September 18, 2021
THE CARS on the UK’s roads are changing. According to the World Economic Forum, a global think tank, more than a tenth of new cars sold in 2020 were electrically powered. That is less than some other parts of Northern Europe, but four times what it is in America. And the shift from fossil fuels to electricity is likely to accelerate. According to government plans to decarbonise the economy, the number of battery-powered electric vehicles (EVs) on Britain’s roads is expected to increase from around 100,000 currently to 3 million by 2025, 10 million by 2030 and 25 million by 2035.
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This rapid shift is necessary if the UK is to meet international commitments to reduce its carbon emissions. But an analysis by the Tony Blair Institute for Global Change, a think tank, reveals three looming risks: a fiscal hole, increased inequality and more congestion. All three result from the way driving is taxed in the UK, largely through a levy on fuels. That makes driving an electric vehicle much cheaper than alternatives. The average UK driver currently spends a total of around £ 1,100 ($ 1,520) a year on fuel and vehicle excise duty (VED), a tax levied on most personal vehicles, of which around £ 750 is tax. But the typical owner of a battery-powered EV exempt from VED spends only £ 320 a year, of which only £ 20 is tax.
These significantly lower operating costs encourage drivers to switch. But as is so often the case with “taxes on sin”, this also falls victim to its own success. Part of the sin taxes is to encourage people to become more virtuous, but the faster it does, the faster the revenues dry up. By 2030, the annual loss of tax revenue from VED and fuel taxes is projected to be around £ 8 billion, or 0.3% of GDP. That is around two thirds as much as the politically controversial increase in social security, a payroll tax, announced on September 7th. The cumulative cost of the public purse will rise to over £ 50 billion by the end of the decade (see chart).
The savings are not distributed evenly. Since wealthier households tend to have newer cars, they are most likely to own electric vehicles. Without a major overhaul, the car tax burden will fall ever more heavily on the less affluent Britons in the years to come.
The final problem predicted by the Institute for Global Change is increased congestion. Switching to an electric vehicle lowers the effective fuel cost of driving an extra mile by about 70%, which means that as electric vehicles become more prevalent, motorists are likely to drive more. The Ministry of Transport assumes that in the next two decades, without reform of vehicle taxes, the number of kilometers driven will increase by 30% and the proportion of people stuck in traffic jams will increase from 7% to 12%.
The Treasury Department has long since closed the budget gap caused by lower smoking rates by aggressively raising tobacco tariffs. But the fuel tax is much more politically sensitive. The Conservative Party enjoys greater support from car owners and has frozen tariffs for the past decade.
The most obvious solution would be to shift the tax base of driving away from fuel and towards road use. A road charging system would burden the heaviest users the most. It could also allow for variable prices in congested areas, which would help reduce congestion. But such proposals are deeply unpopular with car owners. With parliamentary elections approaching, perhaps as early as 2023, the Conservative government is unlikely to risk angering its core voters. Public order, like the UK’s roads, is at a standstill. ■
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This article appeared in the UK section of the print edition under the heading “Road to Traffic Crash”
