Clause 5 — Rates

Orders of the Day — Finance Bill — [1st Allotted Day] – in the House of Commons at 4:36 pm on 27th April 2004.

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Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary 4:36 pm, 27th April 2004

I beg to move amendment No. 2, in page 4, line 9, leave out "£0.0664" and insert "£0.0435".

I have no interest to declare—so far as I am aware—beyond having a very large rural constituency with a coastline. Many of the farmers and boat-owners who live there will be hit by the red diesel fuel hike.

I want to begin by making a few general observations about clause 5, and in particular about the scale of the hikes involved and the enormous amount of tax being raised. The clause raises a further £1.6 billion in excise from fuel duties, nearly £1 billion of which is over and above revalorisation. These are very large increases in taxation on millions of people. There is an increase from 47.1p to 49p per litre for both low sulphur petrol and diesel, and an increase for fuel oil for home heating of 1p above revalorisation. Of course, all duty increases are to be frozen until 1 September 2004, as the Economic Secretary will doubtless point out in a moment. But as the chief executive of the Road Haulage Association said recently, this freeze

"serves only to delay the pain. Come September, UK road hauliers will be operating at an even greater disadvantage compared with their foreign competitors".

We will return to the issue of biodiesel when we go Upstairs into Standing Committee. The only point that need be made today is that maintaining the 20 per cent. incentive for biodiesel does little or nothing to encourage its use, as my right hon. Friend Mr. Jack—unfortunately, he cannot be here today—so clearly illustrated in a speech last year. Everybody who has looked at this issue agrees that the differential is too small to be meaningful. Yesterday, the Government published a consultation paper the title of which—"Towards A UK Strategy for Biofuels"—admits as much. In other words, there is no strategy at the moment. Regrettably, the consultation paper tries to argue that a differential of 20p might work, but nobody else thinks that such a differential will be enough.

My amendment seeks to highlight the hike in red diesel, which dwarfs even the large hikes that will occur elsewhere as a result of the clause. The Bill proposes increasing fuel duty on red diesel from 4.22p to 6.64p per litre. That is an increase of 57 per cent.—a huge hike—which will come into force on 1 September. The purpose of my amendment is to ensure that the rate of duty on red diesel increases not by 57 per cent., but broadly in line with inflation.

Of course, this is the second large hike: last year's Budget imposed a hike of 35 per cent. Indeed, the Government are accelerating the rate of increase. Last year, there was a 1.1p increase, and this year there was a 2.4p increase; I wonder whether there will be a 3.7p increase—if the Government get the chance—next year. There is a policy at work of steadily raising the tax on red diesel and narrowing the differential, but it is not being articulated as such. I shall come back to that point in a moment, and consider whether there is what amounts to a policy and whether it is in fact coherent.

This is a very large revenue-raising measure indeed. I estimate that increasing the fuel duty for red diesel to 6.64p per litre will raise about £141 million in a full year, and I should be grateful if the Economic Secretary confirmed that figure. That estimate assumes no behavioural effects, which, of course, there will be. People will use less red diesel; indeed, raising £140 million in this way will cripple some. They will either go out of business—it will be the straw that breaks the camel's back—or will simply use less red diesel.

It is worth looking into who is going to pay the £140 million that will be raised. Red diesel is used primarily by farmers in tractors and other off-road vehicles; by the quarrying industry, so building costs will go up; and by boat users. I have not seen an accurate breakdown of the share of the burden between those groups, but I hope that the Government have, if not a precise view, at least an estimate of the share of the burden. I would be grateful if the Minister could provide the House with a breakdown. If they can give me that information, it will be a sign that they have thought carefully about this. It is safe to say that everyone will be hit and that some will be badly hit. I should like to discuss two groups that will be particularly hit by the hike.

