Memorandum submitted by UK Steel Association
TAXES ON CORPORATE INCOME
|Country||As percentage of tax revenues
||As percentage of GDP
Source: OECD Revenue Statistics 1999.
This is not a new phenomenon. It is partly a vestige from
the 1980s, when the UK Government sought to reduce direct personal
taxation. Corporate tax levels go up, as government seeks to keep
personal tax levels low.
Britain starts losing its business appeal
Many inward investors of course are able to benefit from
different tax arrangements. Be that as it may, they have still
come to the UK for other reasons than the level of tax. The strength
of the financial centre, language, corporate governance, EU membership
and the flexible labour market have all been important considerations.
However, the continued emergence of Frankfurt as a financial
power house, the adverse position of sterling as an export currency
into Euroland, increased regulation and the creeping adoption
of some of the rigid European social programmes are all taking
the edge off the UK's competitiveness. In the World Economic Forum
rankings of most competitive countries, Britain has now fallen
from forth to ninth in two years.
"City's" focus on short-term returns
Recent public discussion has highlighted how the banking
sector is now held in the thrall of the telecommunications giants
having helped to underwrite the huge investments made to acquire
the digital licences. These funds, some £21 billion in the
case of the UK, have gone directly to Government, and are no longer
available to the economy at large.
Meanwhile, manufacturing and steel companies are in competition
with sectors like telecommunications for funds. Unable to provide
the large short-term gains, they are not favoured by the UK banks
and have increasingly had to depend on foreign sources of capital
for investment, hence the large number of foreign investors in
UK manufacturing companies.
When financial markets lose their perspective, the consequences
can be dire for the rest of the economy. Are the current market
mechanisms sufficient to both deal with and help facilitate the
huge and rapid changes taking place as ICT (Information and Communications
Technology) processes are taken up across all sectors of the economy?
Some of the Central and Eastern European Countries (CEECs)
seeking EU membership have relatively large steel industries (Poland,
Hungary and the Czech Republic out of the first wave, and Bulgaria,
Romania and Slovakia out of subsequent waves).
Because these industries were developed to meet the needs
of centrally planned economies and consequently focused on heavy
products intended primarily for the armaments industry, they paid
little attention to energy efficiency and are often poorly sited
(away from transport or shipping infrastructure). Productivity
is low, 20 per cent of EU levels and that gap has been widening
over the last 10 years.
There is significant potential for European market disruption
and trade conflict with these countries.
We believe that the Government should ensure before they
enter the EU that:
(1) the CEECs adopt the full Acquis Communautaire;
(2) their steel industries implement agreed restructuring
plans, based on realistic market analyses;
(3) the process of privatisation is completed, with all
forms of state assistance and involvement terminated.
It will be better to have a more prolonged pre-accession
period than allow them early entry with transitional arrangements
that give them favourable treatment at the expense of jobs and
plant in the UK.
These issues all run counter to the Government's clearly
expressed policy of encouraging business competitiveness. Some
seem to share a common root, all too common in the UK, in that
they stem from policies framed from a "consumer" perspective,
rather than from a knowledge and understanding of making things
and trading them internationally.
Euro exchange rate and its impact on steel's customers as well
UK stability has been achieved at a cost. Imbalances between
different sectors of industry and regions of the country have
increased. Indeed, large parts of the traded sectors have suffered,
losing orders and seeing margins squeezed. This has forced them
to cut jobs and delay much-needed investment.
Stability may have been achieved in the domestic economy,
but there is still huge volatility in the currency markets, wreaking
havoc with UK steelmakers' gains in international efficiency.
The euro, the key currency for UK steelmakers, has now depreciated
by nearly 20 per cent since January 1999. So, for example, despite
pay restraint to contain wage increases to levels below inflation,
the strengthening pound means that in euro terms, pay per head
has soared over 40 per cent since 1996. Although the industry
has been able to improve labour productivity, this has of course
seriously eroded steel's competitive position internationally.
