Wednesday, June 27, 2012

Is fuel tax in the UK becoming impossible to increase?

I hope so.

Yesterday, Chancellor of the Exchequer George Osborne did his latest U-turn on his budget – he deferred a 3p/l increase in fuel duty that was planned for August. The increase had actually been planned under the Gordon Brown administration, which was always keen to increase taxes on fuel faster than inflation. The coalition government simply sought to maintain it, but was under pressure from Labour (hypocritically) and others to not proceed with it, so it has been delayed.

Now this move is welcome. Unlike the US (and New Zealand now), increases in fuel tax in the UK are not dedicated to spending on transport, but general revenue (and indeed four times as much is collected in fuel tax than is spent on roads). The statist media (indeed state media in the form of the BBC and Channel 4) talk about how it is a “cost” of £500 million (£1.5 billion if the increase is permanently suspended), but this is of course only the nonsense accounting view of Treasury.

It is £500 million that remains in the economy to be spent, invested or saved by individuals and businesses, rather than be spent by government. On top of that the official view (ineptly put by junior minister Chloe Smith) is that it is “funded” by savings in spending from various government agencies. All good stuff, but it does raise two issues.

The first is whether it is permanent. It’s unclear how it will be easier to raise fuel duty in January compared to August. The same politics will arise then and rightfully so.

The second is whether the UK is finally getting to the point where atlas (in the form of motorists) will shrug and say “no more”, at least in relation to fuel tax. That stage has already been reached in the US where the federal government has been unable to raise fuel tax since 1994 and neither have 20 states. It’s causing concern because, unlike the UK, fuel tax in the US is dedicated to expenditure on transport, mostly roads and so it is becoming difficult to fund improvements and maintenance. As a result, more and more states are looking at new ways to pay for roads, with tolls for new links and capacity being popular, along with letting private companies build improvements and toll for them, others are considering how to replace fuel tax completely with direct user charges.

In short, the politics of increasing fuel tax are promoting a shift to user pays, away from taxing proxies, in the United States.

Opposition to fuel tax increases is understandable. People don’t want to pay more when they see government poorly spending the money it does get, with money misdirected to politically motivated new works whilst maintenance falls by the wayside. Tolls are grudgingly supported because they get linked to what you use.

In the UK, opposition is twofold. For a start, motorists feel unfairly singled out, with tax at around 59p a litre BEFORE VAT, tax is the majority of the price of fuel.

Most grudgingly accept VAT on most goods and services, because it isn’t targeted. There is also tolerance of taxes on alcohol and tobacco because of the links between their consumption and health impacts. However, why fuel?

Since none of the money is dedicated to roads (and it is many times higher than the road budget) and roads are crumbling, it seems it has nothing to do with that.

Since there is a discounted rate of VAT on electricity and gas, the environmental argument seems fatuous and inconsistent.

What remains is a Nanny State finger pointing view, aligned to the Green Party, that people “shouldn’t” drive and so fuel tax is a way of encouraging them to use public transport, cycle or walk. The fact that the freight hauled on most trucks has no realistic alternative mode is blanked out. The fact that so many reject other modes, even though they are subsidised (with taxpayer subsidies for rail almost as much as total spending on roads), indicates that it doesn’t meet their needs.

So the overwhelming impression is that fuel duty in the UK is about fleecing people who have few options to avoid it.

It is about time motorists stood up and said enough.

There is a reasonable argument that, in the absence of tolls and privatisation of roads, a tax on fuel used on the roads is a rough proxy for user pays. So if the rate of fuel duty was to match that (taking into account tax taken from annual vehicle excise duty) it would drop from 59p to around 9p a litre (in fact given the massive backlog of capital work needed to renew the network I’d say 10p). If that was transparent, then it would show it up for what it is – a tax grab. Any reasonable view of it being environmental would mean increasing VAT on electricity and gas, which is also unpalatable.

It SHOULD become political unpalatable to continually increase fuel duty – a tactic that Chancellors of the Exchequer have been using since John Major, with Gordon Brown particularly keen on milking money from motorists.

Of course the UK can’t cut fuel tax more than half, for EU law prevents reducing tax on unleaded fuel below what is around 29p/l. Yes, the EU actually sets FLOORS for taxes with Directive 2003/96/EC.

Meanwhile, it ought to be time that UK motorists generally said no – and were louder and more militant against persistent tax increases. This fuel duty increase postponement should be permanent, and fuel duty ought to be in decline.

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