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Future funding crisis looms?

First publishedin World Highways
2012 July August
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Editor of World Highways
From the UK’s Institute for Fiscal Studies (IFS) comes data revealing a future funding crisis many governments will face. The IFS study, commissioned by the RAC Foundation, shows that income from motoring taxation will fall as traffic volumes increase. The problem is that increasing fuel efficiency of new generation vehicles, plus the introduction of electric cars, will deliver smaller and smaller returns on fuel taxation. Although fuel is taxed heavily in the UK, and right across Europe, projections show the amount of fuel duty revenue collected by the UK Government will drop from 1.7-1.1% of GDP between now and 2029. Worse still, UK’s Department for Transport most recent estimate predicts a 44% increase in traffic by 2035. At the same time, the IFS figures show that revenue from motoring taxation will plunge from £38 billion/year, to £25 billion (in today’s value) in 2029. Taxes may have paid to build existing networks, but they will not stretch to future repairs, improvements and capacity upgrades.

Vehicle manufacturers are investing heavily in improving fuel efficiency and associated improvements in emissions in response both to governmental climate change targets for greenhouse gas reduction and to customer demand for lower running costs. And some campaigners are looking for tougher constraints on Europe’s automotive manufacturers, forcing industry to develop ever more frugal vehicles.

These campaigners take a simplistic view that improved fuel efficiency will offer huge savings in running costs for vehicle users. But they do not comprehend that this will exacerbate the problem of transport infrastructure funding. Nor is this restricted to Europe, with similar issues being seen in the US and other developed nations. And what is happening now in the developed world will almost certainly come into effect right across the globe in due course. Because European drivers are being encouraged to purchase fuel efficient cars, Europe’s governments are considering methods to recoup money according to RAC Foundation director, Professor Stephen Glaister. But few options are appealing. Governments could set aside current vehicle taxation and increase fuel duty instead, as well as introducing taxes on electricity used in battery driven vehicles. But removing vehicle taxation will reduce income, while taxing electric vehicles directly risks halting their more widespread introduction.

Furthermore, IFS director Paul Johnson points out that fuel taxation does not fully reflect when and where each road user drives. Many rural drivers are effectively over-taxed and paying a surcharge for road users in congested urban areas. Meanwhile drivers in some congested urban areas are paying less than the costs they impose on other road users.

As vehicles become more fuel efficient the revenue from fuel taxes will continue to fall if climate change targets are to be met. From this perspective, a national system of road user charging related to distance and congestion could replace the current system of fuel taxation, according to Johnson. Like it or not, there may be little alternative to more road tolling and comprehensive road user charging schemes for Europe’s drivers.

Companies in this article

Department for Transport
Institute for Fiscal Studies
RAC Foundation
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