The 5538 Institute for Fiscal Studies (IFS) has highlighted the dilemma facing many governments – motoring tax income set to fall even as traffic rises - in an analysis of the decline in the amount of revenue collect from fuel duty and VED (vehicle excise duty) in the UK.
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 per cent of GDP, but will tumble to 1.1 per cent of GDP by 2029. Unless policy is changed VED will also drop - from 0.4 per cent of GDP to 0.1 per cent - over the same period.
Against this backdrop, a new difficulty has arisen for government. Despite a projected growth in traffic – the UK1837 Department for Transport’s January 2012 estimate is for 44 per cent more traffic by 2035 – the IFS, using the government’s own figures, notes that revenue from motoring taxation (fuel and VED combined) is set to drop by £13 billion (US$20.94) a year in today’s money by 2029 (to £25 billion, from £38 billion in 2010). This is simply due to the improvement in the fuel efficiency of vehicles, as existing technologies are refined and new ones are adopted in response to the government’s climate change targets for greenhouse gas reduction.
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 the4961 RAC Foundation from the independent Institute for Fiscal Studies (IFS) and which is available at this link.
“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,” said Professor Stephen Glaister, director of the RAC Foundation. “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.”
Pointing out that the government has hard choices to make, Glaister said that amongst the options available 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,” says Glaister. “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.”
According to Paul Johnson, the director of the Institute for Fiscal Studies, 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 effectively 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 our 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,” Johnson said.
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 per cent of GDP, but will tumble to 1.1 per cent of GDP by 2029. Unless policy is changed VED will also drop - from 0.4 per cent of GDP to 0.1 per cent - over the same period.
Against this backdrop, a new difficulty has arisen for government. Despite a projected growth in traffic – the UK
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
“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,” said Professor Stephen Glaister, director of the RAC Foundation. “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.”
Pointing out that the government has hard choices to make, Glaister said that amongst the options available 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,” says Glaister. “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.”
According to Paul Johnson, the director of the Institute for Fiscal Studies, 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 effectively 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 our 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,” Johnson said.
