Isn’t it ironic. Treasury needs to tax #green cars to stave off looming financial black hole…

The irony won’t be lost on motorists.

Even as we cope with an era of high fuel prices, and with predictions of significant traffic growth in the future, the Chancellor is confronted with a worrying drop off in fuel duty and VED revenue. The reason? The greening of the vehicle fleet brought about by more frugal petrol and diesel engines and the expected take-up of electric cars.

By 2029 the shortfall in motoring taxation will be about £13 billion (in today’s terms).

Unfortunately motorists should also be worried. Because however much we might like to think we are getting one over the Chancellor it seems implausible that he won’t come after with armed with a plan to maintain his income. Essentially there are three ways he could do so:

1)      Push up the rate of fuel duty significantly over and above inflation, perhaps by as much as 50% by 2029.

2)      Start taxing battery powered cars, but at the risk of stalling the decarbonisation of road transport as drivers take offence at paying large sums for new technology only to see the anticipated savings from lower running costs shrink.

3)      Introduce a whole new system of motoring taxation based on the idea of Pay As You Go (PAYG). That is, impose charges that are distance related but also bear some relation to levels of congestion. This would be an alternative to the current VED and fuel duty levies, not an addition to it.

The Institute for Fiscal Studies has no doubt that this third option is the one to go for. In a report commissioned by the RAC Foundation – Fuel for Thought: the what, why and how of motoring taxation – the IFS says PAYG would more closely associate charges to drivers with the ‘externalities’ they impose on the rest of society: air pollution, accidents, traffic jams, CO₂ emissions amongst them.

This is a thorny subject but one which needs to be tackled. To be fair to the Chancellor he has already taken some tentative steps, announcing in Budget 2012 that the VED bandings would be reviewed to ensure drivers continued to make a ‘fair contribution’ to the public finances even as cars become more eco-friendly.

Amongst the 35 million drivers in Great Britain the price of fuel is arguably as common a talking point as that other national obsession, the weather. Given the recent record pump prices and the fact that transport is the single biggest area of household expenditure, this is unsurprising. It would be good if politicians devoted as much time to the subject as voters.

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Chancellor drives through #fuelduty rise in #Budget2012 but what would Adam Smith think?

So that’s that then.

After a cut in fuel duty in the March 2011 Budget and the postponement of the January 2012 3p rise until August this year, it was always going to be hard to convince the Chancellor to once again tinker with fuel duty rates even if there are pressing and convincing reasons to do so, as George Osborne himself appeared to recognise today.

What was surprising about Mr Osborne’s Budget speech was that contained the rationale for amending the way motorists are taxed. Referring to the work of the 18^th Century economist Adam Smith, Mr Osborne said that a tax system needs to be four things: fair, predictable, simple and supportive of work. Yet it is quite easy to argue that fuel duty is no more than one of those things.

The premise behind fuel duty has never been entirely clear: varyingly it has been described as an environmental tax, general revenue raiser and method of covering the externalities drivers impose on others (who are often other road users). Nor have the changes in fuel duty rates over many years been smooth or consistent. Fuel duty is also a regressive tax, hitting the poor harder than the rich.

Therefore the single area where fuel duty might fit the bill under Smith’s criteria is the ease by which it is collected.

Mr Osborne did recognise that drivers are likely to be hit by things beyond his control. Early in his speech he said a risk to the economy identified by the Office of Budget Responsibility “is a ‘further spike in oil prices’, and there is no doubt that the high oil price – driven both by real demand and the Iranian situation – is of great concern across the world.”

While it is a dangerous game to predict the future from the past, it is hard to see oil prices falling significantly, which does at least mean that rises in fuel duty – at least during the life of this Parliament – will be inflation only. In the unlikely event that oil prices drop below $75 a barrel for a sustained period of time then the Treasury will raise duty rates by inflation plus one percent per annum.

Many of the nation’s 34 million drivers will be feeling disappointed tonight that the price of fuel remains were it is with the prospect that it will jump markedly later this year. The cost of motoring is a real drag on the finances of the majority of households. In the absence of more, effectively arbitrary and politically driven postponements in duty rate rises, perhaps the Chancellor will at least turn his attention to making motoring taxation more closely fit the principles outlined by Adam Smith more than two hundred years ago. That would be progress.

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