Thursday, 21 March 2013

UK Budget - easier to tax owning a car than using it?

Yesterday, the UK Chancellor of the Exchequer (Minister of Finance/Treasurer), George Osborne, released the 2013 budget.  The entire content is here, but I only want to focus on the road pricing/charging elements which are of passing interest.

They are:
- Another inflation based increase in fuel tax cancelled;
- An inflation based increase in vehicle excise duty (annual tax on ownership) proceeds;
- No reform of vehicle excise duty to proceed;
- Expected net revenue of lorry road user charging scheme (vignettes) announced.

Fuel tax increased cancelled - again

For some years, UK governments have increased fuel tax every year, increasing it by inflation and an increment of between 1 and 5%.

None of this revenue is hypothecated at all onto road spending; it is treated as general taxation.  As an aside £9 billion is the total central government spending in the UK on roads, whereas fuel duty raises £26.6 billion this year (and taxation on owning a vehicle adds another £5.9 billion).  This issue is widely known, many motorists being aware that they pay far more to use the roads than government spends on them.  It's particularly an issue when there is a significant backlog of deferred maintenance on local authority roads, and a long list of unfunded major capacity relief projects.  There is a widespread perception of poor value for money.

So the Chancellor announced a planned 1.89p/l increase in fuel duty for September 2013 has been cancelled.  This follows cancellation of a January 2013 increase last December.  The rate is £0.5795 per litre (US$3.33 per gallon).  Compare that to the highest combined state and federal fuel tax in the USA of US$0.69 per gallon (New York State), and you can see this is a different order of magnitude.  

Fuel tax in the UK conceptually funds roads, railways (which get about £7 billion in subsidies) and helps pay for welfare, health, education, housing, defence etc.  Clearly fuel tax increases were tolerated in the UK (although a massive campaign in 2000 ended the inflation + 5% automatic escalator) during times of prosperity, but not any more.

The Chancellor claims that fuel prices are now 13p/l lower than they would have been otherwise, saving £7 per average tank fill.

What this raises is an obvious question, which I have mentioned before.  Are fuel tax rises in the UK now too politically toxic, in the way they are in the United States?  There has been a vocal campaign called "Fair Fuel UK" calling for cuts in fuel tax, with the support of some MPs.  It argued high fuel tax was "corrosive" to business and affected the competitiveness of UK businesses, based largely on the UK having one of the highest fuel taxes in the world.

Bear in mind that in the US the fuel taxes are a fraction of the level in the UK, and they are typically hypothecated to highway trust funds, so most if not all of the revenue goes on roads.  Increases in fuel tax in the US would mean more money for roads (whether it is spent wisely is another debate).  Increases in fuel tax in the UK have never been argued as being about spending money on roads, but just as a general tax.   However, with tax comprising over half the price of a litre of fuel (when you factor 20% VAT on top of the retail price and the fuel duty), the case for fuel duty being the tax that has gone too far becomes clearer.

This might change when there is an economic recovery, and if wholesale petroleum prices drop.  However, if market prices remain high, I suspect it will be too hard for politicians to do for some time yet.   It might be easier if part of the revenue was hypothecated towards road spending (a point vehemently opposed by Treasury which does not want fuel tax treated as a road user charge), and increases were linked to that.  Yet, if all road spending came from fuel tax revenue, it would only need 20p/l (7p/l if you took the revenue from vehicle excise duty).  

However, for the rest of the term of this Parliament the issue will be whether planned increases in 2014 and 2015 (the year of the next general election) proceed, I am betting they wont.  The cut in revenue will be swallowed by general efficiencies across the board (the Department of Transport, along with most others, faces a 1% reduction in spending this year).  So the debate on the future of fuel tax wont be loud this side of the election, but it is a debate that should happen.

Vehicle excise duty raised - again

Almost no coverage has been given to the inflation based increase in vehicle excise duty, which is a tax on owning a vehicle paid either annually or six-monthly.  The rates range from zero for electric and other ultra low emission vehicles to £460 a year (US$699), varying based entirely on CO2 emission ratings.   VED applies to all vehicles, but there will be no increase in rates for HGVs, in part because of the introduction of the Lorry Road User Charge, which for UK registered lorries means an offsetting reduction in VED for those liable.

There have been minor changes to exemptions for this tax for disabled drivers, but also an extension of the exemption for old vehicles (those manufactured before 1974).   However, my conclusion on this is that it is obviously easier to tax owning a car than it is to tax operating it, although clearly even an inflation based increase to £460 a year would be much less than an inflation based increase in £0.58/l in fuel tax.

No reform of vehicle excise duty

I wrote extensively about a proposal to introduce a "two-tier" vehicle excise duty, essentially lowering the basic VED on one hand, but introduce a voluntary "motorway access charge" (essentially similar to a vignette) for using the motorways and other major highways.  The purpose was to enable some dedicated revenue to be available for those roads as part of plans to privatise the motorways.  

It appears the idea has been shelved, and announcements on structural reform of the highway sector to allow more private investment are now expected in June.   None of this is a great surprise, as it appears that MPs fear any reform wont be popular with the public.

Lorry road user charge revenue

One line in the Budget mentions expected revenues from the lorry road user charge (a vignette on HGVs 12 tonnes and over), net of the reductions in VED for UK lorries subject to the charge.  This essentially represents the new revenue from foreign lorries and is £25m a year (US$38m), and is not estimated to increase in the next three years (indicating that there is not much confidence in the figure and a belief that it may suppress growth in foreign lorry traffic).   What is significant about this is how insignificant foreign lorry traffic is to the UK, but then this was more about a political promise to put foreign lorries on an even footing with UK ones.


The word "toll" isn't mentioned once in the Budget, and what it all appears to show is a lack of ambition and a very conservative attitude to taxing motorists.  Fuel tax looks impossible to increase, yet vehicle excise duty because it is a one off annual payment, seems easier.  Given VED costs less than insurance for most vehicles,  it isn't a surprise that this is tolerated.  I am pleased the VED reform has been scrapped, because it doesn't really meet specific criteria for a good pricing instrument.  It wouldn't reflect usage, it wouldn't reflect expenditure on infrastructure, would have limited effect on demand, would probably be negative for externalities (encouraging diversion onto unsuitable roads) and bears little resemblance to any sort of market based pricing.   Finally, it shows that the UK government is almost frightened of mentioning tolls and their use at all for funding new infrastructure, which is a pity.   The UK has high poorly targeted motoring taxes, it could have better roads, better quality road spending, less congestion and more efficient outcomes if a package could be put together that could be sold convincingly to motorists that delivered better pricing and spending.   However, for now motorists are just pleased to not be paying more fuel tax, and government looks like it will make some governance reforms in managing highways that we will see in coming months, with next to no role for tolls.

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