George Osborne Opposition Whip (Commons)

I accept that a proportion of the money will remain, but it is quite small; indeed, it will be less than half. According to the letter that I received from the Economic Secretary, approximately £47 million will remain in the scheme annually, but £100 million will be taken out. Only a third of the money will remain. Given the environmental credentials of Dr. Whitehead, I wonder whether he supports the change. Does he think that the Government would be better at spending the money centrally than local charities and environmental groups on the ground? I would be surprised if he took that view, as it is certainly not my view or that of the groups involved.

I ask the Economic Secretary to reflect on what I have said and deal with my points, some of which he will no doubt have heard about from environmental groups. In particular, will he address the loss of match funding and the question of where the groups will get their money? I know that he is phasing in some of the changes, but in a year or two those involved will be hit with a big shortfall. Will he also comment on the serious job losses that at least one organisation that has written to me predicts?

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

The clause is relatively narrow in the context of this rather wide debate. In line with the escalator that we announced in 1999, it increases the standard rate of landfill tax by £1 a tonne to £14 a tonne, with effect from 1 April this year, and by a further £1 a tonne to £15 a tonne, with effect from 1 April next year.

The Government are committed to a sustainable approach to waste management. The increases will encourage waste producers to seek more environmentally friendly alternatives to landfill, as they will encourage producers and the waste management industry to switch from landfill to minimising waste and increasing re-use and recycling rates—the very purposes that Mr. Flight urged us to adopt.

The increases are part of a principled national policy to reduce the volumes of waste going to landfill, and they are complemented by additional public spending on sustainable waste management that was announced in the House on 6 May by my right hon. Friend the Secretary of State for Environment, Food and Rural Affairs.

The hon. Member for Arundel and South Downs asked about revenue from increasing the landfill tax by £3 per tonne in 2005–06—not in 2003–04 or 2004–05, which are covered by the clause. Although that will make a significant contribution to the increased investment, it is not directly hypothecated. However, the Government made a commitment in the pre-Budget report and the Budget that additional revenue from the increases in the standard rate would be recycled to business.

Discussions with business and other stakeholder groups have already shown that there is broad support for a package of measures, including some tailored to those sectors facing the greatest waste management challenges. We will continue to pursue that package of measures through developing the options and consulting further, and we plan to make decisions to the time scale in the pre-Budget report and the Budget.

The hon. Gentleman raised the spectre of fly tipping connected with increases in the landfill tax. There is no evidence to justify that. A Tidy Britain Group survey in 1999 showed that the majority of fly tipped waste is household waste. As householders do not directly pay the landfill tax, it is unlikely to be the cause of the increase in fly tipping. That said, we take illegal waste disposal by fly tipping very seriously. The penalties are now severe: they include unlimited fines and up to two years in prison.

The hon. Gentleman and Mr. Thomas asked about incineration. As announced in Budget 2003, the Government have commissioned a review of the environmental and health effects of all waste management and disposal methods, and we aim to report on its findings later this year. The case for using economic instruments in relation to incineration will be considered in the light of that work and in consultation with those with an interest in the field.

The hon. Member for Ceredigion urged the Government to increase the rate of landfill tax more quickly in order sooner to reach what we set as the medium to long-term level of £35 per tonne. Our research and the recommendations of several reports suggest that that level will result in alternatives to landfill being more widely available and becoming more economically viable. As the hon. Gentleman will know from his work on the Select Committee on Environmental Audit, that view is widely shared. Given the lead times for investment, however, the most important factor in stimulating a shift in behaviour away from landfill is not the current rate of the tax, but the confidence, knowledge and certainty that it will reach the medium to long-term level of £35 per tonne. That gives the lie to the accusation by the hon. Member for Arundel and South Downs that we have a short-term set of policies.

I have been fortunate enough to give evidence to the Environmental Audit Committee a couple of times. I say to the hon. Member for Ceredigion that I am confident that the landfill tax increases, alongside the other policy measures that we have introduced or plan to introduce, will deliver a waste policy that is better suited to Britain, and which increases recyling and re-use, minimises waste production and helps us to make the reductions in volume that we need to meet our European Union targets.

