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Mr. Letwin: First, let me say a few words first about the proposition of the hon. Member for Somerton and

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Frome (Mr. Heath). For reasons that I will come to, I am not--as the hon. Gentleman and others may know from the Committee stage and Second Reading--a great fan of this tax. However, the logic of the hon. Gentleman's argument is difficult to dispute.

The Financial Secretary has said on numerous occasions that he will continue discussions with the industry about the possibility of introducing an exemption scheme. If he is so minded, it must be true, as the hon. Member for Somerton and Frome said, that it would be convenient to avoid the necessity for subsequent primary legislation. Indeed, it may be more than merely convenient--it may be necessary for the survival of large parts of the industry that it be possible to introduce the exemption scheme without the need for the laborious process of primary legislation.

We ought to hear today--although I harbour a doubt that we will--that the Financial Secretary has at last capitulated to the demands for at the very least an enabling clause of the kind proposed by the hon. Member for Somerton and Frome. The Financial Secretary said in Committee not a day or two ago that an enabling clause did not commit the Government to very much. That is true. The resistance that the Government have so far displayed towards an enabling clause, however, suggests that they are not so convinced as they make out and that they will eventually introduce an exemption scheme. That would be lamentable. I hope that the expectations that I have voiced will be shown to be false and that the Financial Secretary will accept the hon. Gentleman's new clause.

As we have said repeatedly during the passage of the Bill and those parts of it relating to the aggregates levy, even with the exemption scheme, we strongly oppose the introduction of this new stealth tax. That is why we have tabled amendments Nos. 1, 3 and 2. At this point, I should declare an interest the nature of which has always eluded me, but which might exist.

8.15 pm

I am clear that there is a deficiency in the tax, even in the rational version of it entailing the hon. Gentleman's proposed exemption clause and regulations that provide for exemption. That version is rational because it might at least achieve the environmental effects that the tax purportedly seeks to achieve. In that, I agree with the hon. Gentleman.

Our objection is to the triadic rhythm, which runs like this: the Government announce a tax, in the nature of a fine, for a particular segment of British industry. The second step is that the Government announce that people who behave well will not be subject to the fine. The third step is that the Government institute officials, in a more or less arbitrary fashion, to negotiate with particular parties in the industry sector about whether they are sufficiently good boys not to pay the fine.

That is not how to govern the country. We do not believe that there should be pre-ordained fines or that officials should be put in the position of judges, seeking to determine whether particular firms have behaved sufficiently like good boys or girls to avoid such fines. I grant that it may be effective--in that, I agree with the hon. Gentleman--but I do not think that it is proper. It is not the right way in which to go about achieving the aim.

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If the aim is essentially regulatory, let the device be essentially regulatory. If the aim is to create a market or charging system, let the device be a charging system of tradeable permits or the like. If the aim is to create an economic incentive, let it be an incentive and not a penalty. None of those devices is the same as a fine, which people can avoid if they behave well in the judgment of some official. That is a route, not to immediate disaster, but gradually, by degrees, to an arbitrariness in government which I think even Labour Members will come to regret.

The Financial Secretary to the Treasury (Mr. Stephen Timms): I am listening to the hon. Gentleman's discourse with interest. Would he include in the list of avenues that might be considered the price mechanism, which applies in this case? I should have thought that, on reflection, he would agree that there could be an important role for the price mechanism in achieving environmentally beneficial results.

Mr. Letwin: I do not wish to prolong the debate, but I should like briefly to address the really interesting issue raised by the Financial Secretary. I suspect that all three parties are at one in believing that economic incentives, including pricing mechanisms, are in some circumstances appropriate for achieving desirable environmental effects. The problem about this tax, and particularly in relation to the way in which it is being implemented, is that it is not a pricing mechanism, because the elasticity at the other end--the supply elasticity--does not exist.

The tax will not reduce the propensity of people who are building buildings to use less that is made with aggregates, because that cannot be done. If there were a serious elasticity of building, the tax would slightly reduce the amount of building in the United Kingdom. I judge the effect to be minimal, however. The Financial Secretary has never brought forward an elasticity study suggesting anything to the contrary. Cross-elasticities, on the other hand, may be considerable, and I shall come to that.

The problem about the tax is that what elasticity effect it has is at the wrong end. It will drive out domestic aggregates production in favour of imported aggregates production, in the form of asphalt and pre-cast concrete. It will destroy British jobs, and in that, it will indeed be a price signal. However, that is not the price signal that the Financial Secretary wants to send, and the tax, in its present form, will have no other serious effect. So although we agree with the hon. Gentleman about the principle, he has unfortunately not translated that principle into practice in this instance.

That leads me directly to the essential point that I want to make tonight. I do not want to rehearse at length all the arguments that we made on Second Reading and in Committee of the whole House about this tax; that would be tedious. I do want to place on the record and put in the mind of the Financial Secretary, who has exhibited a tendency to think about these things and to reach conclusions after debates, a series of answers to his response to a point that I made in the Committee of the whole House.

I argued in the Committee, as I had on Second Reading, that the effect of the tax would be seriously to displace employment from this country to southern Ireland and the

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northern continental shelf. The Financial Secretary said--I know from experience that when he says these things, he means them--that he did not believe that proposition. He said that he did not believe that the £1.60 a tonne of tax, even with the differential that it created with the zero tax rate in southern Ireland or the 5p tax rate in France, would be sufficient to offset the transport cost disadvantage of displacing production to those locations outside the United Kingdom.

To be absolutely fair to the Financial Secretary, because this is no party political game and I want to try to get this straight, I believe that he made that argument particularly about northern Europe--the northern continent. He was less firm about southern Ireland. I believe that he did take on board the issue in relation to southern and Northern Ireland.

I stress here that, essentially, we are dealing with the commodities that are made of aggregates, as opposed to the aggregates themselves. The aggregates themselves are correctly subject to tax if imported, just as if produced domestically.

I have looked into that assertion by the Financial Secretary since those debates in the Committee of the whole House, and I have consulted the industry. To say that I have done so widely would be hyperbole. I have consulted a number of people in the industry--among the small producers and the larger producers--who are very well informed, to try to get a sense of whether there is a serious problem of differentials. I want to try to identify briefly why I believe that there is a very serious problem of differentials.

Eight tenths of this argument depends on understanding that the £1.60 is not the end of the story. The first part of that part of the argument stems from the fact that £1.60 a tonne is a true assessment of the average cost of the tax to the producer, but, as we have had occasion to note in our rather lengthy debates about this matter--although not, alas, sufficiently lengthy in some cases--the production of aggregates is a highly complex business in the sense that many things are being produced simultaneously, some of which are the intended product and some of which are by-products. The Financial Secretary is as familiar with that reality as we are.

It is impossible to sell by-products and low-grade waste--in Committee, we had a long disquisition about dust--at full price. They cannot be sold at much above the price at which they are currently sold. That is what I am told by both sides of the industry--the aggregate producers and the construction industry. As a result, the average cost of production of the high-grade material will go up by more than £1.60 a tonne, because a hefty part of the tax, which would otherwise be borne by the by-products and will be chargeable to the by-products, will have to be loaded on to the price of the primary products. That, I suspect, is an inescapable conclusion.

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