Budget 2010: Fixing finances and cutting carbon

Our guest writer is Chris Hewett, an associate at Green Alliance

This week’s budget is being held against the backdrop of severe pressures on public finances. In recent month’s politicians have been exhorted to “think the unthinkable”, from universal benefits to Trident to public sector pensions.

Many of the policies required to cut carbon will need extra money and the more expensive ones are starting to come under greater pressure. So are there still areas where the taxpayer is propping up the high carbon economy that should now be challenged? And is the economic situation an opportunity or threat for green taxation?

First, reducing spending. Believe it or not, £10bn is still earmarked for road expansion over the next few years, despite the track record of such projects being that of escalating costs and often not delivering the benefits originally promised.

Analysis from the Highways Agency itself shows that studies used to decide on whether or not to build a road often underestimate the impacts on emissions and noise and fail to predict how much extra traffic the roads will generate. There are serious questions about value for money in road spending.

The A14 widening scheme, currently at public inquiry, is forecast to cost us £1.4bn alone. If you cancelled the eight most expensive schemes still in the Highways Agency plans, then £5.2bn could be saved.

Then there are the tax breaks and allowances that are still enjoyed by parts of industry dedicated to rapid consumption of fossil fuels. Aircraft and shipping industries are zero-rated for VAT. Energy intensive industries get a reduced rate for the Climate Change Levy. The Chancellor recently announced new investments in oil and gas exploration in the North Sea, which the industry claimed were only made commercially viable because of new tax breaks in the Pre-Budget statement.

There are many more barriers for private investment in renewables and energy efficiency than in the mature market of the fossil fuel economy. Shouldn’t we focus taxpayer support there? So, removing these tax breaks could save another £4-5bn. Already we’ve got an Olympic sized saving.

Green Alliance has just reviewed the potential options for reducing spending and tax breaks to the high-carbon economy. If all of the measures are taken spending could be cut by nearly £7bn over four years, and tax receipts could go up by about £5bn, thus reducing the deficit by £12bn. Of course, these cuts would not solve the problem of the national debt on their own, but using taxpayers’ money to promote a high-carbon economy never made long term sense, and at a time of economic austerity, they make even less sense in the short term.

The pre-election politics have focused on the spending side of the equation, but whoever the Chancellor is after the election, there will be a great deal more discussion of tax raising options. If we are to have a more honest public debate about taxation, then the case for green taxes to be a larger part of the mix needs to be made. Don’t expect much in this budget, but Green Alliance will be working with the Green Fiscal Commission to make the case in the coming months.

Finally, all of the political parties are looking at ways to lever more private finance into the low carbon economy, and the creation of a Green Infrastructure Bank is something to watch out for in the Budget. In fact, the degree to which any Infrastructure Bank proposals are linked to the low carbon transition will be one of the key environmental litmus tests for Alistair Darling this week.