As Paul covered in our post Budget blog, the Government has announced the recreation of a Vehicle Excise Duty (VED) linked Roads Fund. This will pay for the management, operation and maintenance of England’s strategic A-road and motorway network.
In addition to the creation of the Roads Fund, VED will be reformed.
From April 2017 cars will be banded according to carbon dioxide emissions for the first year only (unlike currently where they are always banded on this basis), after the first year there will be a standard rate of £140 for all bands except zero emissions vehicles.
These changes will deliver £5.4bn of England VED revenue in 2020/21 of which £4.1bn will be spent on the strategic road network in the same year. The rest - just over a billion pounds, will be allocated as part of the upcoming Spending Review.
Reform of VED was needed as revenues were set to decline significantly in the next decade, with the SMMT/Cebr noting that by 2025 close to 80% of newly registered vehicles would be in Band A i.e. paying no VED.
A step in the right direction
EEF's manifesto for the General election highlighted the need to reform the way roads are funded stating that:
"Funding for local and strategic road improvements must be put on a sustainable footing."
Our 2014 Business Environment survey also showed that there is majority support amongst manufacturers for moving away from the current funding model of using existing general taxation and spending review cycles to allocate funding to roads.
Our survey showed that 44% of manufacturers wanted a move to using existing motoring taxation, 38% using the status quo and 18% moving to road charging.
But only a partial solution...
However, while the Government has made a step in the right direction, this is only a partial fix for several reasons.
Firstly, this isn't a whole network solution but provides a remedy for just 3% of the road network by length and 33% by journeys.
Extending the Roads Fund to include the rest of the 'major road network' would ensure the majority of journeys are covered.
Secondly, the Government's own Productivity Plan also flagged up the £8.6bn maintenance backlog on the local road network and the need to address this. While this figure is lower than the ALARM survey, it is still significant (and expected) growing sum.
Finally, without an expansion of the Roads Fund to the rest of the road network there will be some road users paying VED, into a Roads Fund and receiving little, if at all any, of the benefit.
This is why in other countries such as the US and Canada, taxes from petrol are hypothecated and not taxes from car ownership.
...and a medium term fix
The Government intends this to be a stable fix to fund the road network over the long term. However the Committee on Climate Change estimates that there will need to be a significant shift to ultra-low emission vehicles and electric vehicles over the coming 15 years, to enable Britain to meet carbon targets.
This would be achievable due to the rapid increase in vehicle turnover rates with vehicle leasing, rather than ownership, becoming more prevalent.
The impact of this, given that VED bands will have to be uprated to ensure the same amount of revenue is hypothecated to the Roads Fund, is that VED will increasingly be paid by a smaller and smaller group of people over time.
This in turn could cause another potential sting: as the UK moves away from petrol fuelled vehicles, the revenues from fuel duty – a more significant source of revenue for the Treasury – is also set to decline. This revenue will need to be replaced.
A potential fix?
A potential long-term solution to fuel duty decline, the ‘elephant in the road’ the UK has been staring at for some time, is full road user charging.
In the medium-term, the Government will need to find a fix to assuage those losing out. Otherwise any long-term solution to the fuel duty revenue decline, will require huge dollops of political capital to enact.