Cable on Vehicle Excise Duty [VED]

12.28.03pm BST (GMT +0100) Fri 16th May 2008

' . . Road-user pricing is probably the best long-term replacement, and my party supports that view. I shall not hold my breath, because I wrote essays on road-user pricing when I was an undergraduate 40 years ago, and it still is not with us. . . '

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): I approached the Conservative motion in my usual constructive way and found things in it with which I could agree. I agree that the change for existing vehicles was not introduced with great clarity. I am sure that it is in the Red Book, but not too many British families sit around reading the Red Book in the evening to find out what will happen to their taxation. I also agree with the Conservatives that it is wrong, in terms of retrospectivity and the social consequences, to attack existing vehicles rather than new vehicles. That principle is clear. I also agree with the basic approach that such is the lack of faith in environmental taxes that any future changes have to be included within a package that is offset against other forms of tax. I agree with the motion on those three key points.

In parenthesis-since the Financial Secretary chose to have a go at my colleague, my hon. Friend the Member for Taunton (Mr. Browne), who is not here-I am not sure what she meant by the reference to a £50 billion package. The package that I crafted, which has gone through our party conferences and has been published, would cost about £20 billion. The basic principle behind it was that we would want to cut taxes on hard-working families-I think that that is the expression-and that it would be funded by a combination of environmental taxes, increased capital gains taxes and the removal of some of the reliefs on high earners. People might not like the politics of it, but the numbers were fully checked out by the Institute for Fiscal Studies. Indeed, I presented a copy to the Prime Minister, and since he proceeded with the cut in income tax, he may well have read part of it, although he did not follow up my advice on how to raise the revenue.

Jane Kennedy (Financial Secretary, HM Treasury; Liverpool, Wavertree, Labour): Let me make it absolutely clear. The hon. Member for Dundee, East (Stewart Hosie) suggested that the cost would be £57.5 billion over the years and asked the hon. Member for Taunton (Mr. Browne) whether he could make it clear

"what environmentally damaging things he would tax to find £57.5 billion".

The hon. Member for Taunton replied:

"I can indeed. Let me give the Committee a few examples". --[Official Report, Finance Public Bill Committee, 6 May 2008; c. 9.]

He then gave the example of removing higher rate tax relief on pension contributions, but failed singularly to bring forward any other measure.

. . Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): I think that I understand the mystery. Twenty times three is fairly close to 57-I think that that is where the Financial Secretary has got her number from. Of course, the environmental measures were a combination of aviation taxation-I think that even the Conservatives are fairly sympathetic to the point that aviation is under-taxed-and various specific proposals on VED. The environmental measures were clearly spelled out, costed and independently audited. I do not know why the Financial Secretary has a problem with it.

Let me return to the Conservative motion. Although I agree with elements of it, I disagree with the final phrase, in which it

"calls upon the Government to abandon its planned increases".

As I understand it-I might have misunderstood the legislation-the measures went much further than the changes for old vehicles. Was there not a package of measures that involved a new scale and a new structure for dealing with new vehicles? One can pick holes in particular details, but it seemed to me that much of that was reasonably sensible.

I ask the question that the hon. Member for Birmingham, Northfield (Richard Burden) asked earlier, as it was exactly right. What is the strategic framework within which the policy is located? If the Conservatives are attacking the retrospective taxation of old vehicles, do they go along with the argument-on which, until now, I thought there was a reasonable degree of consensus-that the differential for new vehicles should be widened? That view was not only set out in the quality of life policy group report, but argued on a cross-party basis by the all-party Environmental Audit Committee, chaired by the hon. Member for South Suffolk (Mr. Yeo). I think that many Conservative Members subscribed to the idea. The highest rate would have been of the order of £3,000, which is substantially more than the Government are proposing. I do not know whether that idea is being disowned or criticised now, but I always understood that the Conservatives supported it.

My second, related question is whether the Conservatives are questioning the whole basis of the idea of graduated VED as it relates to the environment. If graduated VED does not work-and there is a perfectly sensible, empirical debate to be had on whether it will work-what other signals could be used? There are other options. We could use more petrol duty, or road-user pricing. Do they want to shift the emphasis on to those options? There are of course problems with all those things, but VED probably involves fewer problems than some of them.

