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Pre-Budget Report
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The Government is committed to creating a fairer society in which everyone can share in higher living standards and has the opportunity to fulfil their potential. This chapter highlights the reforms the Government has already undertaken and discusses further ways of achieving this objective, including:
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5.1 The Government is committed to creating a fairer society in which everyone can share in higher living standards and has the opportunity to fulfil their potential.
5.2 The tax system encourages this by:
5.3 The Government is also taking steps to ensure that the tax system is seen to be fair by:
5.4 The tax system must be designed in a way that is fair to future as well as present generations. It has an important role to play in underpinning the Government's strategy on sustainable development. This means securing economic growth, higher living standards and social progress, while protecting and, where possible, enhancing the environment. As the Statement of Intent on Environmental Taxation published last year made clear, the Government is committed to exploring the scope for using the tax system to deliver environmental objectives.
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Box 5.1 - Moving towards a fairer society The Government's commitment to enhance fairness can be seen throughout its approach to tax and spending. Amongst the many measures already announced which promote fairness are:
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Fairness to pensioners
5.5 The Government is committed to providing help for pensioners. An additional £2.5 billion package of support for pensioners was announced in the Comprehensive Spending Review (CSR). This package includes:
5.6 In addition, the Government has introduced a national programme of personal advisers for pensioners on Income Support. Taking effect from April 1999, the programme will get help to pensioners who are entitled to Income Support, but not claiming it. The Government estimates that almost one million pensioners are not getting what they are entitled to and this programme should help bring the guaranteed minimum income to them.
5.7 All these measures will help give pensioners higher spending power and a better standard of living in years to come. However, the programme does not stop there. The Government is drawing up a Green Paper on pensions which will be published later this year. This will examine the causes of hardship in retirement and will set out some ideas for long-term changes to the system to deliver opportunity and fairness for the next generation of pensioners.
Reform of Child Benefit
5.8 The Government is committed to supporting families with children and tackling child poverty. Following decisions in the last Budget, Child Benefit will be increased by £2.95 a week for the eldest child from April 1999, with additional increases in the child premiums in income-related benefits. The Budget also gave further help to poorer families with young children with an increase of £2.85 a week for each child under 11 on all income-related benefits.
5.9 At the same time, the Chancellor said that if Child Benefit were raised in future there would be a case in principle for higher rate taxpayers paying tax on it. He emphasised the Government's commitment to keeping Child Benefit universal where it is already universal, and made clear it would continue to be paid, as now, directly to the mother. The Government is currently considering options for bringing Child Benefit into higher rate tax.
ISAs and CAT standards
5.10 Following consultation, the Government announced details of its proposals for Individual Savings Accounts (ISAs) in the March Budget. The objectives of the ISA are to develop and extend the savings habit, particularly to those on modest incomes, and to ensure that tax relief on savings is more fairly distributed.
5.11 Since March, the Inland Revenue has also published for consultation draft regulations, which have now been laid before Parliament, and guidance on their operation.
5.12 The Treasury has, following consultation, recently announced voluntary CAT standards for each kind of ISA. These define fair charges, easy access and decent terms for savings products which might appeal to people new to saving, or thinking of saving more. It is already clear that a good number of ISA managers are actively considering providing ISAs which will meet these standards.
5.13 The Government is continuing the dialogue on ISAs and is, for example, continuing to work with the industry on publicity. Many firms in the financial industry have now applied to be approved as ISA managers and even more have expressed an interest in ISAs. The Government is therefore confident that in April 1999 there will be a large number of ISA managers offering savers a wide variety of ISAs.
The Review of Charities' Taxation
5.14 Charities are important partners of Government in dealing with many different issues in our society.
5.15 The Government has established a Review of Charities' Taxation to identify a taxation system for charities which is clear, simple and less costly for charities to comply with. The review covers direct and indirect taxation, as well as business rate relief. Following careful consideration of the responses to the initial consultation with charities, businesses and other interested parties, Customs and Excise, the Inland Revenue and the Treasury intend to publish a consultation document outlining options for change as soon as possible.
Anti-avoidance : General Anti-Avoidance Rule
5.16 When individuals and businesses develop schemes to avoid paying tax, or defer or reduce their liability, it leads to higher burdens falling on the majority of taxpayers. The Government is committed to countering abuses and artificial avoidance, whilst recognising that businesses and individuals may operate in a tax-efficient way.
