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Motoring tax take set to fall even as traffic rises

15 May 2012

Future Chancellors of the Exchequer will be faced with a hole in the public finances caused by the relentless decline in fuel duty and VED revenue.

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 currently stands at 1.7% of GDP, but will tumble to 1.1% by 2029. Over the same period VED revenue will fall by 0.4% to 0.1%. Combined, the shortfall will be - in today's terms - £13 billion.

The forecast is part of a detailed analysis of motoring taxation commissioned by the RAC Foundation from the Institute for Fiscal Studies. The conclusions of the IFS are contained in a report called Fuel for Thought.

One way a future Chancellor could fill the black hole would be by lifting fuel duty by 50%. Alternatively he could raise the basic rate of income tax by 3.5p

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 are 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 as cars become more fuel efficient."