UK Motoring Taxes: The Road Ahead
Andrew Leicester, IFS
ITS Road User Charging conference, February 23rd 2012
© Institute for Fiscal Studies
Motoring is a significant source of tax revenue
2011–12
Revenue (£ bn)
Fuel duties
27.0
VAT on duty
5.4
VED
5.9
Total motoring
38.3
% Receipts
£ bn
Total receipts
GDP
Source: IFS calculations from OBR Autumn Statement 2011 estimates
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% GDP
Motoring is a significant source of tax revenue
2011–12
Revenue (£ bn)
% Receipts
% GDP
Fuel duties
27.0
4.7%
1.8%
VAT on duty
5.4
0.9%
0.4%
VED
5.9
1.0%
0.4%
Total motoring
38.3
6.7%
2.5%
£ bn
Total receipts
GDP
575.5
1,521.0
Source: IFS calculations from OBR Autumn Statement 2011 estimates
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Real revenues are near historic highs ...
Inflation-adjusted receipts of motoring taxes (2010 prices), 1965–2010
Real receipts (£ bn, 2010 prices)
45
40
Car tax
35
30
VED
25
20
15
VAT on duty
10
5
0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: IFS calculations from ONS data, deflated using GDP deflator from HM Treasury data
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Fuel duties
... but fallen relative to other receipts recently
Motoring taxes as a share of total receipts, 1965–2010
12%
Share of total receipts
10%
Car tax
8%
VED
6%
4%
2%
0%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: IFS calculations from ONS data
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VAT on duty
Fuel duties
The trend looks set to continue in the short-term
Forecast motoring taxes as a share of total receipts
8%
Outturn
Share of total receipts
7%
Forecasts
VED
6%
5%
4%
VAT on duty
3%
2%
Fuel duties
1%
0%
2009 – 2010 – 2011 – 2012 – 2013 – 2014 – 2015 – 2016 –
10
11
12
13
14
15
16
17
6.0%: lowest since 1954
Source: IFS calculations from OBR data
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Revenues could continue to erode in long-run
Forecast motoring taxes as a share of GDP, 2000–01 to 2029–30
2.5
Share of GDP (%)
2
Fuel duties
1.5
1
VED
0.5
Source: OBR Fiscal Sustainability Report (2011)
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2028-29
2026-27
2024-25
2022-23
2020-21
2018-19
2016-17
2014-15
2012-13
2010-11
2008-09
2006-07
2004-05
2002-03
2000-01
0
Putting the long-term decline into context
• Receipts 0.9% of GDP lower by 2029–30 if OBR correct
• Equivalent to about £13.2 billion in today’s terms
• Approximate tax changes to generate £13 billion include:
– 3.4p rise in the basic rate (from 20p)
– 2.7ppt rise in the main rate of VAT (from 20%)
– 51% rise in main fuel duty rate (from 58p)
• Overstating the likely decline?
– Assume no change in VED thresholds: 85% of fleet exempt by 2030
• Or understating?
– Assume fuel duty inflation-adjusted each year
– Unlikely if oil prices remain high – Autumn Statement froze rates
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What’s behind the decline?
... and recession-hit road use ...
Avg. new car emissions, g CO2/km, 1997–2010
Motor vehicle km (billions), 1997–2010 (GB)
520
190
510
180
500
170
490
160
480
150
470
140
460
130
450
120
440
110
430
100
420
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
200
Source: Society of Motor Manufacturers and Traders
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1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Increased fuel efficiency...
Source: Department for Transport
What’s behind the decline?
... have combined to reduce fuel sales
Sales of vehicle fuel, billion litres, 1997–98 to 2010–11
50
45
40
Diesel
35
30
25
20
15
Petrol
10
5
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2010–11
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
Source: HMRC UK Trade Info data
2002–03
2001–02
2000–01
1999–00
1998–99
1997–98
0
What’s behind the decline?
More efficiency & falling real duty means each km is taxed less
7
65
6.5
60
6
55
5.5
50
5
45
4.5
40
4
35
3.5
30
3
Source: IFS calculations from DfT and ONS data, deflated using all-items RPI index
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Real receipts (p/km, 2010 prices)
70
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Real duty (p/litre, 2010 prices)
Average duty rate and receipts per kilometre, 1993–2010 (2010 prices)
Real duty
Real receipts
per km
What’s behind the decline?
Vehicle numbers up, but VED per vehicle down as efficiency rises
270
34
255
32
240
30
225
28
210
26
195
24
180
22
165
20
150
Source: IFS calculations from DfT and ONS data, deflated using all-items RPI index
© Institute for Fiscal Studies
Receipts/vehicle (£, 2010 prices)
36
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Registered vehicles (millions)
Registered vehicles and real VED receipts per vehicle, 1993–2010 (2010 prices)
Registered
vehicles
Real VED
per vehicle
The economic rationale for road pricing is clear
Distribution of marginal external costs of road use (pence/km), 2010
250
Pence per kilometre
225
200
175
150
125
100
75
50
25
0
0%
10%
20%
30%
40%
50%
60%
70%
80%
Cumulative proportion of road use
Fuel duty per km
Source: IFS calculations from DfT (2010) estimates
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Marginal external cost
90% 100%
But fiscal pressure may be spur for reform
• Economic case is well-known, certainly since Eddington (2006)
• Would need ever higher real duty to offset revenue loss
– Increasingly regressive if poor households have less efficient cars
– Duty becomes ever-worse instrument to target external costs
• Road use may provide more secure tax base than vehicles & fuel
• CCC (2010) estimates:
– Fleet efficiency 168g CO2/km (2011) to 76g (2030)
– 60% new car sales electric (zero fuel) by 2030
– Road use 516 billion vehicle km (2011) to 637 billion (2030)
• Government should recognise this and start to lay ground now
– Road user charging should be largely offset by cuts to fuel duty
– Need to make the case for reform: inaction not a neutral policy!
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