How we can phase out fuel duty

By Rory Meakin 


The budget is almost upon us. As ever, the TaxPayers’ Alliance will be reminding the chancellor that what we really need is a recovery budget, not childish threats of tax rises. But the reports of potential personal allowance changes or pension raids sound eerily familiar, as do warnings to raise fuel duty


Instead of getting lost in the usual to-and-fro over the taxes we’re forced to pay on petrol, why not take a step back? What could be the long term future for taxes on driving? 


There are plenty of reasons to address this question. Congestion in 2019 cost the UK economy £6.9 billion, according to consultants Inrix. The time spent waiting in jams or slow-moving traffic is frustrating for motorists and expensive for the economy. That’s the most straightforward reason why meaningful action to address it could prove hugely beneficial. It's not just people driving to the shops or commutes to and from work which are needlessly long. Businesses waste a fortune paying delivery drivers stuck in traffic, too, and more vehicles are required to transport the same amount of goods if the journeys are slower.


Another benefit of reducing congestion is that it could help improve air quality - vehicle engines tend to run most efficiently at higher speeds so having slow-moving and stop-start traffic only increases pollution.


So what’s the solution? Last week, parliament’s transport select committee concluded its call to evidence for an inquiry on road pricing. 


The economic benefits of road pricing are well-rehearsed: driving isn’t properly priced. On most roads, at most times of day, a driver causes no congestion. Conversely, in certain locations at particular times of day (typically routes to and from employment centres in the morning and evening rush hours) each driver adds to the congestion suffered by other drivers. Despite this discrepancy, the price for using the roads remains the same at either time: an annual charge for petrol and diesel cars (arguably fuel duty too), and nothing for electric models. That is why there is a problem of congestion on roads which don’t price use at busy times.


In all sorts of sectors, prices go up at busy times and come down at quiet times. Whether it’s happy hours in bars, January sales in shops, peak fares in black cabs or the finely-tuned dynamic pricing of airliners and Uber, pricing is the best tool available for encouraging the efficient use of resources, including when it is we sit at a bar, on an airplane or taxi seat. So why not when we use a busy road, too?


Using prices to allocate resources is a large part of why western supermarkets have always had shelves full of goods to buy. People’s willingness to wait in a queue was also a big part of the reason why people in communist countries spent hours queuing at shops for bread, often without success. That same principle explains why there is a problem of congestion on roads which don’t price use at busy times.


That fundamentally sound basis for road pricing is very important because the government has started to take notice of the idea, but sadly not for the same reason. Instead, it is trying to phase out petrol and diesel vehicles to combat climate change, but has realised this will diminish the very large sums of cash they extract from drivers in motoring taxes, which are based on emissions: fuel duty and vehicle excise duty. The government wants to replace the lost revenue from these taxes.


It is critically important that the government abandons replacing revenue from motoring taxes as an objective of a road pricing scheme, because that would change the design and diminish the economic benefits it could provide. It also means that a road pricing scheme could be unpopular with the very motorists who could otherwise benefit.


When then chancellor Norman Lamont introduced the fuel duty escalator in the 1993 budget, he warned that the “largest contribution to the growth in United Kingdom carbon dioxide emissions in the coming years is expected to come from the transport sector. I therefore propose to make clear today the Government's long-term intention on road fuel duty.” In other words, officially, the rationale for fuel duty is to discourage carbon emissions. He reinforced the point by adding that it “should provide a strong incentive for motorists to buy more fuel-efficient vehicles”.


That is important. Officially, at least, fuel duty is not supposed to be a general tax designed to raise revenue. The rate is set above the government’s carbon price. Nonetheless the objective is to discourage emissions, and the revenue raised is supposed to be a consequence of that which can then be used to keep other taxes low. When revenue declines because less fuel is burnt, that is supposed to be a policy success.


If it is decided to raise replacement revenue, it should be raised in the most efficient way available. Drivers of electric vehicles should not have to pay a special tax just because other drivers are burning less petrol. It would also be likely to become a source of endless debates, as politicians found new reasons to use it to raise cash for their pet projects. And that is the crucial difference between a road pricing scheme which has the sole objective of solving congestion, and one whose unwelcome objective is to raise revenue.


A well-designed road pricing scheme would set charges at the level needed to discourage congestion at busy times so that the traffic flows freely. Some motorists might switch their journeys to quieter times (or switch to other forms of transport) and enjoy lower costs as a result. Those remaining at the busy times would pay for the privilege but enjoy faster, delay-free, and less stressful journeys. A very sensible balance. 


As long as the system stuck to that objective, it could be popular with drivers, if coupled with the abolition of VED and fuel duty cuts that ensured drivers didn't pay any more as a whole. Importantly, there’d be lower or no taxes for using quiet roads and more only where necessary to address congestion. That potential popularity would evaporate if the charges were set at a level to raise revenue, going beyond the amount necessary to ensure efficient, free-flowing roads. Turning this into a tax grab would be a serious mistake. 


At the budget, fuel duty absolutely should not rise. But there are bigger questions to deal with if politicians are serious about looking at the taxes on driving without simply penalising motorists. Road pricing has the potential to enhance economic efficiency and make Britain’s roads run smoothly. That could provide a win-win, but only if politicians don’t let themselves become led astray by the prospect of using it as a means to hike tax.

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