5.17 The Inland Revenue is consulting on the usefulness of a General Anti-Avoidance Rule (GAAR) as a way of spreading the tax burden as fairly as possible. A GAAR would need to balance fairness with the interests of companies, and be applied in a way which would not add unreasonably to the requirements placed on business. The Revenue recognises the importance of a GAAR. As well as listening to the views expressed in this consultation, it will also consult on any proposed legislation. If it is decided to introduce a GAAR, the legislation could be enacted in the year 2000 Finance Bill.
5.18 Although a GAAR in VAT is not ruled out for the future, Customs and Excise will shortly be consulting about the option of a 'mini-GAAR';, a general anti-avoidance rule limited to a specific area within VAT. They will use as an illustration a measure intended to negate any tax advantage arising from the use of artificial arrangements to purchase construction services.
Ensuring better compliance
5.19 The Government is also considering additional measures to encourage everybody to pay their fair share of tax. In some areas of tax legislation the interest and penalty provisions to deal with non-compliance are out of date and, as a result, fairness in the tax system is undermined. The Stamp Duty interest and penalty regimes need to be brought up to date and the Government will include a Stamp Duty compliance package in the 1999 Finance Bill.
5.20 The Government is also considering introducing interest on Customs duty debts. And if agreement is reached on a draft EC directive, there will also be improvements in the mutual assistance arrangements for the recovery in the UK of debts owed to tax authorities in other member states and vice versa. The scope of these arrangements will also be extended to include direct taxes.
Alcohol and tobacco fraud
5.21 The outcome of the Alcohol and Tobacco Fraud Review (ATFR) was announced in July. Customs has been allocated £35 million over the next three years to implement the review recommendations. Money has also been made available in the current year so that implementation could begin immediately.
5.22 The ATFR recommended a number of measures to counter the revenue lost through cross-channel smuggling, including extra resources. The recruitment process for the new staff to counter cross-channel smuggling at the channel ports is well underway and they should all be in post before Christmas. By 2001-02, Customs aim to increase the revenue value of detected alcohol and tobacco goods by £80 million.
5.23 Some of the recommendations have already been implemented including tougher policies on prosecution of offenders and restoration of seized vehicles, the introduction of sentencing guidelines and the revocation of licences of those businesses who are caught smuggling. The Government is considering what measures are required to implement the remaining recommendations.
Fairness in indirect tax
5.24 In the Budget, the Chancellor announced a consultation on the VAT grouping facility to achieve a better balance between the revenue costs to the Exchequer and the compliance costs to business, and to minimise tax avoidance opportunities. Responses to that consultation are now being considered. Responses are also being considered to a consultation on the VAT registration threshold.
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Box 5.2 - Prosperity and fairness through international cooperation on tax
Taxation is a national responsibility but the development of the global economy is making international cooperation more important. The UK therefore is working with its partners to develop international agreements that support fair and effective taxation while at the same time promoting economic growth and prosperity. In some areas action through the OECD is the best way forward. In others, action will be appropriate through the European Union (EU) within which the UK will retain a national veto on tax legislation.
Improved communications, the expansion of international trade and capital flows, and the continued growth of multinational companies are increasing the mobility of businesses, capital and people worldwide. The further development of the single market and the elimination of exchange risk within European Monetary Union will only add to that mobility. Together these developments present both risks and opportunities. For national tax systems, the challenge is to minimise the risks without stifling the opportunities or harming the competitiveness of business.
The challenge is partly technical - for example how to treat new types of business like electronic commerce, how to avoid the double taxation of cross-border activity and how to prevent technology from opening new gateways to evasion. But the growing mobility of capital and the removal of barriers to international trade has also brought a new urgency to a familiar issue: the risk that unfair tax competition between countries through preferential tax regimes could lead to the erosion of the tax base and distortions in the allocation of resources.
The Government fully recognises the importance of these challenges for business, for international trade and for the tax base, and is playing an active role in the modernisation of international practice.
On the domestic front, it has:
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On the international front the Government has:
The Government is actively engaged on taxation issues in the EU and other international fora and will continue to look for effective solutions to specific problems, while protecting the competitiveness and prosperity of the UK and the EU as a whole. |
Sustainable development
5.25 The Government's overall aim is a long-term increase in prosperity. Economic development must therefore take place in a sustainable way, ensuring a better quality of life for everyone - now and for future generations.