First, there is the motor boat and yachting industry. It is a large and growing industry, particularly significant in my constituency, and subject to vigorous global competition. The increase will reduce its competitiveness. As the Economic Secretary knows, the leisure boat industry also benefits from an EU derogation from harmonisation of fuel duty for a transitional period, so is the hike part of the preparation for the removal of that derogation? Do the Government intend to negotiate an extension of the derogation, which expires at the end of 2006? Will the hike in red diesel duty be seen as the harbinger of further, even larger, increases for the leisure boat industry? Many people will be listening to the Economic Secretary's reply.

Farmers will be the most gravely hit group. Many farmers in my constituency are, in effect, small business men. They are just recovering from a ghastly crisis of many years. Farm incomes have more than halved over the past 10 years. There has been a deep and prolonged recession in the industry. Farmers earn, on average, only half the average national wage. The most crucial consideration—I hope that the Government start to think it through—is that now is not the right time to clobber people in the agricultural sector, who have already been hit so badly. I believe that doing so is an insensitive move—and it will be seen as such.

Why are the Government acting in this way, and do they have a policy? The stated policy for the hike that was given last year was:

"We understand the value of the rebate to those who depend on it, but we are keen to pursue and meet our environmental objectives."—[Hansard, 13 May 2003; Vol. 405, c. 255.]

In other words, it is viewed as an environmental measure, but the trouble is that that argument does not square with the Government's stated objectives and means of achieving them, as set out in the policy document, "Tax and the Environment", which was released at the time of the pre-Budget report of 2002. To the few Members present in the Chamber, I would particularly commend page 28, paragraph 6.19, of that document, which makes it clear that Government policy is quite different from the apparent policy for red diesel.

That document argues that the best way to meet environmental objectives is to tax vehicles that make use of the road system. After all, they are the ones that contribute most to pollution, congestion, noise, accidents and damage to roads. I believe that that is a reasonable viewpoint. The logic of the red diesel differential is, by implication, exactly the same. The vehicles that use red diesel are not road vehicles, so they should not be subject to the same level of tax.

It is true, of course, that red diesel contributes more pollution pro rata than forecourt diesels and the ultra-low sulphur fuels, but even that argument does not wash very well. We are increasingly told that it is other particulates, not just the amount of sulphur, that matter most. In any case, if the argument were environmental, all the logic of the Government's own policy documents would point to increasing road fuel duties by slightly more. I do not advocate that, but it would be a way for the Government to find the extra £140 million. However, they have not done that.

In addition, the Government have destroyed what remains of the environmental argument for a hike by raising the rate for ultra-low sulphur red diesel by the same amount as the more environmentally unfriendly variety. What, therefore, remains of the environmental argument for raising the red diesel rate? I think that it hardly exists as an argument.

Environmental concerns have nothing to do with this proposed hike. It is a tax grab on groups, such as farmers and boat users, about whom the Government do not care much. After the tax revolt of 2000, the Government regard them as an easier target than road users.

The truth is that the Government need the money. Tax revenues are not as high as forecast, even though growth in the economy remains strong. The Chancellor has already spent the money that will be obtained, as he cannot afford to renege on the very large increases in public spending that he has announced. A number of people will have to pick up the tab for the shortfall. One such group is made up of boat users, members of the quarry extraction industry, and—most important of all—farmers.

Instead of producing all their other explanations for the narrowing of the differential, the Government would have done far better simply to say, "We need the money." I hope that when Conservative Members occupy the Government Benches again—and that may be sooner than people think—we will have the courage to say that, when we come to the House with proposals for tax increases whose main purpose is to enable us to get our hands on the money.

In 1981, the then Conservative Government introduced a large rise in fuel duties, and the Chancellor at the time had the courage to say, "We need the money." However, after another Conservative Government raised fuel duties in 1995, the environmental argument was peddled a little. That did not cut much ice with the current Paymaster General, who is sitting opposite me. On 23 January 1995, she told the House of Commons:

"Pitching the . . . tax rise as an environmental measure is cynical".

That is pretty much what I think about the Government's claim that the red diesel rise is an environmental measure. I hope that they abandon that argument.

