Move to electric cars sparks end of fuel’s gold for government

The government’s recent announcement that it intends to ban new diesel and petrol vehicles from 2040 heralds the death knell for fuel duty revenues and will leave a gaping hole in the Treasury’s finances.

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Fuel Duty is 4% of UK tax receipts

Fuel duty currently accounts for 4% of UK tax receipts and this year alone will bring in about £28 billion to the Exchequer. That figure is on a par with what Council Tax currently raises and, by comparison, dwarfs the proceeds from Stamp Duty Land Tax which comes in at around half the amount. The switch to electric cars poses a major financial headache for the government. Every time a driver turns his or her back on a petrol or diesel-powered vehicle in favour of an electric version, the government in essence loses nearly 60p per litre in fuel tax at every fill-up. As a percentage of GDP, fuel duty revenues have been on the wane for several years, partly because of the increasing trend for fuel efficiency. Earlier this summer, a report from the Policy Exchange think tank warned that the Treasury could find a gap in its expected tax revenues unless its move to cleaner vehicles is part of a wider government strategy which recognises the fiscal implications of cleaning up road transport. The Office for Budgetary Responsibility (OBR) has estimated that fuel duty receipts could increase from £28 billion a year to around £40 billion by 2030. But Policy Exchange said that fuel duty tax receipts could be as low as £17 billion to £31 billion by the next decade – or £9 billion to £23 billion lower than the OBR is banking on – if current carbon target legislation is met. The Society of Motor Manufacturers & Traders, the car industry body, has suggested that the government may look at road pricing in some form to take over eventually from fuel duty. Technology already exists to track vehicles and charge drivers per mile. The road ahead will certainly be paved with change.

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