5.26 The Government's approach to sustainable development is based on four broad objectives: maintenance of high and stable levels of growth and employment; effective protection of the environment; prudent use of natural resources; and social progress which recognises the needs of everyone.
5.27 Early next year, the Government will publish its strategy on sustainable development. It will set out the Government's aims, outline the measures being undertaken to achieve those aims, and highlight what further action might be undertaken - by all of us - to achieve them. This follows an extensive consultation exercise in the first half of this year.
5.28 The tax system has an important role to play in underpinning this strategy. It must be designed in a way that is fair to future as well as to present generations. As the Statement of Intent on Environmental Taxation published last year made clear, the Government is committed to exploring the scope for using the tax system to deliver environmental objectives.
5.29 Environmental taxes must meet the general tests of good taxation. Introducing new environmental taxes, or making changes to existing taxes to deliver environmental aims, therefore requires detailed research, careful planning, and extensive consultation.
5.30 Much has been achieved already. The 1998 Financial Statement and Budget Report detailed a number of measures, and areas of further work, aimed at:
5.31 It also included, for the first time, an assessment of the environmental impact of those Budget measures which are expected to have a significant effect on the environment. An updated version of that assessment, showing the expected impact of the Government's environmental tax measures to date, and those under consideration, is shown in Table 5.1. We will be looking to build on this approach in future Budgets.
5.32 Progress continues on a number of fronts. The main developments are summarised below under the following headings - climate change, local air quality, land use and water pollution.
Climate change
5.33 Climate change is recognised as one of the greatest environmental threats facing the world today. The UK is committed under the Kyoto Protocol to reducing greenhouse gas emissions by 12.5 per cent on 1990 levels by 2008-2012. The UK must now develop a programme of measures to deliver its climate change targets.
5.34 On 26 October, the Government published a consultation document, the UK Climate Change Programme, on policy options for achieving this legal commitment, and how we might move beyond that towards our own domestic goal of a 20 per cent reduction in emissions of carbon dioxide on 1990 levels by 2010.
5.35 As the consultation document shows, the Government is keen to look across all sectors of the economy, and at all kinds of instruments, to find the right combination of measures which meets its targets in the most cost-effective way. An important strand of this work is the study carried out by Lord Marshall into the industrial and commercial use of energy.
Industrial and commercial use of energy
5.36 In March this year, the Chancellor asked Lord Marshall to report on whether, and if so, how best to use new economic instruments to improve the industrial and commercial use of energy and help reduce emissions of greenhouse gases.
5.37 Lord Marshall's report is published today. It follows a widespread consultation exercise. The main conclusions and recommendations of Lord Marshall's report are summarised in the box below.
5.38 The Government will be considering Lord Marshall's recommendations very carefully in developing its strategy on climate change, and will continue work and consultation on the further design issues identified in his report. The Government will take into account any potential impacts on competitiveness in seeking to find the most cost-effective means of meeting its targets for reductions in emissions of greenhouse gases.
