Fuel for thought 15 May 2012

Motoring tax income to fall even as traffic rises.

Future Chancellors of the Exchequer will need to fill the hole in the public finances caused by a relentless decline in the amount of revenue collected from fuel duty and VED.

The fall has already started and comes even though traffic is predicted to grow strongly over the coming decades. 

The collapse in income from motoring taxation will be caused by increasingly fuel efficient petrol and diesel cars, and the predicted large-scale take-up of electric vehicles.

Projections show the amount of fuel duty revenue collected by the Exchequer currently stands at 1.7% of GDP, but will tumble to 1.1% of GDP by 2029. Unless policy is changed VED will also drop - from 0.4% of GDP to 0.1% - over the same period. The combined fall will leave a £13 billion hole (in today’s money) in the Treasury’s coffers.

The forecast is drawn as part of a detailed analysis of motoring taxation in a report called Fuel for Thought - The what, why and how of motoring taxation, commissioned by the RAC Foundation from the independent Institute for Fiscal Studies (IFS).

One way a future chancellor could make up the shortfall would be by lifting the fuel duty rate by 50%. To put this in perspective, £13 billion could also be raised through a rise of just over 3p in the basic rate of income tax.

Professor Stephen Glaister, director of the RAC Foundation, said:

“As drivers endure record prices at the pumps they might be surprised to learn that future governments face a ‘drought’ in motoring tax income.

“The irony is that while ministers encourage us to buy greener, leaner cars, they are being forced to look at ways of clawing back the money motorists think they will be saving. This isn’t scaremongering. The Treasury has already announced a review of VED bands to ensure drivers make a ‘fair contribution’ to the public finances even as cars become more fuel efficient.

“If the Chancellor was faced with a £13 billion shortfall in motoring tax revenue today he would need to push the rate of fuel duty up from 58p per litre to 87p per litre to fill the financial black hole. Clearly there is no guarantee that future rises in duty rates will be limited to inflation as is current policy.

“The government has hard choices to make. Amongst the options are: foregoing the money it gets from drivers, pushing up duty on petrol and diesel, or starting to tax green forms of energy such as the electricity used in battery powered cars. None are appealing. The first blows a hole in the Treasury’s budget. The second blows a hole in drivers’ budgets. And the third risks stalling the decarbonisation of road transport.”

Paul Johnson, the director of the Institute for Fiscal Studies, said:

“The current system of motoring taxation suffers from two significant problems. First, petrol taxation does not reflect the fact that the costs I impose on others vary dramatically according to when and where I drive. So many drivers, in rural areas for example, are effectivey over-taxed. But some, in congested urban areas, pay a lot less in tax than they would if they were paying for the costs they impose on other road users. Second, as cars become more fuel efficient the revenue from petrol tax will fall – eventually to close to nothing if we are to meet out climate change targets. A national system of charging related to mileage and congestion, largely replacing the current system of fuel taxation, would help solve both those problems.”

ENDS

Contact:

RAC Foundation - Philip Gomm – Head of External Communications

020 7747 3445 / 07711 776448 / 020 7389 0601 (ISDN) / philip.gomm@racfoundation.org

IFS – Emma Hyman – Head of Communications

020 7291 4800 / 020 3205 0176 (ISDN) / emma_h@ifs.org.uk

Notes to editors:

The RAC Foundation is a charity that explores the economic, mobility, safety and environmental issues relating to roads and responsible road users. Independent and authoritative research, carried out for the public benefit, is central to the Foundation’s activities.

The remit of the Institute for Fiscal Studies is to promote effective economic and social policies by understanding better their impact on individuals, families, businesses and the government's finances. Our findings are based on rigorous analysis, detailed empirical evidence and in-depth institutional knowledge. We seek to communicate them effectively, to a wide range of audiences, thereby maximising their impact on policy both directly and by informing public debate.

The Fuel for Thought - The what, why and how of motoring taxation report is available on the RACF website from the date of publication:

www.racfoundation.org/research/economics

According to the DfT’s Road Transport Forecasts 2011, traffic is predicted to rise by 44% by 2035:

http://assets.dft.gov.uk/publications/road-transport-forecasts-2011/road-transport-forecasts-2011-results.pdf

Of the combined total revenue of £32.7bn collected from VED and fuel duty in 2010, the VED portion was £5.7bn (17%) and the fuel duty portion was £27bn (83%). Source: ONS Statistical Bulletin: Environmental Accounts 2011

The figures from the Office for Budget Responsibility showing a decline in the amount of fuel duty revenue as a percentage of GDP are based on: inflation only increases in the rate of fuel duty; an annual 2.7% increase in the price of oil; and improvements in the efficiency of the vehicle fleet to 2030 as assumed by the Committee on Climate Change: http://budgetresponsibility.independent.gov.uk/wordpress/docs/FSR2011.pdf

In Budget 2012, the Chancellor announced:

“The Government will consider whether to reform VED over the medium term, to ensure that all motorists continue to make a fair contribution to the sustainability of the public finances, and to reflect continuing improvements in vehicle fuel efficiency.”

As well as raising fuel duty by 50%, a £13 billion black hole could also be filled by:

  • A 3.4p increase in the basic rate of income tax; or
  • A 2.9p increase in all income tax rates;
  • A 1.7ppt rise in the main employee and employer rates of NICs; or
  • An increase in the main rate of VAT from 20% to 22.7%
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