The Government faces a black hole in its finances due to the loss of income from fuel duty on petrol, it has emerged.
A vote-winning decision by successive Conservative chancellors to freeze the duty charged on fuel has dramatically cut Government receipts.
At the same time, the move away from petrol and diesel towards electric cars will remove billions in tax income through forecourt fuel sales.
The change in the tax regime and the move to electric vehicles will increase the pressure to find an alternative to fuel duty – most likely a regime of road pricing where people are charged per mile.
Government decisions to hold down fuel duty since 2011 are estimated to have cost the Treasury a staggering £90billion and a new analysis by the Office for Budget Responsibility (OBR) suggests a continuing freeze on fuel duty over the next five years would cost the government coffers another £15billion.
This threat to Treasury income is exacerbated by the uptake of electric vehicles — part of the UK’s push to hit net zero emissions by 2050 — which will dramatically cut the number of drivers paying at the pump.
Carl Emmerson, deputy director at the Institute for Fiscal Studies think-tank, warned: “Roll forward a few more years, and most motorists will be driving electric cars, and the fuel duty tax base will collapse completely.”
The latest OBR forecasts show fuel duty declining permanently after a peak of £24.7billion in the fiscal year ending in 2025 if the rate remains unchanged for the next five years. That is equal to a loss of £15billion in revenue from 2024 to 2029, compared to if the rate was not frozen.
And if the freeze on fuel duty is extended by whatever party is in power at the next Budget, the amount of so-called fiscal headroom the Chancellor will have to fund tax cuts or extra public spending crashes from £8.9billion to just £4.8billion.
The drop-off in fuel duty receipts adds to the list of fiscal headaches facing the next Government.
James Browne, senior policy adviser at the Tony Blair Institute, told the FT: “I think the big picture is that fuel duty revenues will disappear anyway as we move to an electric fleet. (The Government) needs to do something pretty soon.
“The next Government will have to go about this quite carefully, because you do not want a new tax to slow down the take-up of electric vehicles, but we cannot end up in a situation where we continue to have no taxation for the use of electric vehicles.”
Alternatives to fuel duty include the introduction of a ‘road pricing’ tax, where drivers would pay to use certain roads at different times of the day.
