Wednesday 10 November 2021

Making Road User Charging work in the UK: Part One - it's got a problem

Nothing to see here! This is the response you might give to the Chancellor of the Exchequer (UK)’s latest budget (PDF) in terms of the future of revenue from UK road users. Well not strictly true. For the twelve year in a row, the Government has frozen fuel duty (it officially is meant to inflation adjust it, but this has not happened now except once, under the Conservative/Liberal Democrat coalition in the Government’s first term). This is estimated by Treasury to cost £1.51 billion (US$2.05 billion) in 2022/23 alone, but the net impact over that time has been to erode the value of the £0.5795 per litre (US$2.99 per gallon) fuel duty significantly. If it had been adjusted it would be £0.78 per litre (US$4.01 per gallon), meaning it has already lost almost 26% of its value, although arguably if it had been inflation adjusted there would be slightly reduce demand, so the revenue loss is far from linear (and indeed it is a gain in the hands of households and businesses).

So this is quite some problem. It's not quite the US scenario, which has seen the US Federal Gas Tax not increased since 1993, at US$0.187 per gallon, which translates into a mere £0.035 per litre. Even California, which has the highest state gas tax, only adds £0.129 per litre.  So even around £0.16 per litre in the US isn't anywhere near £0.5795 per litre in the UK.  What it means though, is that fuel tax in the UK is much much more important than in the US, and the key reason being, it isn't about paying for roads, it's just another tax.

What do existing motoring taxes raise?

Fuel duty does raise £28 billion (US$37.9 billion) per annum as it stands. 

Related, but much simpler to resolve, is declining revenue from Vehicle Tax (formerly known as Vehicle Excise Duty (VED)), which is basically registration fees. The decline is purely due to the zero rating for new electric vehicles, which could easily be addressed by introducing fees for such vehicles. VED raises £7 billion (US$9.5 billion) a year. There might be a case for shifting away from a fixed fee to pay for roads to a usage-based fee, to encourage change in behaviour, and better reflect externalities, but that’s another story. 

The real issue is that the UK Government has a whole series of policies that result in declining fuel tax revenue. The main one being the prohibition on the sale of new petrol and diesel light vehicles from 2030, supported by £620 million (US$840 million) in public spending to fund plug-in charging points for electric vehicles. Of course, all of this is driven by UK Government commitments on climate change, so the issue arises as to whether the UK can manage with fuel duty revenue declining or if it will want to replace it, and if so with what?

Road user charging (RUC) is an obvious answer, but unlike in the United States, the revenue collected from fuel duty is many times the spending on roads in the UK. The latest budget (which only reflects England), seeks the Department for Transport spending £6.4 billion on roads, £5.6 billion which comes from VED (the remainder of VED is allocated to Scotland, Wales and Northern Ireland as devolved administrations). Adding fuel duty and VED revenue sees £35 billion raised almost entirely from road transport, even though spending on the sector is a fraction of that. A shift towards RUC to replace revenue becomes qualitatively and politically challenging if it is revenue, not only to pay for roads, and even public transport, but for general spending purposes. RUC, after all, is much closer to a fee set to recover costs, not a general tax. Nowhere has RUC been introduced just as a tax to raise revenue for general government spending (although Singapore’s Electronic Road Pricing (ERP) system, which is a congestion pricing scheme, sees all net revenues treated exactly like that – but its objective is not to generate revenue).

UK history of RUC

The history of attempts to introduce RUC in the UK matter as well. Let's also NOT muddy the waters with related, but fundamentally different policies. For a start, tolls are insignificant ( a full list here) in their role in paying for roads in the UK. Beyond a few bridges and tunnels, and one motorway near Birmingham (M6 toll), they have not been widely used. Similarly, congestion charges are not really relevant here. There are two in the UK, London and Durham, and both are in place to manage traffic, not raise revenue. 

From 2001 until 2010 there were three connected but separate attempt to introduce road pricing, which varied on scale, scope and to some extent, objectives.