Not all environmental arguments for hikes in fuel duties are bogus. In fact, there is much that is good in the Chancellor's 2002 document, to which I referred a moment ago. Nor are other arguments for narrowing the differential between excise levels on red diesel and road diesel always—at all times, and in principle—invalid. There may be something to those arguments, but raising red diesel duty now takes a great deal of justifying. It will hit a lot of vulnerable people who have had a very tough time already. As the Paymaster General also said on 23 January 1995:

"People living in rural areas will be badly affected."—[Hansard, 23 January 1995; Vol. 253, c. 99.]

I agree with that. We should reject this hike. If the Government persist with it, I shall be forced to press the amendment to a Division.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury 5:00 pm, 27th April 2004

I shall be fairly brief, as Mr. Tyrie has set out the case quite clearly. He made his concerns clear, and even managed to mention his constituency interests in respect of the leisure boat industry. He did that very effectively, and I commend him for it. I promise the Committee that I shall not speak at such length about my constituency interests in agriculture but, as the hon. Gentleman said, the proposals would have a very real effect on that sector.

I have two concerns about the measure. First, as the hon. Member for Chichester said, it is a tax grab masquerading as an environmental measure. The relevant line of the Red Book increases revenues by some £450 million over a three-year period. That is a very significant amount of money. If the Government see the proposal as part of an environmental strategy, there is no reason why the increased revenue could not be offset in some other area to stimulate more environmentally helpful activities.

The second reason for concern is the sheer size of the increase—57 per cent. on the duty for red diesel. That is a huge rise in just one year, and we hoped that the Treasury would see the advantages of moving tax policy in much smaller increments, particularly when changes of this type have a big impact on particular sectors. The hon. Member for Chichester mentioned the impact on farming, and that sector has estimated that the change will add 10 per cent. to on-farm fuel costs, which is extremely damaging at a time when agriculture has been under such pressure for a number of reasons, including depressed prices of many products and commodities. We would hope, therefore, that a change of this type would be accompanied at the very least by some measures to offset the impact on the farming sector.

Another area of concern, referred to by my hon. Friend John Thurso at the time of the Budget statement, is the potential impact on the railway industry, which also uses red diesel. The change will increase costs in a sector of the economy that should have better environmental and lower pollution characteristics than other parts of the travel sector, and it is in that sense a retrograde step. We would have expected the Government to take offsetting action to stimulate environmental improvements elsewhere.

Our concerns, therefore, are the size of the tax grab, the fact that money has not been switched to other sectors to compensate some of those who have lost out, and to stimulate other environmental improvements. We also think that the Treasury should seek to avoid the magnitude of the rise over a short. I have no doubt that the Minister will be unwilling to rescind the measure, but it is regrettable.

Photo of Robert Smith Robert Smith Opposition Deputy Chief Whip (Commons)

I want briefly to reinforce the argument against such a large rise in a rate of duty in just one year without a clear strategy behind the rise or a clear indication of the principles on which people should plan. Mr. Tyrie rightly highlighted the leisure boating industry, and as treasurer of the House of Commons yacht club I can certainly reinforce that concern. However, all small boat users, leisure and commercial, will be affected, and while larger fishing boats can reclaim duty, the smaller fleets, which are lower users, will be hit.

Will the Economic Secretary clarify whether red diesel is used for heating, particularly in large public buildings such as rural hospitals and schools? Will they be hit by the duty increase?

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

This has been a short but interesting debate on the range of issues that arise from hydrocarbon oil duties, which are dealt with in amendment No. 2 and clause 5. In considering the amendment, it is important to bear it in mind that the main rate of duty on ultra-low sulphur diesel is 47.1p per litre. The duty on rebated gas oil—red diesel, as it is commonly known—is just 4.22p per litre. The amendment would limit the increase on rebated gas oil to a simple increase in line with inflation, which would be 0.13p per litre. I am interested to note, and glad, that Opposition Front Benchers endorse the need to increase duty on fuels at least in line with inflation, but the amendment does not take account of wider policy objectives.