Are the Conservatives questioning the principle of using market incentives? That is what taxes are about: the use of a market incentive to change behaviour. There are people-not just environmentalists, but tough business people-who argue that we need to stop pussyfooting around with market instruments and should just get on with regulation. My former boss at Shell, Mark Moody-Stuart, was recently on the radio saying, "Let's stop all this silly nonsense about environmental taxes. It's all involved in giving money to the Government. We need draconian controls on vehicle emissions, and if car manufacturers cannot make cars with sufficiently low emissions, they will go out of business. You might want to toughen things further by tightening MOT controls, so that old vehicles simply go off the road." That is much tougher and nastier to people who own old vehicles, but that draconian approach would be the alternative to using market instruments. I do not know whether the Conservatives want us to move more in that direction or less in that direction, but that is the question that the hon. Member for Birmingham, Northfield, asked earlier. It is exactly the right question, and I have not yet heard the answer.

We got a hint of the answer when the hon. Member for Runnymede and Weybridge (Mr. Hammond) got a little carried away in a response to one of his colleagues, and started telling us about the motorist under assault. Most of us are motorists, and of course most of us are concerned about rising costs, but the concept of the motorist under assault needs to be examined a little. The Financial Secretary to the Treasury gave us a bit of a clue when she talked about real costs, and the overall cost of motoring in comparison with other modes of transport. What she said was quite true: in the past 10 years, the real cost of motoring, including everything-the private costs as well as the different types of tax costs-has fallen by 10 to 11 per cent. The cost may have increased in the last year-I do not think that those figures include the effects of petrol increases last year-but the figures are fairly neutral. Certainly the real cost has not risen in the past decade.

By comparison, in real terms, the cost of trains has increased by 6 per cent., and buses by 13 per cent. If we take a 30-year perspective, car costs have fallen in real terms by 10 per cent., and train costs have risen by more than 50 per cent. If we compare costs, it simply is not meaningful to talk about motorists being under assault, unless we mean the day-to-day irritation of higher fuel costs. In terms of the incentives structure, the system clearly remains heavily geared against public transport.

Before I say a little about my approach to the specifics of VED, it may be useful if I give a bit of historical context. It is often forgotten that vehicle excise duty was one of the many creations of the 1906 Liberal Government and of Lloyd George. He introduced it with two provisos, which were subsequently forgotten. First, he was very keen on graduated VED. It was to have been graduated by horsepower. That was not because of global warming, but there was an awareness, even then, of environmental costs. However, his recommendation that VED be graduated was subsequently forgotten. That is how VED was introduced.

Lloyd George also recommended that the receipts from vehicle excise duty should be ring-fenced. He was very conscious of the way in which the Treasury absorbs revenue, and specifically recommended that it should be set aside in a separate fund, which ultimately became the road fund.

The second historical point to which it is worth drawing attention is that in 1978 the vehicle excise duty almost disappeared, because the then Labour Government argued strongly that it was a bad tax. They wanted to get rid of it and convert it entirely into petrol duty. The serious analytical point that was made at the time was that if they did that, it would save emissions and fuel use, on a one-off basis, of about 10 per cent.

VED was saved for the nation by the Conservatives, who felt that it should not be abolished. They thought it was a good tax with all kinds of secondary advantages, including tightening up on the enforcement of insurance, so they kept it. That is why we have the debate today. The tax has gone a lot further since then, with the introduction in 1998 of environmental differences. Those are its origins, which are somewhat strange, one might think.

In conclusion, I shall run through some key points in the motion, which require some attention from the Front-Bench spokesmen on either side. I begin with a simple factual question; it is not a policy point. I do not know the answer to it. In the motion the Conservatives imply that the introduction of differentiated VED has very little impact on CO2 emissions. They say that there will be a 1 per cent. reduction. That may or may not be true. It may be what the Government are saying. Is it true? What is the evidence?

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede & Weybridge, Conservative): The hon. Gentleman may have heard the exchange earlier with the Minister, when we appeared to be in dissension, but as the right hon. Lady confirmed, we were saying precisely the same thing-that the expected change over 10 years as a result of the measure is less than one seventh of 1 per cent. of CO2 output.

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): If that is true, ceteris paribus and ignoring other considerations, it is an extraordinary conclusion and it goes completely contrary to all the experience that we have had. I am interested and intrigued. If that is the case, we will need to rethink the policy. If it does not work, what is the point of continuing with it?

