Wednesday, March 07, 2012
Fair Fuel UK? How to make UK fuel duty a little fairer
A nationwide campaign comes to London today, called National Fair Fuel Day, demanding that the UK government act on fuel taxes. Finally, the road transport sector and motoring lobby have cottoned onto the fact that some in the media have ignored – the high price of fuel is substantially due to government taxation.
Some have argued that it is all about oil company gouging. Oil companies being the bogey of the left and easily pilloried. Yet whilst demand and supply do greatly influence price fluctuations, oil companies can't be blamed for much of the price of fuel in the UK. It isn't hard to compare prices between countries, and notice that once currency fluctuations are taken into account, most of the real difference is tax.
Today, the average price of standard unleaded petrol in the UK is around £1.38 per litre, for diesel it is £1.45. However of those prices, around £0.58 is fuel duty. For the petrol there is also £0.23 in VAT (£0.24 for diesel) (on top of the retail price and fuel duty). So of the total price, the majority is tax.
In the UK, this situation came about because of the two previous governments. John Major’s government introduced a fuel duty escalator, which increased fuel duty by inflation + 3%, which was then increased to inflation + 5%. When Gordon Brown became Chancellor of the Exchequer he raised it to inflation + 6%. So in short, it was a way to pillage the pockets of motorists, given that most revenue from fuel duty comes from road use.
Unlike the US or New Zealand, none of the UK fuel tax is hypothecated for transport purposes. The reason being that the UK Treasury has a phobic opposition to government restricting the use of any tax revenues for any specific purpose. The history behind this being that the last time fuel tax was hypothecated was in the 1930s, and revenue was far in excess of spending on roads (which suggested the tax should have been lowered or more spending should have been made on roads). However, even compared to road spending, the fuel tax is grossly excessive.
About £10 billion is spent in the UK every year on maintaining and upgrading all roads, yet £26 billion is collected in fuel duty and £6 billion from vehicle excise duty. As these taxes wouldn’t be collected if people didn’t own or use motor vehicles, it is fair to link that revenue to that expenditure, although the left/environmental movement likes to think of it differently.
So what should the rate of fuel duty be? Let’s reject the Treasury approach to this, and say that a dedicated roads fund could be set up which would be funded from revenue from road users. If the current level of spending is maintained it would be £6 billion from vehicle excise duty and £4 billion from fuel , or rather only 12.5% of current fuel duty. Given that there is significant deferred maintenance on road networks (and assuming this funding can replace council tax contributions to road maintenance), let’s boost that slightly by rounding it up to 8p a litre that could be hypothecated for road spending. Yes, in theory fuel duty could be only £0.08 if it was all spent on roads, with vehicle excise duty and it was used to fully fund local roads and given a small boost to maintenance. Yes, the UK government is profiteering from the use of its own roads on a grand scale, that would make most entrepreneurs blush. However, it's the government, so the left don't get so worked up about that, because tax is "good" because governments "spend it on everyone".
Of course cutting fuel duty by 50p devastate public finances unless there were equivalent spending cuts to match. Not something I'm unafraid of at all, but let's proceed down a train of thought to do something a little different.
A £0.50 cut in fuel duty would also correspond to another £0.10 off in VAT, so a £0.60 cut in fuel would nearly halve prices. That would be a major shot in the arm for the competitiveness of transport intensive industries, transport operators and motorists, but of course would dreadfully upset environmentalists, public transport operators and would increase congestion. Environmentalists would argue it would increase climate change.
Let me be controversial and assume that this is correct, and accept that road users should pay for the "cost" of carbon emissions. The Stern Report claimed that the cost of climate change is around £0.14 per litre. However, even if I add that to the road spending, fuel duty still drops by £0.36 with a £0.07 cut in VAT.
Another claim from environmentalists will be the cost of real pollution, the noxious kind that actually does affect people's health in cities. Well that’s been calculated too, and is around half of the cost of infrastructure maintenance, indicating a tax level of around £0.16 per litre. It is a cost that is declining as cleaner burning vehicles are renewing the fleet. Again, it still means that fuel duty would drop by £0.20 with a £0.04 cut in VAT.
At that point I’d make an argument that there is a long run lack of investment in British highways, only part of which can be recovered in the short term by private investment (simply due to public sector crowd out in planning), so that an extra £0.04 a litre should be retained to be transferred at a rate of £0.01 a litre every year to the roads fund, to address 15 years of underspending.
Indeed, given the rail sector pays a small portion into this, it could be argued that tax could be recycled into paying for rail subsidies (although surely it would be simpler and fairer to enable rail operators to claim back the duty).
So what to do? Yes the government makes a fortune from road users, it collects over three times what it spends on roads. However, it also faces a massive budget deficit to cut, so in the meantime, here are my steps to remedy this, over time:
1. No more increases in fuel duty.
2. Set up a hypothecated highway fund to which all vehicle excise duty and 8p of fuel duty goes into. Establish an independent board to determine how to allocate those funds to the Highways Agency, local authorities and the Welsh, Scottish and Northern Ireland administrations, based on receiving bids for maintenance and capital expenditure. Have those funds allocated on transparent criteria based on cost/benefit analysis.
3. Calculate and explicitly state that a proportion of fuel duty is to reflect climate change and pollution costs, if that is deemed necessary. Regularly recalculate these to reflect changes in the vehicle fleet.
4. Explicitly identify the remainder of fuel duty as “surplus”, with the aim of policy to reduce that downwards by 1p a litre every year until the budget is in surplus (estimated 2016/2017), with another 1p shifted into the roads fund for additional capital works.
5. Once the budget is in surplus, cut fuel duty by the remainder, so that all that remains is the road fund component, plus the externality charge.
Whilst I'd much rather slash fuel duty by 16p overnight, and then argue over the rest regarding externalities, these gentle steps would put some transparency around fuel duty and cease the endless increases just to pay for general government expenditure. If all the roads were privately owned, or run as a business, they wouldn’t be paid for by fuel duty, but from user charges. However, unless and until that sort of radical reform is implemented, the second best option is to treat fuel duty as being linked to road use and road spending. It would stop penalising the road transport sector and treating it as a cash cow.