28 October 2019
The Institute for Fiscal Studies has predicted that the trend towards greener vehicles, particularly electric ones, will leave the Treasury with a hole of £33 billion. It argues that now is the best time to commence a reorganisation of taxation on road users.
The cash cow gets thinner
As most of us are aware, the taxation of the motorist takes many and varied forms: vehicle excise duty, VAT on vehicles, income tax and national insurance on company car benefits, fuel duty and, weirdly, VAT on fuel duty. At £40 billion per annum, this represents 5% of The UK’s total tax revenues. 70% of this is fuel duty and the amount is falling. Since 2010, the Government has frozen the rates of fuel duty so they have fallen in real terms. Over the same period, vehicles have become more efficient, using less fuel. So fuel duty as a proportion of GDP has fallen from 2.2% to 1.3%. This trend is expected not only to continue, but also to accelerate with the take-up of electric vehicles (EVs), so that fuel duty will eventually all but disappear.
What motoring costs society
It might seem fair to give the motorist a break and try to raise the shortfall in revenue elsewhere, but this would overlook other significant considerations. First, tax on motoring is relatively easy to collect; second, and more important, is the need to compensate society for the costs and damage caused by road transport. This includes wear and tear on roads and other infrastructure, greenhouse gas emissions, pollution, the cost of accidents, policing, noise, and, above all, congestion. Congestion accounts for 80% of motoring’s total costs to society. Last year, each driver lost 178 hours of productive time stuck in traffic. This is estimated to cost the economy nearly £8 billion annually.
A blunt instrument
The Institute for Fiscal Studies (IFS) calculates that the average social cost per kilometre driven is 17p. Fuel duty amounts to 7p per kilometre, so on average it falls a long way short of covering the cost. But this is not the full story. Not all kilometres are equal. Kilometres driven in cities are more damaging than those elsewhere. Kilometres driven in congested streets, as well as being more polluting, are a waste of valuable time. In fact, 60% of the social cost of motoring is caused by 10% of kilometres driven. So fuel duty is too blunt an instrument to fairly recoup compensation for the damage done.
Graphic: the Institute for Fiscal Studies
The alternative
With fuel duty likely to disappear almost completely over the next three decades, the IFS suggest that now is a good time to gradually introduce the motorist to fairer ways of taxing car usage. Its starting point is the London congestion charge, whereby motorists are charged for entering a specified zone. But as the IFS points out, this is not ideal. Once a driver has paid to enter the zone, they can drive around within it all day without further payment. What is needed is a road-pricing system where the amount paid relates to the true social cost per kilometre, depending on time and place. Such a system already exists in Singapore. Presumably, this would work either by automatic number plate recognition or more likely by a transponder fitted to every vehicle, with roadside installations recording the vehicle’s passage. A point not covered by the IFS is the political angle. Installing such a system in the compliant and law-abiding society of Singapore is one thing; overcoming the reservations of the British public and the likely accusations of Big Brother style surveillance is quite another. And those early adopters of electric vehicles who are currently enjoying low fuel costs are going to be the most opposed to road pricing.
But that is why the IFS is recommending that such a system be introduced soon, especially before expectations of low cost driving in EVs become ingrained.
To see the IFS presentation, ‘A Road Map for Motoring Taxation’ click here. If you have any views on this subject why not share them with me or any other member of the UHY automotive sector team.