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Box 5.3 - Lord Marshall's report on economic instruments and the business use of energy
Lord Marshall's main conclusions and recommendations on the role of economic instruments and the business use of energy are as follows:
On the role of business and other sectors:
On whether economic instruments have a role to play:
On the two leading options:
(a) A system of tradeable emissions permits
(b) On tax
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Table 5.1: The Government's environmental tax measures: principal measures in place or under consideration
| Measure/Issue | Environmental function | Environmental impact1 |
| 1. Economic instruments for the industrial and commercial use of energy | Improve energy efficiency and reduce CO2 emissions | Reduce emissions of CO2 and other air pollutants (see Lord Marshall's report for further details) |
| 2. Fuel duty increases2,3 | Reduce CO2 emissions | Escalator over the period 1996 to 2002 produces carbon savings of 2 to 5 MtC by 2010 and a reduction of 1% in NOX emissions and 1.2% in particulate emissions |
| 3. Increase in duty on standard diesel3 | Improve air quality and move towards fairer treatment of fuels | Reduction of 1-3% of particulates and NOX. Very small increase in emissions of CO2 |
| 4. Increase duty differential for ULSD3 | Improve air quality | Reduction of 20% of particulates and up to 2% of NOX |
| 5. Maintain 1997 duty differential between road fuel gases and diesel | Improve air quality | Reduction in emissions of particulates and NOX |
| 6. Minor oils duties | Reduce CO2 emissions and other air pollutants | Small reduction in emissions of CO2 and other air pollutants |
| 7. Reduction in VAT on installation of energy saving materials | Improve energy efficiency and reduce CO2 emissions | Small reduction in emissions of CO2 |
| 8. Graduated car VED | To provide an incentive for less polluting cars | A reduction in emissions of CO2, NOX and particulates. |
| 9. VED for lorries | To ensure that the environmental damage caused by lorries is reflected in VED | Reduce road wear and emissions of CO2, NOX and particulates |
| 10. £500 VED discount for clean lorries/buses | Improve air quality | Reduction in particulates and NOX highly dependent on long-run level of take up. |
| 11. Increase in scale charges for free fuel provided with company cars3 | Discourage the provision of free fuel and reduce CO2 emissions | Reduction of 0.3 billion car kilometres. Reduction of CO2 of <0.1MtC |
| 12. Increase in bus fuel duty rebate | To encourage bus use relative to private motoring | Small reduction in car kilometres |
| 13. Workplace parking tax | Reduce congestion, emissions of CO2 and other local air pollutants | Depends on take up. Reduction in CO2, NOX and particulate emissions |
| 14. Road user charging | Reduce congestion, emissions of CO2 and other local air pollutants | Depends on take up. Reduction in CO2, NOX and particulate emissions |
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15. Changes to landfill tax -exemption for inert waste used for restoration of sites and filling of quarries -increase in standard rate -freeze in lower rate on inert wastes |
Reduce amount of waste going to landfill. To ensure inert waste materials available to landfill sites | Will reduce volumes of landfill with associated methane savings and reduction in overall environmental impact of landfilling. Land used for landfill or quarrying will continue to be brought back into beneficial use |
| 16. Extraction of aggregates | To help ensure environmental costs of aggregates extraction are reflected in price | Possible reductions in noise, dust, visual intrusion, damage to wildlife habitats and other environmental impacts |
| 17. Options for dealing with water pollution | To cost-effectively minimise the environmental damage from water pollution | Reductions in emissions of pollutants into rivers |
| 18. Use of pesticides | To encourage less harmful pesticides and alternative techniques | Improve water quality, biodiversity and reduce impact on wildlife |
| 1These estimates are subject to significant margins of uncertainty. | ||
| 2Based on assumption that the fuel duty escalator continues at its present level, increases of at least 6 per cent on average in real terms a year, until the end of this Parliament. | ||
| 3The reductions in particulates and NOx emissions are calculated as a percentage of 2010 emissions from urban road transport. The reduction in car kilometres and CO2 emissions are the estimated annual reduction by 2010. | ||
Local air quality
5.39 In addition to playing its part in tackling the global problem of climate change, the Government is actively seeking to improve local air quality.
5.40 Air quality in our urban centres is currently improving. However this downward trend in pollution is predicted to reverse early in the next century as the growth in road traffic offsets the reduction in emissions from individual vehicles.
5.41 The Government's policies for tackling air pollution are set out in the National Air Quality Strategy. This is currently being reviewed and proposals will be published for consultation in early 1999.
5.42 The Government is pursuing a mix of policy instruments in addressing the environmental problems associated with road transport. In July, the Government published its White Paper on the Future of Transport, A New Deal for Transport: Better for Everyone. The White Paper aims to extend choice in transport and secure mobility in a way that supports sustainable development. The White Paper proposed a number of new measures affecting road traffic, such as powers for local authorities to introduce road user charges and workplace parking charges to reduce congestion and to generate revenue to fund complementary local transport projects.
5.43 There have also been important developments within the context of the European Union that are relevant to both local air quality and climate change.
5.44 The Auto-Oil programme provides for improvements in vehicle technology and fuel quality. As part of this programme, tighter emission standards for new cars and light vans will apply from October 2000. These will be 20 to 50 per cent more stringent than those currently in force, and will tighten further in 2005. Cleaner fuels will be required from 1 January 2000, and further improvements in fuel quality will also be made in 2005.