The evidence of the past few years is that differentiated VED produces substantial changes. Even over the past six years, the number of vehicles in the A, B and C groups has increased from 19 to 36 per cent., and the number of vehicles in the higher range-E, F and G-has fallen from 58 to 37 per cent. Not all of that is necessarily environmentally driven, but it is suggested that that is what has been going on.

The Carbon Trust, which advised the Environmental Audit Committee, produced remarkably high elasticities for the impact of vehicle excise duty on consumer choice. If all this is wrong, it is important that the Government present the analysis. All parties need to rethink what they are doing. There is no point in blindly pursuing a strategy that is not working. May we have the evidence and the basis on which the policy was arrived at?

Rob Marris (PPS (Rt Hon Shaun Woodward, Secretary of State), Northern Ireland Office; Wolverhampton South West, Labour): When the hon. Gentleman looks for the evidence underlying the changes to which he referred, I suggest that he examines the taxation regime for company cars, which changed markedly in those years and was a driver when prospective purchasers of company cars looked at what the income tax effect would be, perhaps more than the vehicle excise duty effect.

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): That may be part of the argument. In the opposite direction, I saw a study produced by the Environmental Transport Association, reporting that 42 per cent. of all motorists planned to switch to more environmentally friendly cars at their next purchase. That may be tax driven; it may be ethically driven. We do not know. Clearly, there is a mood to switch, and I do not believe those wholly negative results, but I believe in science and I would be interested to see where they came from.

On the policy, I agree. There is nothing much to add. The arguments against taxing existing vehicles are strong, in terms of both fairness and the underlying economics. There is no need to labour the point.

One question that the Conservative spokesman did not raise, which is worthy of mention and often posed by the farming community, is how we deal with the specific problems of working vehicles. The NFU argues that it can produce a workable definition of working vehicles. It is a technical point, but if it can do that, we should try to exempt them. There is no point treating real tractor-type vehicles on the same basis as Chelsea tractors, which would defeat the objective of the policy and undermine agriculture, and there is clearly work to be done on that point.

If we are looking to the longer term, both for the reasons that have been advanced in this debate and more generally, there is a strong argument for moving away from vehicle excise duty as the main instrument to attempting to change behaviour on the roads. Road-user pricing is probably the best long-term replacement, and my party supports that view. I shall not hold my breath, because I wrote essays on road-user pricing when I was an undergraduate 40 years ago, and it still is not with us. It has real problems of technology and privacy, but the technology is now much more advanced and I would welcome progress in that direction.

I was surprised that neither of the two speeches so far referred to the technological change required to produce the switch to low-carbon vehicles. We can play around with prices and taxes, but if the technology does not advance, we are unlikely to achieve very much. Fifteen years ago, I helped to produce scenarios for the oil company for which I worked, and we knew then that low-carbon emission vehicles were available. All the elements were in place-light materials, more efficient engines, more efficient batteries-and that was why the company did not anticipate some of the high prices that we have seen. It assumed that high growth in China and India was entirely compatible with relatively low oil prices because we would see all those energy-efficient vehicles on the roads, but it never has seen them. It has been a slow process and I wonder whether the Government should now consider some of the regulatory steps that need to be taken to push the revolution along faster.

Adam Price (Spokesperson (Communities and Local Government; Culture, Media and Sport; Defence; Transport; Ministry of Justice); Carmarthen East & Dinefwr, Plaid Cymru): The hon. Gentleman is making a typically thoughtful speech. Given that he agrees with some of the elements of the Conservative motion, but has problems-as I do-with the last clause, will he join the Conservatives in the Lobby tonight?

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): I was not inclined to do so, because of the aspect that the hon. Gentleman mentions, and it is interesting to hear further contributions on that subject.

Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour): The hon. Gentleman talks about regulation and the context in which motor manufacturers make their engines. I am sure that he knows about the EU directive that we hope will be in place by 2012 to regulate the emissions allowed from the tailpipes of cars, reducing them to 130g of CO2 per kg. That is a significant stretch for current technology, but that is the regulatory context in which policy has to be set.

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): That is a helpful additional factual point. If we are to round off this discussion properly, we have to have some concept both of the targets for introducing new technology and the monitoring and enforcement of it. All those different elements have to accompany the tax changes, otherwise they will have no effect.