Peston's Picks

Green taxes to fill black hole

• Robert Peston
• 11 Mar 08, 04:45 PM

The story of this year’s Budget will, I think, be new and higher green taxes to fill a potential black hole in the public finances.

Or to put it another way, the Treasury badly needs to raise money.

So the imposition of assorted green taxes – on gas-guzzling cars and flying – will not be matched by cuts in other taxes.

There, I think, is where any political row will ignite, because the Tories claim they would wholly offset any green levies with reductions in other taxes, so as not to increase the overall burden of taxation through environmental initiatives.

And although there may be many who will applaud the taxing of environmental bads, there will be plenty of others who will see the new taxes as disingenuous.

But what are the strains on the government’s finances that the green taxes are supposed to ease?

Well they stem from last summer’s pricking of the bubble in debt markets, which has taken its toll on property and share prices and will prompt a consequential fall in projected tax revenues from transactions in shares and property.

In the pre-Budget report of 9 October, the Treasury had expected stamp-duty proceeds to rise 5% to £15.8bn in 2008/9 and the contribution from capital gains tax to increase by 13% to £5.4bn.

Both of those forecasts look absurdly optimistic, even allowing for the incremental revenues that should flow from the controversial reform of CGT.

The FTSE All Share index has, for example, fallen 14% from the level that was built into the Treasury’s audited assumptions of last autumn.

That decrease automatically reduces the Treasury’s revenue projections.

Also, the level of housing sales is running 14% below where it was a year ago.

And although there are regional variations (the Scottish market is still pretty buoyant, for example), house prices are beginning to fall.

Lower share prices, lower house prices, and fewer transactions: collectively they would reduce the take from stamp and CGT by many billions of pounds.

And it gets worse, because the outlook for corporation tax isn’t brilliant either.

There is likely to be a fall of between 5% and 10% in profits reported by British companies in the coming year, according to City analysts.

That should mean they’ll pay less tax.

However there is a credit-crunch skew to this corporate slowdown: the prospects are gloomiest for our big banks, which, as it happens, pay a massively disproportionate amount of all corporation tax.

So on the revenue-raising side of things, the prospects could be at their least benign since Labour took office in 1997.

And that’s on the assumption there’s simply a modest economic slowdown this year, and that we avoid a sharp rise in unemployment or a recession.

In other words, and to state the bloomin’ obvious, if the government is to avoid humiliating cuts in its public-spending plans, the Treasury has to find additional revenues. Taxes will have to be increased.

Which is why Gordon Brown and Alistair Darling are presumably counting their lucky stars for global warming.

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Heathrow: Cleared for take off

• Robert Peston
• 11 Mar 08, 10:15 AM

I am suffering from a ‘flu-like’ virus which – according to my doctor – is afflicting “young adults” all across North London.

“Young adult” must be a technical, medical term. It was a bit of surprise to be categorised as such, but far be it from me to disagree with expert opinion.

But through the viral fog, I’ve been trying to discern the shape of the price settlement for our leading airports.

And from what I can see, the Civil Aviation Authority has blinked. In fact the airlines will probably complain that the CAA has shut its eyes and is refusing to open them.

The airlines will squeal because Heathrow and Gatwick are being allowed to increase what they charge them from 1 April by far more than could have been expected.

BAA will express disappointment with elements of the settlement, notably that there has been no increase in the cost-of-capital assumptions that underpin the pricing proposals.

But BAA is largely trying to spare the blushes of the regulator. The fact is that today’s settlement is very good news for the airports operator and its owner, the consortium led by Ferrovial of Spain.

So the first and big point to make is that there will not be a financial crisis at BAA.

With money markets still in turmoil, it may not be an ideal moment for the Ferrovial consortium to refinance the £9bn of debt it took on when buying the airports in 2006 (see last week’s blog on this).

However if there was doubt it would be able to find new loans, the CAA has laid that doubt to rest.

Or to put it another way, it has provided some comfort to future purchasers of regulated British businesses that if they don’t do their sums quite right, well the consequences should not be too severe.

The governor of the Bank of England would describe that, I think, as an increase in moral hazard.

But the Treasury, which thinks Britain has benefited from the sale of important companies to overseas interests, will be relieved that future buyers from abroad of great British businesses won’t be scared off.

Now, let’s look at those chunky increments in what Heathrow and Gatwick can charge.

Actually before I get on to that I am going to be horribly pedantic and point out that the CAA in today’s statement seems to have confused percentage points and percentages – which would be amusing, except that it’s an economic regulator and is presumably supposed to know the difference (actually its possible, I suppose, that the CAA doesn’t know how to round to the nearest whole number, which would be even more upsetting).

Anyway, Heathrow is being permitted to charge 7% (“per cent” NOT “percentage points”) more than what the CAA proposed just last November (the increase in percentage points is 8).

And Gatwick can charge 12% more than the November recommendation.

As a result of the wonderful power of compounding, that represents a massive increase in the airports’ cash flow over the five years of this settlement: the increment will compound at 7.5% plus RPI inflation every subsequent year.

That means, according to my calculations, that by 2013 BAA will receive £1.26 more per Heathrow passenger than it had expected to receive just three months ago – or about £95m in gross incremental revenue.

Not all of that will be profit.

It’s to state the obvious to say that there have been massive increases in security-related costs for airports over the past few years. But I’m not clear quite how security demands have changed since the last price-control proposals were published on November 20.

Understandably the airlines, which incur these charges, will moan.

However their argument that landing at Heathrow is becoming uneconomic isn’t strengthened by their propensity to pay huge amounts to each other to acquire landing slots at what some regard as a circle of hell too horrible even for Dante’s imagination.

The point is that Heathrow has an enormous share of the market. Many of us have to use it: there’s no real choice for some destinations at certain times.

Which means that the airlines will be able to feed the increased charges through to us. Passengers will pay.

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