5.45 In addition, a voluntary agreement has recently been concluded between the European Commission and European car manufacturers to reduce fleet emissions of carbon dioxide. The motor industry agreed, through their trade association ACEA, a 25 per cent reduction in average carbon dioxide emissions per kilometre to 140 grammes by 2008. This will apply to new cars across the European fleet.
Road fuel duty differentials
5.46 In the Spring 1998 Budget, the Chancellor increased duty on diesel by 1 penny per litre more than duty on unleaded petrol, and announced that future Budgets would further increase the duty on ordinary diesel relative to unleaded petrol. This is a step towards the Government's objective of a fairer treatment of petrol and diesel, when calculated on an energy or carbon basis.
5.47 The Chancellor also tightened the specification for ultra-low sulphur diesel (ULSD), and widened the duty differential between this cleaner fuel and ordinary diesel to 2 pence per litre. The Government expects to increase this by a further 1 penny in the next Budget. The Government will also continue the policy of increasing road fuel duties by at least 6 per cent on average in real terms a year.
Vehicle Excise Duty for cars
5.48 In the March 1998 Budget, the Chancellor announced a significant reform of Vehicle Excise Duty (VED) to encourage cleaner cars. In particular, VED for the cleanest cars will be cut by £50. A consultation document issued today sets out a range of car characteristics which could, in future, be used in determining VED for cars:
VED rates will be announced, as usual, at the time of the next Budget.
5.49 By encouraging more fuel-efficient and cleaner cars, the proposals aim to help reduce emissions of greenhouse gases and local air pollutants.
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Box 5.4 - Using contingent valuation to measure environmental costs and benefits
Government guidance is clear that appraisal systems should try to take into account all environmental costs and benefits1. The Government accepts that there will be difficulties in trying to place a value on the environment, whether by monetary or non-monetary means. But the monetary valuation of environmental costs and benefits can help integrate the environment more fully in the policy making process.
Placing monetary values on environmental costs and benefits is not straightforward because there are usually no prices for environmental goods. But a number of techniques are available for doing so, some of which are summarised in Environmental Appraisal in Government Departments2.
Contingent valuation is one such technique. This approach tries to identify individuals' preferences directly by exploring, through detailed surveys, the value they would place on specific improvements or deterioration in the quality of the environment. Typically, people are asked either:
The survey results can then be aggregated to provide an estimate of the overall impact.
There are some criticisms of contingent valuation. Some question the assumptions on which it is based, and the weight given to individual preferences; others question how much weight should be placed on the results where the environmental effects being measured are complex and may not be widely understood. But the technique has an extensive academic pedigree and support, and is now used around the world both by government agencies and the International Bank for Reconstruction and Development. In the UK, for example, it has been used to value impacts on road safety and time savings in transport appraisals. Careful design of the survey techniques can help limit any unintentional bias in the results. The Government believes that, although it is not universally appropriate, contingent valuation may often be the best approach available.
One example where the Government is currently using the contingent valuation method is in research on the environmental costs and benefits of aggregates extraction. An independent expert review of the first research project undertaken for the Government confirmed that contingent valuation was appropriate for a study of this kind3. Further work in this area will continue to use contingent valuation to build on the initial findings.
References:
1 Appraisal and Evaluation in Central Government, HM Treasury, 1997.
2 Environmental Appraisal in Government Departments, Department of the Environment, 1994. 3 The Environmental Costs and Benefits of the Supply of Aggregates: A Review of the London Economics Report, Department of the Environment, Transport and the Regions, 1998. |
Vehicle Excise Duty for lorries
5.50 Vehicle Excise Duty rates for lorries are under review, to ensure that rates better reflect the environmental impact of different lorry types.
5.51 From 1 January 1999 new classes of heavy goods vehicles will be allowed on UK roads. These vehicles will fit into the current VED rates structure until the next Budget (details are provided in the VED press notice issued today). At the time of the Budget new higher rates will be announced for these lorries. These rates will be set to discourage strongly the use of such vehicles with 11½ tonne axle weights, in view of the additional road damage that they cause.
Taxation of company cars
5.52 In the March 1998 Budget, the Chancellor announced he would be considering, in relation to income tax charged on company cars, the case for replacing the existing business mileage discounts with discounts for driving fewer private miles. Views were invited. Since then, the Inland Revenue has received a number of comments.
