If you want a document to give you sleepless nights, the Office for Budget Responsibility’s biennial Fiscal Risks and Sustainability report is a go-to publication. This is the one that looks to the horizon and covers everything from demographic trends to state pension promises to the climate crisis.
The headline finding in this July’s version was a true jaw-dropper. The UK’s public finances are on an unsustainable long-term trajectory because government debt would rise to a remarkable 270% of GDP by the early 2070s – up from almost 100% today – if current policies were left unchanged.
The “if nothing changes” qualification is important because some of the risks to the public finances are so blindingly obvious – and have been for ages – that it is astonishing successive governments have ignored them. One is the certainty that government income from fuel duty will dwindle to next to nothing once we’re all driving electric vehicles.
The July document spelled out the arithmetic. From expected revenues of £24.4bn from fuel duty in 2024-25, a halving is projected by the 2030s and receipts will be close to zero by 2050. “This is an average £15.5bn a year lost in fuel duty receipts, driven by the assumption all new cars and vans will be zero-emission by 2035 and new HGVs [heavy goods vehicles] by 2040,” said the OBR.
The sums, to state the obvious, are huge. Indeed, fuel duty alone accounts for three-quarters of the revenues that will be lost to government arising from decarbonising the economy. Something plainly has to change on motoring taxes.
And here – finally – is a proposal. Rachel Reeves is considering using this month’s budget to announce plans for a pay-per-mile tax for electric vehicles from 2028. A charge of 3p a mile for EVs, on top of other road taxes, would offset falling revenue from petrol and diesel cars.
Crucially, from a transition perspective, the numbers would still be loaded in favour of EVs. The suggested rate would work out at an average of £250 a year, a lot less than the average £600 that petrol and diesel drivers pay in fuel tax, which can itself be considered a pay-per-mile charge. Enforcement remains an unanswered practical problem if Reeves’s system will rely on EV drivers estimating their mileage themselves. But the principle is sound: the Treasury cannot afford to let motoring taxes disappear.
Naturally, the idea provoked howls from predictable quarters. The Society of Motor Manufacturers and Traders said that at such a pivotal moment in the UK’s transition towards EVs, it would be “the wrong measure”.
The car salesmen need to get real. It is their sort of “not the right time” thinking that has made the problem of evaporating fuel duties so urgent. It would have been better to start reform incrementally half a decade ago, as the Institute for Fiscal Studies was urging at the time. From its 2019 report: “The government needs to rethink how it taxes motoring. It should start now, before the revenue disappears and expectations of low-tax motoring become ingrained.” Quite. The issue has been dodged for too long.
Reeves’s proposal is too blunt to tackle the costs of congestion, the other problem identified by the IFS, but it’s better than letting the pressure on Treasury receipts build and build.
If the UK can’t rejig motoring taxes to keep up with changes in technology, it hasn’t a hope of easing bigger headaches in the OBR’s book of scary projections, such as rising pension and healthcare costs. Reeves should implement her pay-per-mile idea. Most EV drivers, one suspects, will see the fairness.
