HC Deb 24 October 2000 vol 355 cc31-8WH

12 noon

Mr. Calum Macdonald (Western Isles)

I am grateful for the opportunity to debate this important subject again.

A great deal has happened since my previous Adjournment debate on this topic, just before the Budget. I shall start by saying a few words about the events of the summer. I want to stress that the Government's attitude towards the fuel blockades over the summer was absolutely correct. It is not right for any section or interest group to try to use its economic muscle to blackmail a Government into a change of policy, especially when that policy affects not only that group but the great majority of the population. The Government were right to insist that they would not be pushed into any knee-jerk response while under such pressure.

Of course there is concern about the price of petrol and, within that, about the level of fuel taxation. However, the Government's response to these concerns should be properly thought out with an eye to the long term, and should be based on core principles. For a Labour Government, the most important principle underpinning taxation policy surely has to be a progressive one—that is, the principle that, whenever Practical, taxation should bear less heavily on those least able to afford it.

When we apply that principle to petrol taxes, we find that in practice it is the low-income households in rural areas on which the burden of petrol tax is bearing down hard and disproportionately. In urban areas, the Government have a reasonable argument when they say that the operation of petrol tax is progressive in a rough-and-ready way. In such areas, low-income households tend not to have cars and therefore tend to be exempt. For example, in Glasgow, only about 34 per cent. of households have access to a car.

The same argument cannot be made about remote rural areas, however. I shall concentrate on my own constituency, because I am most familiar with that area, but colleagues will be able to draw their own parallels with other rural areas. In the Western Isles, for example, 62 per cent. of households have access to a car—twice the percentage of Glasgow, and higher even than the Scottish average of 57 per cent. Using a car in a place such as the Western Isles is not a luxury; it is a necessity for getting to work and to the shops, and for being able to lead a regular, ordinary life in the community.

In remote communities, car ownership is not related to income or wealth. Average incomes in the Western Isles are substantially—about 25 per cent. —below the national average. A remote community such as the Western Isles has substantially lower incomes than the national average but is substantially more dependent on private car transport. Logically, therefore, a flat rate of petrol tax must hit my constituents disproportionately hard.

I am not exaggerating the difficulty that this issue creates for my constituents. I checked this morning and the price of unleaded petrol in the Western Isles is 92.3p a litre—a price well above that which provoked the public outcry and the blockades on the mainland this summer. I know that petrol tax is not responsible for the phenomenally high prices in the Western Isles, but the Government cannot ignore the fact that petrol tax is part of that price; nor can they ignore the fact that petrol tax has a significant impact on rural communities.

Mr. Lembit Öpik (Montgomeryshire)

The hon. Gentleman is referring to private road users. Does he agree that the same applies to road haulage in rural areas such as his constituency and my own in Montgomeryshire where the only means by which to transport products to the shops is by way of road hauliers who tend to pay proportionately more for fuel?

Mr. Macdonald

Yes, haulage is affected by petrol tax, too. The further that one is from the main trading centres in Britain and Europe, the greater the impact.

Aspects of unfairness in the tax system sometimes can be tolerated when the tax concerned is relatively minor and when it would either be too cumbersome or expensive to make it more progressive. However, as a tax increases and its impact on low-income households becomes greater, any unfairness becomes less acceptable. That is the key problem with petrol taxation. When petrol tax was relatively small, it could be argued that the cost of adjusting it to make it fairer was disproportionate to the improvement in fairness that would be achieved. All that has changed because of the impact of the fuel escalator that was introduced by the Tory Government. The present Government abolished the escalator, and I warmly welcomed that, but its legacy lives on. Petrol tax has risen, mostly under the Tories. It was a relatively small tax, but it is now one of the higher taxes operated by the Treasury. It raises £22 billion a year, making it the fourth highest tax after income tax, value added tax and corporation tax.

Petrol tax needs to be reformed. I do not believe that it is wrong in principle. On the contrary, I accept that there are strong environmental arguments for petrol taxation. It is important for the Government to have a range of taxes to fund their public services. However, petrol tax needs to be reformed because its size has so increased that it demands our making a serious effort to make it more progressive in its impact on remote areas. We shall never make it completely fair, but we can try to make it fairer, and that is what the Government should now be examining.

The solution would be to provide a rebate in vehicle excise duty for motorists living in remote rural areas. For example, a rebate of about £100 in excise duty for the island communities in Scotland would cost £3 million or £4 million. That is a modest sum compared with the £22 billion collected by the tax, but one that would go a long way towards signalling the Government's sensitivity to the matter of fairness.

