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IFS: New taxes required to replace fuel duty

960 640 Stuart O'Brien

The rise of electric vehicles combined with current government polices towards less fuel duty mean new taxes will be required to plug an inevitable funding shortfall.

That’s according to a study by the Institute for Fiscal Studies, which asserts that cutting fuel duty by 2p per litre in the upcoming Budget would cost £1 billion a year in lost revenue.

That’s on top of the £5.5 billion lost since 2010–11 arising from the a failure by government to increase rates in line with CPI inflation.

The FSI says revenue from fuel duties now stands at £28 billion a year, which is 1.3% of national income. Revenue peaked at 2.2% of national income in 1999–2000. Had it remained at that level, the exchequer would currently be getting an extra £19 billion.

In addition, the FSI says the government’s commitment to reaching zero net emissions by 2050 means that revenue from fuel duties will completely disappear over the next few decades.

As such, the FSI says new taxes are required which can gradually replace fuel duties. These should reflect at least distance driven, and ideally vary according to when and where journeys take place. As a result, those driving in busy places would pay more, but the majority of journeys would be taxed less heavily than at present.

Rebekah Stroud, co-author of the report and a Research Economist at the IFS, said: “Cuts to fuel duties over the last two decades have contributed towards revenues’ being £19 billion a year lower than they would have been. Another 2p cut, as reportedly mooted by the Prime Minister, would cost a further £1 billion a year.

“The bigger challenge is that revenues are now set to disappear entirely over coming decades as we transition to electric cars. The government should set out its long-term plan for taxing driving, before it finds itself with virtually no revenues from driving and no way to correct for the costs – most importantly congestion – that driving imposes on others.”

Image by IADE-Michoko from Pixabay