Are Lib Dem tax plans greener?
Updated on 18 September 2006
Can the Lib Dems hog the radical highground when it comes to the environment?
The Claim
"Our new green tax switch proposals are the most radical ever from any major UK political party,"
Sir Menzies Campbell, Lib Dem leader, speech to the party conference, 17 September 2006.
Background
Increasing the amount of money raised by "green" taxes is a key part of the Liberal Democrat's plan for a shake-up of the country's tax system which is intended to punish polluters rather than the poor.
An extra £8.1bn a year would come from taxes on things that harm the environment, according to Fairer, Simpler, Greener, a key policy document set to be debated at the party's annual conference tomorrow.
The increase will fund other tax cuts, such as a reduction in the basic rate of tax and a raising of the basic and higher tax thresholds. The switch to green tax will also provide an important economic incentive to reduce emissions to sustainable levels, the party hopes.
But are the green tax proposals really as radical as the party says?
Analysis
The extra environmental cash will come from three main sources: aviation, vehicle excise duty and fuel duty.
Around £3bn extra will, the party claims, be raised from changing the way planes are taxed. An aircraft tax would be brought in to replace the current airport passenger duty.
In other words, taxes would be calculated in relation to the actual number of flights taking place - and therefore creating emissions - rather than the number of passengers that happen to be on board.
Vehicle excise duty (VED) would also get a shake-up, with owners of cars that cause the most pollution charged £2000 a year.
In total, the party's plans would double the amount raised by VED, and quadruple that raised by taxes on aviation. Taken alone, these are both big increases.
Currently, the majority of environmental tax revenue comes from fuel duty. So, by increasing taxes in these other areas, the Lib Dems can be seen to encourage a change in scope of green taxation.
Getting the sums right
On fuel duty, however, the Lib Dems' proposals seem not only less radical but also less solid. The party has said it will increase fuel duty in line with inflation, bringing in an extra £600m in the first year.
This isn't necessarily that different from the current Labour policy. "The Government's own forecasts assume that fuel duty will go up in line with inflation," Stuart Adam, senior research economist at the Institute for Fiscal Studies, told FactCheck.
"Lib Dems say that in real terms the chancellor is likely to freeze duty [as he has before] but even if he does, he still has to find the money to compensate from somewhere else. They assume that under a Labour government, fuel duty just erodes until, eventually, it disappears."
This means the party is effectively "double-counting" the revenue from fuel duty - factoring it into its proposals as extra new cash, when really it's already part of the UK's tax package. According to Adam, this leaves a hole in its financial package of around £3.25bn.
The power of oil
There's one other fuel duty factor to consider: its relationship with oil prices. If oil gets cheaper, the Lib Dems plan to increase fuel duty so that the price of petrol at the pumps would stay the same.
Still, to compensate for the hole in the budget, Adam says oil prices would have to fall dramatically - far lower than a simple dropping from their current high peak. And there's no guarantee prices will fall - they could rise instead.
The bigger picture
There is also the question of how much money is raised by environmental taxation in total. The latest figures from the Office of National Statistics show environmental taxes bring in £35bn a year - a figure that remained unchanged in 2004 and 2005. So, adding an extra £8bn a year would be an increase of nearly a quarter (23 per cent).
Sounds good, but what about the bigger picture? Over a four-year parliament, the Lib Dems say they want to get the level of environmental taxation back up to at least the level it was in 1999 (3.6 per cent of GDP). This is the highest it has been under the Labour government.
Not bad, perhaps, for four years' work but it could be argued that a truly radical proposal should aim for a much higher level than that set by the previous government.
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Verdict
Although the plans to increase fuel duty in line with inflation aren't dramatically different from the theory behind the government's own forecasts, they do allow the Lib Dems to highlight the fact that Labour has, in reality, frozen fuel duty.
Larger proportional increases to other, less tapped areas of tax such as cars and aircraft, do suggest new ways of thinking about the tax landscape.
And although the shadow Chancellor, George Osborne, has pledged that the Conservative party will increase green taxation, the Tories have yet to reveal any substantive proposals to blow the Lib Dems out of the radical water.
The Sources
Speech to Green Tax Switch Rally, Sir Menzies Campbell, 17 September 2006
Briefing on Environmental Accounts, 23 May 2006
Fairer, Simpler, Greener
Institute for Fiscal Studies
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