First, the Lorry Road User Charging (LRUC) project, from 2001-2005, which was both to recover revenue from foreign lorries, but also to become a first step in introducing national road pricing. It would have priced all UK roads by vehicle weight, but also a broad-based time of day (night/day) and location (cheaper on motorways), using the now widely applied GNSS telematics technology. It folded for several reasons, not least being cost and the low level of expected new revenue generation. It was led by Her Majesty’s Revenue and Customs (HMRC), which raised questions about the incentives around governance for a project requiring high levels of customer service, user acceptability and ultimately application of transport economics. (More recently, the UK introduced the HGV Road User Levy to raise revenue from foreign trucks, essentially implementing a European-style vignette scheme)

In 2005 it was replaced by the National Road Pricing project, which sought to reduce congestion and emissions by implementing full scale time of day, distance and place (TDP) road pricing for all vehicles on all roads.  It was meant to be a 15 year programme, but it collapsed in 2007 due to public opposition, and was folded into the Transport Innovation Fund (TIF) programme to support proposals from local authorities for congestion charging. No actual congestion charging schemes resulted (although Manchester came close, until local politicians decided a referendum was necessary to obtain support to proceed), and with the change of government in 2010 that was the end of further measure by the British Government to promote road pricing.

How hard is this?

The politics around this are brutal. Over 1.7 million people signed a petition opposed the National Road Pricing project, and polling has regularly indicated large majorities opposed to the idea. In 2010, a paper written for the RAC Foundation by Dr John Walker included a poll indicating that a majority would support reforming how roads were paid for, but was not supportive of congestion pricing. Bear in mind that the MAIN objective for all of the previous attempts has been to reduce congestion, which at the time required all vehicles to be equipped with GNSS based telematics systems. Headlines about “tracking your movements” scared many about government interference in privacy. Even more critical, given the previous Labour Government had a policy of increasing fuel duty higher than inflation, year after year, few would believe that same Government would actually cut a tax to introduce road pricing, so on average, people wouldn’t pay more.

So introducing road pricing/RUC in the UK to manage congestion is unlikely to gain much support, but what about introducing RUC simply as a replacement of fuel duty?

The House of Commons Transport Committee recently held an inquiry into both electric vehicles and road pricing, and has yet to issue its report on the inquiry (it most recently heard oral evidence in mid October). However, from the evidence seen so far there is every risk that the UK will repeat some of the previous mistakes. This includes:

· Treating the whole exercise as being mostly if not entirely about revenue-raising, which is understandable if it is led by HM Treasury and HMRC, but does not encourage public support and is unlikely to be seen as acceptable politically.

· Turning only to European experience as particularly relevant, when in the past decade it has been the United States that has moved much more rapidly and, in some cases, nimbly, to test and implement small-scale RUC systems designed to replace fuel tax revenue. Australia also has some lessons that may be drawn upon as it considers whether to replace fuel tax and registration fee revenue from heavy vehicles, and some states introduce RUC for light electric vehicles.

It’s worth reminding those from countries where hypothecating fuel tax for road funding is standard practice that this is NOT what happens in the UK, this is treated as “just another tax”, with no link whatsoever to any spending. This is a position held firmly by HM Treasury, because of fear about what would happen if there was “too much revenue raised” or indeed “too little”, which reflects a position whereby governance, funding decisions and the structure of the highways sector is largely unchanged. Bear in mind, that the creation of Highways England (now National Highways) as a company, with a five-year funding settlement, drawn from VED has already broken away from this model.

Clearly the number one barrier to implementing RUC in the UK is public acceptability and the politics around this, but to address that there needs to be a significant change in the mindset around how motor vehicles are taxed/charged, how the revenue is used and what governance arrangements need to be put in place to support that.

Even if there were to be growth in the scale of spending on roads in the UK, and indeed that might be justified given the backlog of maintenance particularly on local roads (and in some cases, the paucity of local authority interest in capital spending due to funding constraints), it is not going to be anywhere near the scale of £35 billion per annum. The “right” amount is unknown because the lack of price signals and useful data on revenue raised doesn’t indicate what should be spent on the network, but given that motor vehicle owners and users are clearly willing to pay £35 billion a year to own and operate their vehicles, it is likely to be higher than at present. However, the question may well be reasonably asked as to whether the road networks, in their entirety, shouldn’t be generating returns on capital, that could then, reasonably, be treated as dividends able to be applied to other public spending. A return on capital and a carbon tax might be ways to address the revenue gap between road spending and current revenues from motoring taxes, but all of that needs some more revolutionary thinking that has largely been absent from the debate to date.

So what could the UK do? That’s the subject for a future post.