Boris Johnson at the wheel
The UK tax code is notoriously complex. As long ago as 2009 we had the longest tax code in the world – read the Telegraph story here – and it’s only got worse since then. Everyone agrees that we need tax simplification, but no one can deliver it. And politicians are always coming up with ideas for clever new ad hoc complications. This time it’s BoJo.
Just a few years ago we were being urged to switch from petrol cars to diesel, because diesel produces less CO2 emissions per mile than petrol. So we could save the planet (if you believe in that kind of stuff). Now bien pensant opinion has decided that the negative health effects of particulates in diesel exhaust (in terms of respiratory diseases) is even more serious than global warming, so the advice is turned on its head. Please switch back from diesel to petrol. The average punter will be saying “Make yer mind up!”.
But Boris has taken this to heart. He wants to have heavier congestion/pollution charges in London for diesel vehicles.Telegraph piece And he promises to lobby George Osborne for a national increase in diesel duty, to make petrol more attractive.
I always thought that BoJo was a conservative, and if a conservative wants to create a differential, he should call for a cut in petrol duty, not a hike in diesel duty. The British economy (and the long-suffering motorist) are taxed far too much already.
Then again, these things change on a fashion and a whim. Diesel good yesterday. Petrol good today. But drivers buy cars for several years — indeed we are constantly urged to replace them less often, to reduce waste. And auto companies plan for years ahead. Jaguar, for example, are busy building an engine plant in Wolverhampton employing 1400 people. What an excellent thing. But should they build petrol or diesel? Or does BoJo expect them to turn on a dime, halfway through construction? It’s all very well politicians coming up with their latest fad, but they’re imposing heavy burdens on consumers and on industry, who will have made expensive long-term decisions already.
It’s not just petrol and diesel. There’s talk just now of taxing sugar. But a few years ago the bugbear was carbohydrate. Potatoes and pasta made you portly. Then it was fat. Now the culprit is sugar. If opinion is swinging like a weather-vane, that’s not a good basis for tax tinkering.
George Osborne’s “Carbon Floor Price” is another clever idea that looked good on the back of an envelope, but was fraught with unintended consequences and perverse incentives. He started with the European Emissions Trading System (ETS), which has disastrously failed to achieve even its own objectives (and they were bad objectives to start with). Oversupply of carbon credits has been massive, and the price of emissions has been trivial, so we have a vast bureaucratic machine (and thousands of jobs trading carbon futures) for no perceptible result.
The sensible response would have been to dump the ETS. But no. George wanted a quick fix, so he announced a Carbon Floor Price (CFP) If the price of emissions was too low, George would add a surcharge to bring it up to his approved level (making a nonsense of the claim that the ETS was “a market mechanism”, by the way). As a solution, this was no better than a sticking plaster. In fact, worse.
If the gap was small, the CFP would have little effect. But if the gap were substantial, it would have the following effects: It would
- Add to industry’s costs — but only in Britain
- Put British industry at a competitive disadvantage to the rest of Europe
- Deter investment in the UK
- Move jobs and industries and investment out of the UK altogether
Indeed the effect on energy-intensive businesses was so great that they were obliged to tell the Treasury a few home truths, as a result of which a range of extensions was cobbled together for those industries – report But since those industries produce most of the emissions to start with, exemptions would largely destroy the primary objective of the CFP.
The result? More bureaucracy, more market distortion, higher prices, lower growth, fewer jobs, not much revenue, and a failure to achieve the original objective. Nigel Lawson’s famous remark about “teenage scribblers” comes to mind. But now they’re scribbling in the Treasury.
One of the greatest problems facing industry and investors today is regulatory uncertainty. Who’s going to invest £12 billion across sixty years in a nuclear power station while governments in Japan and Germany just arbitrarily close down their nuclear fleets? And it’s not just nuclear. The EU (you’ll not be surprised to hear) is at it too, with bio-fuels. Not strictly a tax example, this, but an example of how politicians pursue their latest fads and insights with a supreme disregard for the industrial mayhem they cause.
A few years ago, the EU was hooked on biofuels. Wonderful, clean, carbon neutral — the answer to a maiden’s prayer. So we mandated that 10% of petrol and diesel should be bio-fuel. That was quite a headache for the industry (both petrochemicals and automotive) but they got on with it and made the best of it.
A Finnish company called Neste (nothing to do with Nestlé) made a huge investment in a biofuel refinery in Singapore — around €550 million. Then we in the European parliament started to realise that biofuels had downsides. They require energy (implying emissions) in the raising and processing of biofuels crops, so the net emissions saving is less than first thought of. Then a second bombshell struck. Mounting evidence showed that committing large land areas to bio-fuels meant that other marginal and previously undeveloped land was brought under cultivation to replace the food crops lost to biofuels. But this process — known as “Indirect Land Use Change” or ILUC — creates a new and massive carbon emission problem. Add it all up, and the emissions savings achieved by biofuels may be trivial, or even negative.
As this became clear, the parliament rushed to change that 10% target to a more modest 5% — cutting Neste, and its investment, off at the knees.
The lesson couldn’t be clearer. Turning clever ideas and passing fads into tax policy does more harm than good, increases regulatory uncertainty, and discourages investment. We need tax policies that are clear, consistent and transparent, and (at least to an extent) predictable.