A policy that benefited the richest and cost the UK £100bn: it's long past time to end the fuel duty freeze
Increased road use from a rising population is one reason for the problem. Cuts to repair budgets are another. Fixing the problem will be expensive, with one estimate putting the cost of mending potholes in England and Wales at a hefty £17bn.
Complaints about the state of the roads have made governments reluctant to arouse the ire of motoring lobby groups by raising fuel excise duty – the tax paid at the pump on fuel. The last chancellor to do so was Alistair Darling 15 years ago. The cumulative cost to the exchequer of the freezes and cuts to fuel duty since 2010 is put at £130bn – a colossal sum given the struggle governments have had to balance the books during that time.
In reality, the days are numbered for fuel duty. Of the 34m vehicles on the UK's roads, 1.6m are fully electric, but that figure will rise steadily over time. Once petrol and diesel vehicles are phased out completely, the £24.4bn currently raised from fuel duty will dwindle to zero. That represents a sizeable and permanent hit to the public finances.
Rachel Reeves has more immediate things to worry about. The weakness of the economy means the chancellor is at grave risk of breaking her self-imposed rule that day-to-day government spending should be matched by tax receipts. Reeves fears that breaking the rule would incur the wrath of the financial markets, while cutting spending would incur the wrath of Labour MPs. So she is scrabbling around for tax increases that don't break Labour's manifesto commitment not to raise the rates of income tax, VAT or employee national insurance contributions.
This is not going to be easy. One estimate last week said Reeves will need to find more than £50bn to stick to her fiscal rule with a reasonable margin for error. Even though other forecasts suggest the figure may be lower than that, there will still be difficult choices to make.
Faced with these pressures, Reeves should do two things. First, she should end the freeze on fuel duty, which has been kept in place no matter whether the cost of petrol and diesel is high or low. It is not just that Reeves could well do with the several billion pounds that a rise in fuel duty would harvest. Fuel duty is now a third lower, in real terms, than it was when Darling was at the Treasury, effectively cutting the cost of motoring and so creating incentives to drive more. Increased congestion and the potholed roads are consequences of that.
The stated rationale for the protracted freeze since 2010 is that it helps hard-pressed motorists, but the main beneficiaries have not been white-van man but the better off, who drive more, own more vehicles and buy gas-guzzling SUVs. The richest fifth of households have benefited twice as much from the fuel duty freeze as the poorest fifth. Raising fuel duty in the budget should be a no-brainer for Reeves.
But the chancellor also needs to come up with a plan for what to do once the era of all-electric vehicles finally arrives, and here there is an obvious solution: road pricing. Conceptually, there should be little problem with this idea. People expect to pay more for a train journey in rush hours. Hotels charge more for rooms on a Friday or Saturday when demand is higher. The same principle should apply to roads.
There are reasons why ministers are reluctant to grasp this nettle. Fuel duty, while a regressive tax, is easy to understand. There are no issues with privacy and surveillance, as there would be with road pricing. Governments are sensitive to charges that they are planning to wage war on motorists. Given that only 5% of vehicles are electric currently, the transition may take longer than originally envisaged. No question, doing nothing has its attractions.
But the costs of inaction will grow over time. A report by the Tony Blair Institute for Global Change (TBI) said the loss of tax revenue from cars would be £10bn by 2030, £20bn by 2035 and £30bn by 2040. This would inevitably lead to chunky tax increases. Reducing the cost of motoring by continually freezing fuel duty would lead to more and longer traffic jams. Those still driving petrol and diesel vehicles would face a triple whammy: spending longer in traffic; paying higher taxes elsewhere to compensate for the lost fuel-duty revenue from those who transferred to electric vehicles; and paying three to four times more for tax and fuel than those who drive EVs.
The TBI report outlined the four ways road pricing might work. Drivers could face a flat-rate charge for each mile they drive; costs could vary according to geographic area or specific roads, with costs increased in areas where congestion was higher; road users could be charged for each minute they spend driving; and finally an 'Uberised' model, where charges vary dynamically on the road used and the time of travel. Technically, it would be possible to make any of the approaches – or a combination of them – work.
It speaks volumes that the report was published four years ago this month, since when inertia has reigned supreme. That needs to change because the do-nothing option is really no option at all.
Larry Elliott is a Guardian columnist
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