Her Majesty’s Treasury is facing a £5 billion “black hole” in tax revenue as drivers switch to electric cars, according to new analysis. Research by the RAC Foundation revealed the Chancellor of the Exchequer, Rishi Sunak, could face losing almost a third of the revenue from fuel duty before the end of the decade.
In 2019, before the coronavirus pandemic struck, the RAC Foundation says the government received £28 billion from fuel duty, with £16.4 billion of that (58.6 percent) derived from the 32.9 million cars on the UK’s roads at the time. However, the transport policy and research organisation thinks an “optimistic” estimate of future electric vehicle (EV) could see that figure fall to £11.4 billion by the middle of 2028.
Even with what the RAC Foundation calls “low uptake” of electric cars, its models suggest the Treasury could see fuel duty receipts fall by £5 billion in 2033. That deficit, it claims, would be about enough to operate, maintain and enhance the nation’s motorways and major A-roads for a year.
And the organisation reckons the decline in income would be faster still were it not for a predicted “short-term” rise in the number of petrol and plug-in hybrid cars on the road as drivers move away from diesels without heading straight for an EV.
It also says the “blow” to public finances will likely be “cushioned” by the temporary rise in the popularity of petrol cars as consumers move away from diesel. In fact, the foundation estimates that the amount of fuel duty derived from petrol cars could cause revenue to increase in the short term.
“Whilst we will all welcome a shift to greener driving, the sooner it happens the more pressing the dilemma for the Chancellor who faces a looming hole in the public finances,” said Steve Gooding, the director of the RAC Foundation. “Currently, drivers of electric cars benefit from purchase subsidies and cheap running costs as ministers push to get more people to ditch fossil fuels. However, ministers must soon decide how and from where they are going to plug the fiscal hole electrification will inevitably cause.
“It could be that they choose to regard a drop in yield from motoring taxation as the price to be paid for saving the planet. That is all well and good but to give certainty to the individuals and businesses who buy the two million or so new cars sold in the UK annually that begs a conscious policy decision, communicated widely, not something we drift into by default.
“Inevitably there are many imponderables in doing this kind of modelling, not least future changes in government policy and shifts in travel behaviour brought on by Covid, however what’s indisputable is that income from the Chancellor’s favourite tax – simple and cheap to collect, and almost impossible to evade – is heading for terminal decline.”