Motoring taxes: a future headache for the chancellor

Treasury coffers will be depleted by an estimated £13bn a year unless action is taken now to deal with a decline in the amount of money raised by fuel and vehicle excise duties.

This warning comes from a report for the RAC Foundation by the Institute for Fiscal Studies (IFS). The report says the chancellor could plug the gap by raising fuel duty by 50 per cent or adding 3.5p to the basic rate of income tax. Another option is taxing green energy, including the electricity used in battery powered cars.

‘Not scaremongering’

Professor Stephen Glaister, director of the RAC Foundation, said: “As drivers endure record prices at the pumps they might be surprised to learn that future governments face a ‘drought’ in motoring tax income.

“The irony is that while ministers encourage us to buy greener, leaner cars, they are being forced to look at ways of clawing back the money motorists think they will be saving. This isn’t scaremongering.

“The Treasury has already announced a review of VED (vehicle excise duty) bands to ensure drivers make a ‘fair contribution’ to the public finances even as cars become more fuel efficient.”

The irony is that while ministers encourage us to buy greener, leaner cars, they are being forced to look at ways of clawing back the money motorists think they will be saving. Stephen Glaister, RAC Foundation

Fuel and vehicle excise duties are one of the biggest sources of government revenue. They contribute about £38bn a year, 7 per cent of the money raised by taxes.

Climate change

The problem for the Treasury is that future revenues from these taxes are likely to fall because of improvements in the fuel efficiency of vehicles and the sale of electric cars, as the government strives to meet its climate change targets.

The IFS says raising income tax, VAT or fuel duty would be politically unpalatable. It believes the solution is the introduction of road pricing, which would help relieve congestion and leave rural motorists better off, without necessarily raising extra revenue from drivers.

Driving in rural areas late at night does not add to congestion costs, but using urban roads cities during the rush hour does, and the institute argues that road pricing would resolve this problem by charging people according to where and when they are travelling.

In March, David Cameron said he wanted the private sector to invest in the roads network. He was keen to keep his options open, but said then that allowing companies to levy tolls on exising roads was not one of them.

In November 2011, the RAC Foundation published a report looking at how road pricing could replace the current system of charges for motorists.

It recommended a system known as PAYG, pay-as-you go, and looked at several models, with road pricing leading to reductions in fuel and vehicle excise duties.