5.53 Many of those who commented supported the proposal, as business mileage discounts were seen as an incentive to drive unnecessary, extra miles. Others were neutral or opposed to the change suggested. A concern about giving discounts for low private mileage is that it would simply shift private miles from company cars to private cars, which would not help reduce congestion or pollution. It would also mean extra record keeping for company car drivers and their employers.
5.54 In light of the views expressed, the Government is continuing to review how the company car tax regime might be altered to send better environmental signals.
Bus fuel duty rebate
5.55 In the last Budget, the Chancellor announced that the Government would be consulting on how bus fuel duty rebate could be better targeted to provide for lower emission vehicles, and to support rural services. The Department of the Environment, Transport and the Regions will shortly publish a consultation document setting out the options for reform.
Landfill and waste strategy
5.56 The Government's consultation document on waste strategy for England and Wales, Less Waste: More Value, set out the need to improve the sustainability of waste management. A draft strategy will be published in Spring 1999, with a view to adopting a final strategy by the end of next year. Parallel strategies are being developed for Scotland and Northern Ireland.
5.57 The new strategy will set out the Government's vision of sustainable waste management over the next twenty years. Several key factors are shaping this vision: the development of the Government's strategy for sustainable development; the draft European Union landfill directive, which would require a reduction in biodegradable municipal waste to landfill to 35 per cent of 1995 levels by 2020; and the packaging regulations, which set staged targets for recovery and recycling of packaging by 2001.
5.58 As part of that strategy, and following the increase in the standard rate of the landfill tax announced in the last Budget, the Government will continue to keep under review the appropriate basis for setting the rate of landfill tax.
5.59 The last Budget also announced that an exemption for inert waste used in the restoration of landfill sites and the filling of quarries will be introduced from October 1999. The exemption will help ensure that suitable materials continue to be available for bringing land back into beneficial use. Having consulted site operators, regulatory bodies and other stakeholders, the Government will bring forward legislation in the next Budget.
Extraction of aggregates
5.60 The Government believes that it is essential that there continues to be an adequate supply of aggregates. However, the Government also recognises that aggregates extraction can have a significant environmental impact and often takes place in areas of attractive countryside.
5.61 Initial research commissioned by the Department of the Environment, Transport and the Regions into the environmental costs and benefits associated with the supply of aggregates was published in April 1998. This demonstrated that there are significant environmental costs not already covered by regulation. Further research, building on the initial findings, and taking account of the conclusions of an independent expert review of the preliminary findings, is ongoing. One of the methodologies used in the research to measure the environmental costs and benefits is described in the box below.
5.62 Over the summer, Customs and Excise have been consulting on how a possible aggregates tax might work. The responses to the consultation are now being analysed.
5.63 Ministers have also offered to consider carefully alternative proposals to a tax made by the industry. Such proposals would have to amount to a deliverable package of measures which would permanently secure equivalent or greater benefits than a tax. The aggregates industry has recently taken some welcome steps to curtail its activities in the National Parks. There may be scope to build on that positive approach in dealing with the remaining environmental impacts of its activities.
Water pollution and pesticides
5.64 Better water quality is an important environmental goal. Water pollution tends to arise either from point sources - such as industry and sewage treatment works - or diffuse sources - such as run-off from agricultural and urban areas, including pesticide or fertiliser use.
5.65 Last November, the Government issued a consultation paper entitled Economic Instruments for Water Pollution. That contained a number of possible measures to help maintain and improve water quality, and meet standards at lower cost. The consultation period has now ended, and the Government is considering the responses.
5.66 Two of the options on which the consultation paper sought views were a system of water pollution charging, applying to point sources, and a possible tax or charge on pesticides.
5.67 The Department of the Environment, Transport and the Regions has since commissioned research both on how a system of water pollution charging might work and into whether a tax or charge on pesticides would be an effective way to reduce pollution. There is evidence to suggest that pesticides have harmful effects on wildlife, terrestrial and aquatic ecosystems, and on human health. The current study on pesticides is focusing on various design options for a charge scheme or tax. The Government will evaluate the findings of the research projects, and the results of other ongoing work, in considering how best to proceed.
Pre-Budget Report 1998 index