Since 1996, the average value of each tonne of steel the
industry exports fell from £410 per tonne to £300 last
year. If the euro/sterling exchange rate had remained unchanged
during 1999, UK steelmakers would have earned an additional £300
million on the export sales they made to Euroland. This would
have cancelled out their losses. With no change in the situation
this year, the only option is to attack the cost base.
Government should acknowledge that the sterling/euro exchange
rate creates a problem for the UK. It should stimulate an informed
debate about euro membership, the MPC and its composition and
the divergence of interest rates between the UK and Euroland.
The Government should change the MPC's target from the Retail
Prices Index excluding mortgage interest payments (RPIX) to the
Harmonised Index of Consumer Prices (HICP) and reduce the target
to 2 per cent (in line with that of the ECB), retaining its symmetrical
The Chancellor should appoint an additional independent non-academic
economist to the MPC who has significant experience of working
in industry. The person should be seen as somebody with general
industrial experience rather than a specific sector representative.
Independent and detailed research should be commissioned
immediately to look at the possibility of incorporating the exchange
rate and other asset prices into the current monetary policy framework.
Steelmaking is energy intensive. Companies have worked hard
to minimise energy use. Compared to 1970 the industry now uses
40 per cent less energy for every tonne of steel produced.
However, UK steel producers are still having to pay up to
40 per cent more for their electricity than their European competitors.
And now the new trading arrangements (NETA), which were to have
been brought in in November, have yet again been delayed for "technical"
reasons, so that they will not now be implemented until February
2001 at the earliest. Government estimates that NETA will cut
electricity costs to industry, which are amongst the highest in
Europe by 10 per cent. This will clearly not be enough.
These high prices have had a direct impact on UK steel production
patterns. One of the two steelmaking processes uses electricity
to produce molten steel from scrap. This Electric Arc (EA) process
has increased its share of steelmaking throughout the EU by 27
per cent since 1984. But in the UK it has fallen by nearly a third.
The industry also suffered very high gas prices, until some
years ago, when market liberalisation eventually delivered competitively
priced supplies. But this has only lasted a few years.
Now gas prices have doubled since January 2000 (see graph),
in the yearly contract negotiations. They have tended sharply
upwards to continental levels (which are linked to the price of
oil) as a result of the influence of sales of UK gas through the
Interconnector. This is ruining 10 years' work in liberalising
the gas market and threatens further cuts in manufacturing capacity
and therefore jobs.
Government has recently shown itself to be more alive to
the way UK energy prices undermine UK manufacturing competitiveness
in the European Single Market. However, more needs to be done
to actually deliver competitive prices. After all the UK has half
of all the EU's oil reserves and a fifth of all the natural gas.
Regulatory action is required at UK and European levels to
re-establish a competitive market. Offshore regulation should
be strengthened particularly with regard to the use of the Interconnector
by national monopoly gas producers.
While no one wants NETA to be introduced prematurely for
a "still birth", the delay certainly does not serve
the interests of big industrial electricity users like steel,
whose competitiveness is fundamentally affected by energy input
prices. Government should not let them get away with it any more.
Fuel excise duty
As an environmental measure the fuel tax has clearly failed.
Despite having the biggest fuel taxes in Europe, a higher percentage
of passenger miles are still travelled by car in the UK than in
any other EU country. Yet UK diesel prices, that are 40 per cent
higher than the EU average, place an additional cost burden at
every stage of the supply chain, with a cumulatively adverse impact
on UK competitiveness all the way down the supply chain.
Studies have shown that the availability of viable alternatives
has a far greater impact on transport choice than taxes.
The Government should therefore substantially reduce fuel
excise duty for diesel, and commit itself to ploughing the remaining
receipts from FED into further public transport investment.
Climate change levy
The Committee was fully briefed on this issue last year.
However, as an aide-memoire there are still, in our view, three
issues that should be dealt with differently.
