Bill Jamieson: Ministers must cut back on '˜tax dumping'

Ministers recalled from abroad; emergency Cabinet meetings; urgent talks in Brussels: the crisis over the future of the British steel industry has unfolded with a flurry of government activity '“ and a growing sense of helplessness.

Energy consumption accounts for a high proportion of UK steel plants running costs

There’s nothing that the government or Tata Steel can do over the global slump in demand for steel or the glut in world markets, or the frustrating delays that have slowed the EU’s response to China dumping. Its anti-state aid rules also represent a formidable obstacle to government support.

But there are two areas where the government can provide help: high energy costs and business rates.

A recurring complaint from the steel lobby, and indeed many of the UK’s large manufacturing concerns has been the high cost of energy and in particular the extra cost of climate change policies.

For the UK’s steel plants, energy consumption accounts for a high proportion of running costs, with grid electricity particularly important for blast furnace operations at Port Talbot. According to the World Steel Association, energy accounts for between 20 per cent and 40 per cent of the cost to produce steel.

The Engineering Employers Federation (EEF) recently warned that the UK’s unilateral Carbon Price Floor (CPF), could cost energy consumers £23 billion from 2013 to 2020.

Liberty Steel – the prospective buyer of steel processing plants at Motherwell and Cambuslang – has recently said that high energy costs and insecurity of energy supply in the UK could force it to move factories abroad.

The problem is far from confined to the UK, though it is particularly pronounced here. International Energy Agency figures show that average European industrial consumers pay twice as much for their power as their counterparts in the US. And the UK’s energy intensive industries face the highest electricity prices of all in the EU.

While China dumping has been singled out as the chief villain, legislation by UK governments have added to the cost of electricity for industrial users. This includes the CPF, which currently sets a price of carbon four times the EU price. And the costs of climate measures are expected to grow for industry. The Department for Energy and Climate Change reckons these policies will collectively add 66 per cent to the costs of electricity for industrial users by 2030.

To mitigate the damage of these climate change levies, the government launched an energy intensive compensation scheme, targeted at steel and other energy intensive groups. But this does not fully compensate industry for the costs of climate measures. The EU’s state-aid rules mean that the full costs of climate policies cannot be mitigated and the scheme does not currently cover all elements of climate policy. There is also no guarantee the compensation scheme will be extended beyond the spending review period.

So what could the government practically do? The free market think tank the Centre for Policy Studies (CPS)argues that the government “should seek a re-think on how climate policies more broadly are impacting on British manufacturers – rather than pursuing the comparatively ineffective policy of compensating energy intensive industries for the costs”.

How much better it would have been had an impact assessment been carried out before the climate policies were introduced. But politicians at the time were in fierce competition to outdo each other on their “Green” credentials and their climate change targets.

Longer term, the CPS suggests that further substantial shale production could reduce costs for energy intensive industries. It cites the House of Lords Economic Affairs Committee warning: “If the UK does not develop its shale resources in a timely fashion, it runs a serious risk of losing the energy intensive and petrochemical industries which depend on competitively priced energy and raw materials.”

No less insidious has been the steady increase in the burden of business rates, on the assumption that firms could absorb continuous rises with impunity. A notable feature of the Scottish Government’s “back to back” deal over the sale of Tata’s plants in Lanarkshire involved cutting business rates.

Disquiet over the relentless rise in business rates in Scotland is far from confined to steel processors. And the burden has just risen again as the main poundage rate rose on 1 April and the extra rates supplement paid by firms occupying medium and larger sized commercial premises is doubled.

Recent research by the Scottish Parliament Information Centre found that businesses are contributing a far greater share towards local authority funding than before. It revealed the tax revenue from business rates has risen by 42.5 per cent over the past seven years, in contrast to council tax revenues which have grown by only 7 per cent.

In 2007-08 both business rates and council tax generated similar amounts, £1.86bn and £1.89bn respectively, with council tax then raising £30 million more in revenues than business rates.

But by 2014-15 there had been a dramatic turnaround with business rates contributing £2.65bn, some £628m more than council tax.

The doubling of the extra rates supplement is expected to add an extra £60m each year to firms’ rates bills, and affect one in every eight commercial premises in Scotland.

The burden has been particularly keenly felt by high street retailers already facing profound challenges in their business models. David Lonsdale, director of the Scottish Retail Consortium, says business rates “have been wholly out of step with the other main local property tax, with rates tied to an escalator whilst council tax has been frozen.”

Any help for Port Talbot should therefore feature a cut in business rates and further action to reduce government-imposed energy costs. It helps when government cuts back on its own “tax dumping”.