Tuesday, 28 August 2012

Opposing sides argue on fuel tax in the UK

To many motorists, including motoring lobby groups, fuel tax in the UK is high.  It is currently nearly £0.58 per litre (US$0.92 per litre or US$0.20 per gallon).  Compared to the US or Australia, this is very high.  Compared to continental Europe it is at the higher end, although some may argue that it is unreasonable to compare fuel tax on its own, when many European countries have extensive toll road networks.  Nevertheless, the issue is highlighted by the fact that far more is recovered in taxation on fuel than is spent on the networks the vehicles consuming that fuel use.  Increases in fuel tax in the UK are never related to increases in spending on roads.

However, some share an alternative view.

Both these views have been getting aired in the UK press in the past week.

Freeze fuel tax

Populist tabloid newspaper, The Sun along with the pro- free market lobby group the Taxpayer Alliance, has launched a campaign to freeze fuel duty in the UK and highlighted it by putting some of its famous "Page 3 girls" at some service stations holding signs to highlight how much the price of fuel in the UK is comprised of tax.  It claims 60% of the price of a tank of petrol is tax (including VAT of 20%).

The Sun and the Taxpayers Alliance want any future planned increases in fuel duty deferred indefinitely (a 4p increase was planned recently and deferred till January 2013).   A special website has been set up for people to send messages to their local MPs to support the campaign.

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The Taxpayers Alliance press release claims the UK has the highest fuel tax in Europe, although it is not always easy to get a reliable figure on this.   It undertook research that it claims shows:

- Motoring taxes raised £31.5 billion in 2009
- Expenditure on roads was £9.9 billion and the "social cost of emissions from road transport" was £3.5 billion
- This is claimed to indicate that motoring taxes are £18 billion a year higher than they should be and that people in rural areas face the highest burden relative to what they gain from the system.

Increase fuel tax

The opposite view is expressed by the Institute for Public Policy Research (IPPR), a centre-left think tank which argues that fuel tax should be raised and road pricing widely introduced, as well, to raise funds for public transport.   It argues on a distributive basis that increased public transport fares fall most highly on those with lower incomes, but motorists can change behaviour more easily by cutting unnecessary journeys and switching modes.  Its key point is that the cost of motoring has been progressively reducing in real terms over time, unlike the cost of living or public transport fares, and that tax policy should "redress" this.  It argues that public transport users have little alternative, but road users do.

IPPR is motivated by support for "sustainable transport" and wants to encourage radical mode shift by state expenditure on walking and cycling infrastructure, and subsidising bus and rail fares more.  It seeks to do this by taxing motorists more.  It sees this as fitting an agenda of redistribution of wealth, improved environmental outcomes and improved social equity.  Its full report is here.


A key issues with UK motoring taxation is a complete absence of any principle or transparency around what it exists for.  Whilst taxes on alcohol and tobacco are explicitly to reduce consumption, it isn't clear whether similar taxes on road transport are designed to reduce usage and what the impacts of that are.  There are sound reasons to have such taxes in the absence of road pricing, because they are a way of recovering public sector expenditure on highway infrastructure.  Arguments can be made on incentivising behaviour to reduce externalities, such as emissions.  However, fuel duty is demonstrably woeful in reducing congestion.  The best that can be said for it is that it is a cheap way of raising money to pay for a road network (although not efficient in recovering such costs in a way that reflects the proportions of costs that should be paid) and that it can incentivise the purchase of vehicles with lower emissions. 
At the moment it appears that motoring taxation in the UK vastly over recovers both infrastructure and environmental costs.  

However, the IPPR argument about motoring costs reducing relative to the cost of living seems spurious and coincidental.  The same argument could be made about air travel, home appliances and clothing, but (with the exception of the first) I have yet to see arguments in favour of taxing new TVs, shoes or other consumer products or services that are reducing in price in real terms.   The reason public transport fares have been increasing in because of the distortion of many years of subsidies that are now being reduced.  With the exception of road use and taxation, motoring operates in a free market that has seen costs for new vehicles reduce over time and maintenance reduce.  However, public transport is far more regulated and susceptible to price increases due to increased labour costs (negotiated under dominant labour suppliers through unions).

The argument that public transport users have no alternatives, but road users do is difficult to sustain outside certain specific contexts.  People may relocate, and people in greater London locate due to public transport now.  Road users outside major metropolitan areas have little alternative either, but this seems to be ignored.

The IPRR arguments regarding equity and access to transport are worthy of consideration, but it is questionable whether it is equitable to treat motorists as the "rich" users of the transport system, and public transport users as "poor".  Certainly there are many tens of thousands of commuters by rail into central London each day on incomes well above the national average, and similar numbers of car commuters elsewhere who are the opposite.  

On sustainability, it is worthwhile for some more scrutiny to be paid to attempts to define what is the most optimal option from environmental, social and economic points of view.  As road vehicles become ever cleaner burning, there needs to be some decent objective research on when rail and bus services cease to be sustainable, and for there to be efforts to consider that denying capital expenditure on some road improvements to reduce congestion, is not a sustainable action.

However, the highest priority should be to define what motoring taxation is for.   If it is to pay for roads, then let's have some relationship between part of that and road expenditure.  If it is to pay for environmental costs, then identify the proportion of taxation that is for that.   If it is to pay for alternatives, then do that based on the extent to which they benefit those paying the tax.

In other words, start relate the price (tax) to what is being paid for.

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