Wednesday, 16 March 2016

UK does not increase fuel tax for sixth year in a row

With the release of today's UK Budget, the rumoured increase in fuel duty did not occur, making it the sixth year in a row that the Government has decided it is inappropriate to increase a tax that has ever decreasing yields due to inflation and the increased efficiency of the vehicle fleet.

It is rumoured that any increase would have been opposed by backbencher Conservative MPs.  For although the price of fuel is now the lowest it has been in many years, it is clear that fuel duty (and VAT on fuel duty) comprises the majority of the price of petrol and diesel (at £0.6954/l), with retail prices usually between £0.999 and £1.10/l depending on location.   Given no UK fuel duty is hypothecated and it has no relationship at all with spending on roads, it has usually been seen as an "easy" tax to raise, but it is clearly unpopular with grassroots Conservative MPs and supporters.   As the Conservative Party has a small majority in the House of Commons, and Chancellor of the Exchequer George Osborne is expected to be seeking to succeed David Cameron as Conservative leader when he stands down before the next election, it is not surprising that he has taken a political decision that raising fuel duty is not wise.

The net impact is a loss of revenue of between £435m and £450m (XLS) per annum each year (the previous assumption being a CPI based increase).  Also notable is that Vehicle Excise Duty and the HGV Levy (vignette) are not being inflation adjusted, costing around £5m per annum in lost revenue. Curiously, Treasury's assumption about the impact of price reductions on fuel consumption is as follows (PDF - pg 53):

For a 1% reduction in pump prices, the model assumes a short-term 0.07% increase in the quantity of fuel consumed which increases to 0.13 as consumers react to the price change.

However, there is no indication that revenues have increased due to lower prices.
Road spending programme

Curiously though, and apparently unrelated, the Budget announced a long term funding approach for the English Strategic Road Network after 2020 (PDF) (Strategic Road Network means the central Government owned motorways and major highways in England only -  Scotland, Wales and Northern Ireland get bulk funded as part of devolution and manage their own transport spending, although not taxation of vehicles and fuel). £15 billion has already been committed through to 2020, that is assured and forms a programme of maintenance and capital spending that is agreed.   The document above is all about consulting about long term priorities, and should be welcomed as developing a closer link between what users want and what money is spent on those roads.  Having long term guaranteed funding streams enables maintenance costs to be optimised across the life cycle of the network and to help depoliticise funding decisions, instead of subjecting the network to annual budgetary whims of increases and decreases in funding.

This notes that from 2020/21, Vehicle Excise Duty in England (effectively the annual registration fee) is to be hypothecated entirely into spending for that network into a new National Roads Fund ( a term I last heard in New Zealand in 2001).   That's worth exploring more.

Tax on ownership?

From a economic pricing point of view I've alway thought that a little odd.  Vehicle excise duty is a tax on owning a vehicle, but it bears no relationship whatsoever to usage of any part of that network.  For example, in London there is very little such network as there are only three motorways that enter metropolitan London, and in each case only reach around halfway from the M25 orbital motorway into central London.  Many thousands of London motorists may never use the Strategic Road Network, so why should their taxes on ownership be used to pay for it?  It would make much more sense for the National Roads Fund to be supporting investment in all local roads, which all vehicle owners use, and treat it as an access charge to recover the fixed costs of the network.

I presume that Vehicle Excise Duty includes the Heavy Goods Vehicle levy which comprises much of the cost of VED for UK registered HGVs and is imposed on foreign ones too.  The link between revenue from the HGV Levy and the Strategic Road Network is 

There could, of course, be a cunning plan behind this, which could allow for a transition from VED to tolls or some other form of road user charging to be introduced on the Strategic Road Network.  A political deal whereby you can choose to not pay VED and instead pay by weight and distance could benefit millions of car owners who rarely use the motorways, and no doubt would reap in much more revenue in the longer term.  However, it will raise the issue of fuel tax, which Treasury resists in seeing as a tax on road use, even though it is - in effect - primarily generated from that activity.

Future for fuel tax?

For now, the UK Government wont entertain road user charging to replace any existing motoring taxes, although it ought to look at the deadweight costs of these existing taxes and watch what is going on in the USA as Oregon and shortly California pilot replacing fuel taxes with distance based charging.  However, to do this well it will need to build up political capital to convince people that any such move is about raising money for roads and about replacing existing taxes.   Given local elections in May, a referendum on EU membership in June and a forthcoming Conservative Party leadership contest, it would appear the interest in taking what would be seen as "brave" steps towards reforming how people pay for the roads is nil.

Meanwhile, given it has been over 20 years since the Federal fuel tax was last increased in the USA (and the state tax in California), is six years of no increases meaning the UK is hitting the same political obstacles the US has already hit with fuel tax?

Will the car oriented motorists of California be phasing out fuel tax whilst UK politicians wring their hands about increasing a tax that it has encouraged motorists to not pay at all?

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