Higher fuel duty is toxic but necessary

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The writer is a visiting professor of transport economics at Plymouth university and a former chair of the Commission for Integrated Transport (1999-2005)

The taxation of motoring goes right to the heart of the balance that politicians face between electoral expediency and sensible policies. But neither main party in the UK has so far excelled in pulling off the trick. Labour faces a choice in next month’s Budget about whether to increase fuel duty (the party denied accusations of such intentions during the election campaign) and the Conservatives have ruled out road pricing.

If you allow for inflation, fuel duty has been cut by about 40 per cent since 2010. This has cost the Treasury more than £100bn in tax receipts. Its forecasts assume that fuel duty will increase in line with inflation in future budgets. So when political parties claim that they will not increase fuel duty, do they mean nominally or in real terms (after allowing for inflation)? If it is nominally, then they would have to find about £6bn in savings from somewhere else. This was not factored in to any of the costings made in the manifestos at the general election.

The political challenge they face in even just increasing fuel duty in line with inflation is that motoring taxation has become politically toxic. The fuel duty escalator was introduced by Ken Clarke as chancellor in 1993 with the levy increasing by 3 per cent initially, then 5 per cent every year. It was done in the name of reducing fuel consumption and air pollution. This was increased to 6 per cent by Gordon Brown as chancellor — which led to the fuel duty protests of 2000, the only occasion when Labour was behind in the opinion polls during Tony Blair’s first term as prime minister.

Around 350 years ago Jean-Baptiste Colbert, a French finance minister, declared: “The art of taxation consists in so plucking the goose as to obtain the largest possible number of feathers with the smallest amount of hissing.” When it comes to fuel duty, this goose had been plucked too much; ever since politicians have been reluctant to increase it. This is especially so when there is a cost of living crisis and pump prices are high.

However, while it is perceived as a popular measure, the reduction in fuel duty since 2010 comes at a price in terms of lost revenue, lower electric car sales, more pollution and carbon emissions and fewer trips by public transport. Without it, carbon from road transport would be 24 per cent lower than it is, and rail and bus patronage would be almost 10 per cent higher.

Labour promised both during the campaign and since being elected not to increase tax on “working people”. While there are millions of working people who drive a car and who would be impacted by any increase in fuel duty, cuts disproportionately benefit better-off earners, who save twice as much as lower earners. The poorest households are more than seven times as likely to have no access to a car than the wealthiest.

The Conservatives did succeed in weaponising motoring taxation during recent years and ruled out road pricing. But how would the party’s next leader plan to pay for road use when there is a £28bn a year shortfall as cars are electrified and motorists no longer pay fuel duty? The Tories would become the party of traffic: road pricing has the potential to cut congestion by more than 40 per cent by incentivising road users to save money by changing the time that they travel.

For ministers, there is no other transport policy that will stimulate economic growth more than national road pricing — if implemented properly. Congestion is a huge drag on the economy. A Royal Commission should look at how we pay for roads when electric cars replace petrol and diesel vehicles.

In his 1956 book Profiles in Courage, John F Kennedy wrote that he admired politicians who put policy before politics. Increasing fuel duty at least in line with inflation in the short to medium term, and road pricing in the longer term, are policies to be commended, regardless of how challenging the politics are.