The amount raised from motorists fuel duty bears little relation to state expenditure on roads, and the tax may well be impeding economic growth. Dr Richard Wellings of the Institute of Economic Affairs sets out how it could be reduced, or abolished altogether.
Fuel duty will raise around £33 billion for the Treasury in 2012. Once road tax is included, the motoring tax burden is now approaching £40 billion a year. This is almost five times the amount spent on roads.
Investment in new road infrastructure has collapsed over the last twenty years, despite rising traffic levels and increased congestion costs. Moreover, a significant proportion of road spending has been directed to ‘anti-car’ traffic management schemes. Additional delays have been introduced by an explosion in the number of traffic lights, traffic calming schemes and priority measures for public transport.
Fuel duty receipts clearly have not been used to improve road infrastructure (as was the original intention when the tax was introduced in 1909). Instead, the vast revenues have been used to fund general expenditure, mostly on the welfare state. Thus the current tax system is deeply unfair.
The amount drivers spend on fuel duty bears little relation to the cost of the roads they use. A motorist on a neglected rural B-road pays pretty much the same as one using a brand-new urban motorway. Fuel duty is also a very bad way of addressing congestion. It is paid at a similar rate whether or not a journey contributes to delays for others.
The economic case for applying fuel duty is already weak before its wider effects are considered. Motoring taxes effectively act like a tariff on trade. By forcing up transport costs they hinder many of the key processes that generate economic growth.
One important example is their impact on labour markets. Inflated motoring costs mean that for some people, particularly those in rural areas, it isn’t worth getting certain jobs. The travel-to-work costs are simply too high. This is a major problem for potential workers on low incomes who already face very high effective tax rates as their benefits and tax credits are withdrawn.
Fuel duty has traditionally been seen as an easy way of raising revenue by politicians, partly because it is difficult to avoid. This view ignores the wider negative effects of the tax, however. If fuel duty damages work incentives, it will increase government spending on welfare benefits, for example.
In fact, inflated road fuel costs have a negative impact on just about every economic activity in the UK. This is because 90 per cent of passenger traffic and 70 per cent of freight traffic goes by road. Rises in fuel prices will tend to translate into higher distribution costs and therefore higher prices in the shops.
There is therefore a very strong case for the government to reduce fuel duty. A good start would be to cancel the 3p increase planned for early 2013. This could be followed by the introduction of a ‘downward escalator’ which gradually moved the tax rate down to the EU prescribed minimum of around 29p per litre.
Initially such a policy would leave the Treasury with a significant revenue shortfall. This could be addressed by cutting wasteful transport expenditure that actually reduces economic efficiency. Cuts could be focused on counterproductive traffic management schemes that increase delays, as well as uneconomic public transport projects such as High Speed 2.
The total abolition of fuel duty is more difficult. It could be achieved, however, through the privatisation of much of the road network. Receipts from the sale of trunk roads and motorways would enable radical cuts in motoring taxes. Spending on transport infrastructure would then gradually be shifted to the private sector, eventually saving the Treasury around £20 billion a year. Efficiency gains from lower taxes, better roads and lower congestion would also result in significantly higher general revenues for the government. The abolition of fuel duty is therefore a practical long-term proposition. The Chancellor should summon up the courage to take the first step by cancelling the planned rise.
Dr Richard Wellings is Head of Transport at the Institute of Economic Affairs, and author of the new report, Time to Excise Fuel Duty?, available from www.iea.org.uk