The misuse of rebated oils as a road fuel cost the Exchequer £650 million in 2002—money that could have been spent on any of our priorities, rather than lining the pockets of criminal fraudsters. In Budget 2002, following our success in tackling tobacco smuggling, we launched the UK oils fraud strategy. The aim is simple: to reduce the illicit oil market to no more than 2 per cent. by 2006. To do that, we put in place new control regimes for rebated fuels, and there are now more Customs officers working with the trade, identifying fraudsters and stopping their criminal activities. Although it is still early days, that approach is proving successful. The total value of oil fraud detected has increased from £8.3 million in 2001–02 to £13.2 million in 2002–03, an increase of almost 60 per cent. The number of detections of oil fraud is also up and the number of fuel laundering plants disrupted and dismantled is also up.

As with all criminal activity, the nature of oil fraud committed is constantly changing. The strategy and our operational response as a customs and law enforcement agency must change to keep up. We are therefore constantly reviewing the effectiveness of the different approaches and adapting them as required.

In response to a question asked by Sir Robert Smith, I can say that it was against that background that we decided to narrow the differential between red diesel and road diesel in the Budget. That in itself will not solve the fraud problem, but reducing the differential between rebated fuels and road diesel eats into the launderers' profits and makes the fraud less attractive.

Photo of Robert Smith Robert Smith Opposition Deputy Chief Whip (Commons)

What is the final target differential in this so-called strategy on fraud?

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

The hon. Gentleman asks me for the philosophy and principles behind the decision encapsulated in clause 5, and I have laid them out for him. We have not set a specific target, but we have set out our direction. I hope that I have explained in summary some of the background to the Budget changes, and I also hope that it explains why I have to reject this amendment. The duty increase on red diesel announced in Budget 2004 helps to reinforce our strategy to tackle road fuel fraud. The proposed duty increase on rebated fuels will raise £80 million in 2004–05, not £141 million, as calculated by the hon. Member for Chichester.

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

I gave the full-year amount, but I think that the Economic Secretary gave the half-year figure that took into account the freeze until September.

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

Yes, that is the revenue that we expect, and the other figures are set out in the Red Book. The Opposition may say that this proposed increase will hurt the farming industry especially, but let us not forget that users of rebated fuel oils pay only a fraction of the duty charged to regular motorists. This measure is also spread across many users in different sectors, rather than unduly affecting the farming community. The hon. Gentleman asked for a breakdown of the burden. The statistics that the Department for Trade and Industry regularly collects from the oil industry show agricultural use accounts for only about 7 per cent. of red diesel consumption. The full breakdown of consumption by sector can be found in the DTI's digest of UK energy statistics.

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

If the total amount is so small, might not the Economic Secretary consider a targeted exemption from the increase to give some relief to farmers, who have taken some severe hits recently?

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

We must always strike a balance. Any targeting increases complexity and I have tried to explain how the decision on red diesel rates has been made to reinforce the wider strategy to tackle fuels fraud. If one were to allow exemptions, one would weaken the impact.

It is interesting to note that the amendment is limited to rebated gas oil: it does not seek to mitigate the increases on the other rebated fuels, such as fuel oil, light oil used as furnace fuel and ultra-low sulphur gas oil, which are also provided for in clause 5. I will be generous and assume that that was an oversight, but it means that amendment No. 2 is only a partial proposal. It gives me the opportunity to point out that each of those fuels is, to some degree, in competition with the others.

The hon. Member for Chichester also asked about the derogation for leisure marine use. The derogation expires on 31 December 2006, and we have an opportunity to try to renegotiate it if we wish. We shall consider the approach that we shall take in the run-up to that date, and we will ensure that we consult widely before we settle on our approach. I emphatically make it clear that the rate change proposed this year is not, as the hon. Member for Chichester suggested, a harbinger of further increases for the leisure boat industry in the run-up to the expiry of the derogation in 2006.