The landfill tax is not our only measure. We recently passed legislation to introduce a scheme of tradeable landfill permits, which will help. We have substantially increased public spending through the EPCS—environmental, protective and cultural services—block grant to local authorities and the transfer of the landfill tax credit scheme to public spending. That will help. We have also announced plans for a performance fund for waste management for local authorities, and that, too, will help. All those measures will play an important part in helping the United Kingdom meet our targets.

Mr. Osborne asked about the national insurance contributions increase, which was introduced in last year's Budget and took effect last month. It will help fund the 7.5 per cent. real-terms increase each year in spending on the national health service from 2002–03 to 2007–08. It has nothing to do with the landfill tax. However, the hon. Gentleman is right that when the previous Government introduced the landfill tax, it was accompanied by a 0.2 per cent. cut in employers' national insurance contributions.

The Government estimate that in 2003–04, the cut that was originally introduced with the landfill tax will be worth approximately £780 million, compared with about £670 million raised by the landfill tax. Next year—2004–05—the NIC cut will be worth approximately £820 million, compared with £745 million raised by the landfill tax. The revenue from the landfill tax has yet to recoup the original cut to employers' national insurance contributions.

The hon. Member for Tatton is a member of the Public Accounts Committee and knows the flaws in the design of the landfill tax credit scheme better than many other hon. Members. He knows that flaws in its design caused the problem, because the Committee examined the matter, as did the then Select Committee on Environment, Transport and Regional Affairs. The problem arises from the design rather than the principle of the scheme. The Government strongly support the principle; that is why we have retained it for non-waste projects. We shall not abandon it, but we will transfer the funding for category C and CC projects to public spending because that will deliver a more strategic, sustainable waste management policy and programme in this country. The hon. Member for Arundel and South Downs urged us to do that.

The hon. Member for Tatton also knows that one of the flaws in the design and operation of the landfill tax credit scheme since its inception has been a chronic lack of information on what the money is being spent. He asked about match funding, but we face a lack of information and evidence on which to assess some of the individual claims and stories that we hear about projects. Glasgow Caledonian university has conducted the only systematic research on that. It suggests that the rate of match funding for waste projects as well as those in other categories of the landfill tax credit scheme is significantly below the levels that the hon. Gentleman cited.

Although it is not directly covered by the clause, Committee members may find it helpful if I say a little about our plans for the standard rate of landfill tax after the two years to which clause 184 applies.

Photo of George Osborne George Osborne Opposition Whip (Commons) 6:00 pm, 14th May 2003

Before the Economic Secretary moves on, will he deal with the specific point about the loss of match funding and jobs that many groups and voluntary organisations will experience? I presume that people have written to him about that.

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

I do not know whether the hon. Gentleman missed it, but I have dealt with match funding. I believe that he refers to category C and CC schemes, although he was not explicit. They deal with waste, and their funding has been transferred to public spending. I have written to him and other hon. Members and made a statement in the House and he therefore knows that we have put in place for this financial year a transition scheme to help such projects continue and reach a point where they can sensibly plan for a continuing operation after this financial year if they choose to do that. That will play an important part in providing security, certainty and the ability to plan in the long term for the projects about which the hon. Gentleman is concerned.

As we have already announced, the standard rate of landfill tax will increase by £3 per tonne to £18 per tonne in 2005–06, and by at least £3 per tonne in the years thereafter, on the way to the medium to long-term target of £35 per tonne. These higher rates send a clear market signal, and announcing them in advance maximises the effect. The Government have discussed with business and others how to make the increases revenue neutral to business as a whole. I have explained that the preferred options will now be developed, and decisions on the package of measures will be announced in the 2003 pre-Budget report. On that basis, I commend the clause to the Committee.

Question put and agreed to.

Clause 184 ordered to stand part of the Bill.