DETR's proposed penalties for non-compliance in the negotiated
agreements make no allowance for marginal failure. Thus companies
reporting 99 per cent compliance and 100 per cent failure would
be treated with equal rigour and suffer the equivalent of 100
per cent of the tax. The EU's draft guidelines on State Aid recommend
proportionality, which we believe should be applied in the UK.
Only companies that operate plant covered by the Integrated
Pollution Prevention and Control (IPPC) Directive are eligible
to enter a negotiated agreement. This will raise costs and distort
competition within the steel sector:
The production of oxygen, an important gas for
the steel industry, is not eligible despite the fact that its
production is very energy intensive and does not produce CO2.
Steel companies will have to absorb extra costs of some £6
million a year, equivalent to 42p per tonne of steel produced.
A steel wire company that has replaced acid pickling
with mechanical descaling (for environmental reasons) will be
excluded from an agreement, whilst a company retaining pickling
may enter an agreement, even though they may be making the same
product for sale in the same market sector.
Steel produced by re-melting scrapped steel requires 69 per
cent less fuel per tonne of product than the primary route, producing
"virgin" steel. Nevertheless, under the CCL, the levy
charge per tonne of steel is considerably higher when using scrap
materials than for "virgin" material. The CCL will cost
the steel industry £10 million in direct taxes. Indirect
costs, such as those passed on by for example oxygen suppliers
will add further costs. An exemption on the melting of ferrous
scrap in electric arc furnaces would result in a loss of tax to
the Treasury of less than £1.9m per annum, or under one fifth
of the sector's commitment under the CCL.
Government sponsored reports into competitiveness have already
highlighted the cost of land as one of the key disadvantages that
business has to overcome in the UK. We have not undertaken detailed
research into rates, but where we have been able to make direct
comparisons, we have found some plants paying as much as 8-10
times the equivalent of another EU Member State.
Further, after the workplace parking levy, which hits car-dependent
away-from-town-centre work locations particularly hard, Government
is now proposing to introduce the Business Supplementary Rate
(BSR). After five years, BSR could add an additional 5 per cent
to businesses' rate bill. The BSR's aim is to encourage business
and local authorities to consult with one another over the spending
of these additional sums. To business it is going to look like
little else than an extra charge to stop vandalism. It is yet
another example of a "good idea" from a consumer perspective
looking like a complex anti-manufacturing tax.
Scrub both proposals and get to understand how such ideas,
that clearly disadvantage manufacturing, can be repeatedly put
forward and gain currency, instead of proposals that would actually
help manufacturing activity.
Capital investment allowances
Government has limited its capital investment allowances
to SMEs. SMEs depend on the financial health of larger companies
for their own viability. Each year, the steel industry alone pays
nearly £600 million into SMEs directly supporting 11,000
man years' work.
Government should widen allowances to include all companies,
thereby encouraging investment. In the first instance, Government
should give all companies whatever their size, the same rights
as SMEs in IT and research and development.
Some trade surges do serious damage to prices and therefore
to producers. However, naturally enough, given that we export
half of all the steel we produce we are ardent advocates of free
trade with the proviso that it is fair.
Since the mid-1980s, the UK Government has shown little enthusiasm
to support EU cases into suspected steel dumping or other trade
distortions. The USA is nothing like so reticent. Its trade laws
provide far more effective short-term remedies than EU procedures.
In the EU, provisional duties are applied 270 days after a case
is filed, at the earliest, provided the Commission and a majority
of Member States are satisfied that material injury has been caused
to them by the imports. In the US an anti-dumping case has a very
low injury hurdle to jump in the very first days of the investigation.
After that, the imposition of provisional duties, at the very
latest 210 days after filing, are a foregone conclusion. This
has a trade freezing effect, as exporters stop selling as soon
as the initial (low threshold) injury determination is reached.
Government should support the European Commission, when it
proposes anti-dumping duties against imports that are threatening
the European steel industry.
In the next WTO round, Government should support world-wide
harmonisation of the way in which anti-dumping rules are implemented.