Road pricing has a reputation as a “Marmite idea”: economists love it and the public hates it.
Gordon Brown was forced into a U-turn over plans for a pay-per-mile system in 2007, and polling today suggests motorists remain wary of what has been dubbed a “poll tax on wheels” by campaigners.
However, the need for road tax reform has become more urgent since Brown failed to push through an overhaul.
A report by the Institute for Fiscal Studies warned last year that booming sales for electric vehicles could leave a £40bn annual revenue shortfall in the coming decades as cleaner cars dodge fuel duty and vehicle excise duty.
How can Rishi Sunak, the Chancellor, plug the hole?
Road pricing revolution
Economists argue a “pay-per-mile” tax system can make up the revenue shortfall, encourage a move to cleaner cars and reduce congestion. Persuading the public will be a trickier sell, however.
Chris Sanger, head of tax policy at EY, says road pricing gives the Government the opportunity to “change people’s behaviour”.
“You can price roads differently at different times of the day, or you can price a shorter journey more expensive than a longer journey,” he explains.
Garnering enough support for the plans could be a key stumbling block for the Chancellor, however.
“The problem is getting political acceptability for it,” cautions Douglas McWilliams, deputy chairman of the Centre for Economics and Business Research. “The public think the Treasury sees road pricing not as a way of allocating road space but as a way of squeezing the motorist.”
A more environmentally conscious public may be more receptive to the idea in 2020, however. Sanger says: “The ability to deliver both in terms of technology and public acceptance is potentially at an all time high.”
Raise revenue elsewhere
If Sunak wants to avoid the ire of motorists, the Treasury could plug the shortfall elsewhere. It generates the bulk of its revenue from three heavy lifters: income tax, national insurance and VAT.
However, the bill from Covid is already putting greater pressure on the Chancellor to increase taxes to rein in borrowing. Hikes on all taxpayers to offset a shortfall from motorists may be seen as unfair and produce its own backlash.
Motoring taxes running out of road?
If road pricing or other revenue raisers are too politically thorny for the Chancellor, he would likely have to hike other motoring taxes.
“If you’re looking to replace that £40bn, it’s quite hard to see things which are not again focused on the motorist,” says Sanger.
The Government could increase current motoring taxes to act as a sticking plaster for the problem. The Treasury could end a fuel duty freeze that dates back to 2011 with the IFS arguing it should be increased in line with inflation.
However, that would not address the long-term problem of less tax revenue from cleaner cars as more make the switch. The Chancellor would, sooner or later, still need to find a way of taxing green motorists.