The government could make up the decline in revenue collected from fuel duty and vehicle excise duty (VED) by raising the fuel duty rate by 50%, according to a new report by the RAC Foundation.
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, leaving a £13bn hole (in today’s money) in the Treasury’s coffers.
Despite an expected rise in traffic, the collapse in income from motoring taxation will be caused by increasingly fuel efficient cars, and the predicted large-scale take-up of electric vehicles.
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%, the report reveals. To put this in perspective, £13bn 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 £13bn shortfall in motoring tax revenue today he would need to push the rate of fuel duty up from 58ppl to 87ppl 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,” added Glaister. “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 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 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.”