Like the hon. Gentleman, I want to talk more widely about clause 5, which will change the rate of excise duty for hydrocarbon oils and biodiesel from 1 September this year. It does not set rates for sulphur-free fuels, but the changes that it will make, combined with the separate definition of sulphur-free fuels set out in clause 7, mean that sulphur-free fuels will become the new main road fuels.

Under clause 5, the duty rates for ultra-low sulphur petrol and diesel are increased by 0.5p per litre above inflation, which will create the differential for sulphur-free fuels that my right hon. Friend the Chancellor announced in the Budget of 2003. The differential means that sulphur-free fuels are set to come on stream much more quickly than had otherwise been predicted.

Our initial indications are that sulphur-free diesel will replace ultra-low sulphur diesel almost immediately after the introduction of the new duty rate in September and that sulphur-free petrol should have entirely replaced ultra-low sulphur petrol by the end of the year. These fuels will therefore be widely available for all motorists in the UK well ahead of the EU mandatory date of 2009. As hon. Members will be aware, as well as offering environmental benefits in themselves, sulphur-free fuels will enable the development and introduction of new engine technologies, giving drivers much greater fuel efficiency savings.

Some people have suggested that the duty should have been frozen, and the hon. Member for Chichester did so in his speech, but that would have a significant impact on a significant source of Government revenue. Each duty freeze represents a real-terms cut in revenue that is vital for maintaining the provision of essential public services. Inflation increases in all duties need to be made to maintain revenue. Even the delay in increasing the duty until September has a price to the taxpayer and to the Exchequer in terms of revenue forgone—about £300 million.

We decided that, with the introduction from 1 September of the differential to switch the market to sulphur-free fuels, the benefits of making changes only once during the year outweighed the hit on Government revenues. It also means that we can reduce the compliance burdens for the oil industry and increase the certainty for motorists at the same time. On that basis, I urge my hon. Friends to reject the amendment and to support the clause.

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary 5:15 pm, 27th April 2004

It is a pity that the Economic Secretary did not begin as he ended, which, although he wrapped it up a little, was to say, "We just need the cash." The Government are short of cash and need the money. Instead, we have had a succession of red herrings—if I can use that term—on red diesel.

I shall briefly pick up on a few points of concern. Just about all we heard from the Economic Secretary was bad news. We had something well short of a commitment even to try to renegotiate the derogation for the leisure boat industry to which I referred. We heard a bizarre remark from him suggesting that my amendment did not seek to mitigate the other fuel duty increases, thereby implying that I supported them. However, he clearly had not listened to the opening few minutes of my speech, in which I hope I made it clear that I was concerned about the increases. On a point of absolute clarification, he and the country should be left in no doubt about the Conservative party's concerns about the increases in fuel duty that are set out in the clause.

The plain fact is that we have not heard a rationale; we have heard only a series of cobbled-together statements. The environmental argument seems to have been taken off the agenda altogether this year. However, although Mr. Environment has disappeared, Mr. Fraud has appeared to justify the clause. The Minister seems to be saying that by narrowing the differential by a few pence, he will sharply reduce the incentive to commit fraud. Either he knows something that we do not about the elasticity of demand for this product, or, much more likely, he intends further sharp hikes in the duty on red diesel, to take it to a point at which the differential would be narrow enough to undermine fraud. That tells us that the Government do have a plan, and it is for further increases that all those who use red diesel commercially should be very worried about.

On the basis of what the Minister has said, I have no confidence that this red diesel hike will be the end of the line, or even near it. We will have more hikes if Labour gets the chance. It is extremely important that a firm marker be put down, and I would like to press the amendment to a Division.

Question put, That the amendment be made:—

The Committee divided: Ayes 166, Noes 294.

Division number 149 Orders of the Day — Finance Bill — [1st Allotted Day] — Clause 5 — Rates

Aye: 166 MPs

No: 294 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly negatived.

Clause 5 ordered to stand part of the Bill.