There are arguments against such a targeted solution. First, the Automobile Association has argued that my solution would be unfair because well-off people in remote areas would benefit while some vulnerable groups in urban areas would still be affected. The fact is that any solution can only make the tax more fair, but not perfectly fair. We accept the rough edges in the case of value added tax exemptions on food and children's clothes, given that rich and poor alike benefit from them. That is similar to the Government's new policy on television licences for the elderly as a result of which rich and poor pensioners alike will benefit. The impact of petrol taxation in remote rural areas is so clearly regressive that a solution directed at those areas can be justified as it will result in substantially improving the overall fairness of the tax.

The second argument against my solution is that it would be difficult to draw or to justify the geographic boundaries that would receive the reduction in vehicle excise duty and those that would fall outside such areas. Such an argument would have some validity if broad swathes of rural Britain were to be included. However, I am not suggesting that. If a vehicle excise duty reduction were confined to genuinely remote areas where the problem was at its most acute, the difficultly would not be insurmountable. The geographic boundaries of remote island communities are certainly obvious to the naked eye and I believe that such a solution would be widely acceptable.

In the case of the Scottish islands, there is a precedent of which the Treasury is aware—the reduction in vehicle excise tax payable on heavy goods vehicles on particular islands. The logic of that targeted reduction for lorries should now be extended to cars.

I believe that the objections to a targeted approach can be answered. The technical obstacles to a targeted reduction in vehicle excise duty that is intended to balance the disproportionate impact of petrol tax on remote communities can be overcome. I grant that a targeted solution has some residual awkwardness and that the Treasury tends to shy away from such measures. In defence, however, I plead the essential residual awkwardness of the geography of the country in which we live. It would be good if Britain were a nice, convenient square shape such as that of France, Germany or Spain. Unfortunately, however, Britain is not shaped like that. It is long and narrow. Most of the population is situated at one end of the country and there are only scattered communities at the other end, on the outer fringes of Europe.

I am not blaming the Treasury for the shape of Britain, but it can be held responsible for policies that ignore the social and economic realities that are dictated by geography. That is why I urge the Government to take those realities into account in framing their fiscal policy during the coming months.

12.11 pm
Mr. David Stewart (Inverness, East, Nairn and Lochaber)

First, I thank my hon. Friend the Member for Western Isles (Mr. Macdonald) for initiating this and previous debates on the subject under discussion. I should like also to thank my hon. Friend the Financial Secretary for agreeing to make a brief contribution.

Like my hon. Friend the Member for Western Isles, I represent a very rural constituency. It is the largest Labour seat in the United Kingdom and stretches from the Atlantic to the North sea. Obviously, the community in this large, spread-out rural area is dependent on cars. The constituency contains a number of island communities, which are a special consideration in this debate. They include Rhum, Eigg, Muck and Canna. For more than a decade, fuel prices have been an issue in my and many other rural constituencies. As the price of fuel approaches £4 a gallon, the problem is becoming more acute. I can safely say that the matter is now the No. 1 issue in my constituency, narrowly beating the Child Support Agency into No. 2, although there is not much in it.

As my hon. Friend said, the car is not a luxury in rural areas. My constituency has a very high car ownership, so increases in fuel duty hit low-paid motorists and essential users especially hard. Rural hauliers in particular have been badly hit. During the past three years, I have approached the issue in a number of ways. I have raised it at Prime Minister's Question Time, initiated Adjournment debates and participated in a number of meetings, not least with my hon. Friend the Economic Secretary but also with my right hon. Friend the Chancellor, along with some other rural Back-Benchers. I have also met those on the other side of the equation: the key companies. I have met the chief executives of British Petroleum, Shell, Esso and Texaco, which was useful in gaining understanding of the issue and have encouraged many of my constituents, not least rural hauliers, to make some contributions to the Select Committee on Trade and Industry, which is discussing the issue as we speak.

Of course, there are many critics of the level of fuel duty. At present, I think that all the tax and duty adds up to around 72 per cent. of the pump price. Ironically, with all the recent uproar, the proportion has fallen since the previous Government were in power, when it was around 78 per cent. of the pump price. As we heard earlier, the Tories invented the fuel escalator, which the Chancellor has now abolished.

We must be careful not to make false comparisons with other European countries on taxes. For instance, Britain does not have motorway tolls and tends to have lower corporation and direct taxes. Of course, the Organisation of Petroleum Exporting Countries has played an important role in the equation. By restricting output—some other political games are going on, especially with Iraq—the spot price of fuel has gone from around $10 a barrel to around $36 a barrel, which is a gigantic increase. Of the last 19p worth of price increases during the past 16 months, which was a big jump, duty contributed only 2p. We must therefore be careful when discussing this equation. OPEC raises much wider issues, such as globalisation, the level of control that individual Governments can have, and what pressure they can bring to bear on OPEC. I am not convinced that the American strategy of releasing the strategic petroleum reserves is the answer. Given the current high petrol prices, I also believe that now is the time to put more pressure on our oil companies to start exploring in a new fields and utilising the existing fields. More than 300 so-called fallow fields in the UK continental shelf are not being developed at all.

What is the future? The easy answer is a cut in fuel duty. A 2p reduction, for example, would cost the Treasury more than £1 billion in revenue. However, the Chancellor also has a responsibility for economic stability. In his reply, will the Minister answer the criticism, which I hear in my constituency, that the Government have made record VAT returns because of the high price of fuel? I would be grateful for his thoughts.

Is there an answer? I would say yes. First, we need a fairness charter to target concessions aimed at lower-income motorists. We must keep the freeze on liquefied petroleum gas—LPG—which is an excellent environmentally correct fuel and only a third of the price of conventional fuel. We should introduce an essential users' allowance for rural hauliers, which would be similar to that for the bus industry. There should be further reductions in road tax for fuel efficient vehicles and a road tax reduction for those in rural areas, as my hon. Friend said. Finally, we need a fuel regulatory setup that monitors prices across the country, as I have no doubt that there is exploitation of the so-called soft market, especially in rural areas. I thank my hon. Friend for initiating this debate.

Mr. Robert Maclennan (Caithness, Sutherland and Easter Ross)


Mr. Deputy Speaker (Mr. Nicholas Winterton)

Order. Has the right hon. Member for Caithness, Sutherland and Easter Ross (Mr. Maclennan) had the permission of the initiator of the debate to speak? If so, I hope that he will be brief and allow the Minister sufficient time to reply.

12.17 pm
Mr. Maclennan

It is very much in the interests of all hon. Members that we receive a reply from the Minister. I am extremely grateful to the hon. Member for Western Isles (Mr. Macdonald) for the opportunity to say that, in the highlands and islands, this matter does not divide political parties. There is a common perception that the issue is one of social justice, and that if there is a will there will be a way to deal with the gross disparities of petrol prices between sparsely populated remote areas and densely populated urban areas, where totally different considerations apply.

It is easy but mistaken to suggest that an alteration of petrol taxation affecting those areas would send the wrong signals about the environmental commitment of the party making the adjustment. Adjustments of the kind proposed by the hon. Member for Western Isles would have no material impact on the environment. It should be recognised as primarily a matter of social justice. The variation of taxes in our country to take account of wholly different circumstances is not only theoretically but demonstrably possible, as it has been done even in countries of a different geographical shape from our own. Even a square country such as France has varied petrol duty to take account of the problems of insularity and remoteness. That has been held to conform with the rules of the European Union, not to speak of variations that have taken place in other comparable parts of northern Europe.

I wholly endorse the views expressed by the hon. Member for Western Isles and regard the matter as a test case for the Government to demonstrate their commitment to inclusivity and to recognise that their employment initiatives can be set at nought if they do not tackle this problem in the Budget statement.

12.20 pm
The Financial Secretary to the Treasury (Mr. Stephen Timms)

I, too, congratulate my hon. Friend the Member for Western Isles (Mr. Macdonald) on securing this debate. I know that what he and others have said reflects genuine concern in their constituencies.

I was interested to hear the comments made by all three speakers, and I was also surprised to note the absence of any representatives of the Scottish National party in this debate, because they have spoken a great deal about these matters. However, they have clearly chosen to leave it to others to raise them in this Chamber. I also want to say how much I agree with my hon. Friend's opening remarks about the Government's response to the blockades last month. He was absolutely right to make those points.

I want to repeat the assurances given by my right hon. Friend the Prime Minister that we understand the deep concern over high fuel prices expressed in today's debate. I spend a great deal of time meeting and listening to road hauliers, petroleum retailers and others who have been particularly affected by the recent price increases. However, I want to emphasise the point made by my hon. Friend the Member for Inverness, East, Nairn and Lochaber (Mr. Stewart), that the recent price increases are not the result of fuel duty. The Budget in March this year saw no real-terms increase in either petrol or diesel duty, and none of the price increases since March has been a consequence of fuel duty either.

The Government have had to make some tough choices over the past three and a half years. Those choices have delivered unprecedented economic stability, benefiting all parts of the United Kingdom. We have cut the deficit, put the public finances back on track, and converted a £27 billion deficit at the time of the election into an £18 billion debt repayment last year. Those provisions have led to very significant gains for the country in terms of the record low unemployment figures announced last week.

Furthermore, because we have been successful in reducing debt and cutting unemployment, we have been able to allocate money that would have gone in debt charges and unemployment benefits to improvements in public services. That will produce important benefits for rural areas over the next few years. Those are the changes that we were elected to deliver, and we are now delivering them—not despite the decisions that we have made on taxation, but because of them. We are now determined to reap the benefits of those tough choices. That means no irresponsible lurches on tax policy and no other reckless moves that some hon. Members—not in this Chamber but elsewhere—have proposed, which would jeopardise the new stability in the economy which is so important for all our futures.

The increases in fuel duties in recent years have produced a number of important benefits. They have given motorists and manufacturers clear incentives to design more fuel-efficient vehicles and to limit unnecessary journeys. The increases have also played a significant part in putting the United Kingdom on track to meet our Kyoto commitments. It has been estimated that real-terms increases in fuel duties between 1996 and 1999 will produce CO2, savings of between 1 million and 2.5 million tonnes a year by 2010. That is a significant contribution towards meeting the Kyoto objectives, which I think that everyone here would support. We have also successfully used duty incentives to improve local air quality. We have significantly reduced the sulphur content in fuels, which has produced widespread benefits.

My hon. Friend the Member for Western Isles proposed a measure relating to vehicle excise duty. We are sensitive to the concerns that he and others have raised. I shall briefly outline the steps that we have already taken on vehicle excise duty, which has already been cut for smaller cars. We introduced a lower annual rate of £100 for cars with engines of up to 1,000 cc, which was a £55 cut benefiting 1.8 million small cars. In this year's Budget, we announced that, from next March, that reduced rate will be extended to apply to all existing cars with engines up to 1,200 cc. That will bring in another 2.2 million cars, making a total of 4 million cars that will benefit from a lower rate. That will provide an incentive for motorists to make their next second-hand car purchase a smaller and more environmentally friendly model. Many of those about whom my hon. Friend the Member for Western Isles expresses concern—I am not referring to those for whom a car is a luxury, but those on modest incomes for whom it is essential to have a car—will benefit from next March from the lower rate that we have introduced, if they have a smaller car.

In addition, also from next March, the vehicle excise duty for new cars will depend on the level of CO2 emissions that the engines of those cars produce. Under the scheme, up to £70 less tax will be charged on 95 per cent. of new cars, and the lower the level of emissions, the lower the rate of duty. The new arrangements will encourage people to buy new cars as opposed to old, and cars with a lower level of CO2, emissions and better fuel efficiency. It is no surprise that the changes that we made in Budget 2000—although that may seem a long time ago now—were warmly welcomed by the press and motoring organisations.

Travel difficulties can be acute in rural areas for particular groups of people, and it is important that we take account in this debate of those unable to use a car, of whom there are quite a number in my hon. Friend's constituency and in other rural areas.

My hon. Friend the Member for Western Isles referred to the high price of petrol in the Western Isles. He will know that there has been a recent investigation of the pricing of fuel in the highlands and islands, which concluded that: there is no evidence of any general problem of excessive pricing or profits. The investigation came to a different conclusion about the Western Isles, making the point that: it cannot be concluded that the market in the Western Isles is working competitively. Prices are higher than elsewhere and this cannot be explained in terms of lower volumes or by what we currently know about costs. The Competition Commission will therefore undertake further work on the issues raised by the Western Isles.

My hon. Friend the Member for Western Isles proposed a reduced rate of vehicle excise duty for motorists in rural areas. The proposal is interesting and merits serious consideration, but it could carry significant risks of fraud, and difficult questions of practicality and fairness would have to be answered as well. Would the measure assist the constituents of my hon. Friend the Member for Inverness, East, Nairn and Lochaber? If it were targeted only on islands, very few of my hon. Friends' constituents would benefit. It would be difficult to decide who would qualify for the reduction. The existing concession for lorries up to 12 tonnes applies only to lorries that do not travel to the mainland or travel on specified journeys to and from the mainland. I am not sure whether my hon. Friend the Member for Western Isles would envisage that restriction applying to his proposal too; it would be much harder to apply to cars. I am well aware of the concerns being expressed and am interested in what he proposes, but I do not want him to think that the measure could be introduced quickly, even if it were decided that it was worth while.

Briefly, I refer to the point raised by my hon. Friend the Member for Inverness, East, Nairn and Lochaber about VAT. Of course, people may be spending more on fuel, but they are spending less on other things. Broadly speaking, therefore, the receipts on VAT are not exceptionally different from those that were expected at the Budget.

I am grateful to my hon. Friends and to the right hon. Member for Caithness, Sutherland and Easter Ross (Mr. Maclennan) for expressing their concerns and those of their constituents. I have no doubt that we shall return to these matters both before and after the forthcoming pre-Budget report, whose date of publication is likely to be announced later today in a written answer to a parliamentary question.

Mr. Deputy Speaker

We have run out of time and we now move on the last of this morning's debates in Westminster Hall, which will be initiated by the hon. Member for St. Ives (Mr. George).