Professor David Newbery argues that the UK’s transport policy needs to change direction as the economy starts to exit from lockdown. Investment in transport infrastructure needs to take full account of environmental imperatives, with more spending on walking and cycling, and higher fuel duty to pave the way for a transition to electric vehicles and road pricing schemes.
As part of the UK Government’s plan to help the economy recover after the lock-down, the Chancellor announced in March that he would “get Britain building” by investing in roads and broadband. The plans included £27.4 billion for the Strategic Roads Network.
Within a month lawyers acting for Transport Action Network took the first steps toward a Judicial Review opposing the Government’s plan to spend on roads, arguing that: “The Secretary of State must have regard, in particular, to the effect of the Strategy on the environment (underline added).”
In a recent paper I explain why the Government’s transport policy needs re-orienting after the Covid-19 lockdown to deliver sustainable and equitable growth. There are two key changes. First, the project appraisals for any spending on roads needs to include all external environmental effects, both good and bad, as the Treasury’s guidelines (The Green Book) says they should. The choice of where to invest government funds must then be guided by that proper investment appraisal.
Second, road fuel duty rates need to be considerably increased as a prelude to its replacement by road pricing. This economic mechanism will change people’s behaviour and encourage their use of electric cars, as well as raising much-needed tax revenues.
The Chancellor’s emphasis on roads in his statement was partly counterbalanced by the greener February Cycling and Walking Investment Strategy Report to Parliament. Since the launch of that strategy in 2017, investment in cycling and walking infrastructure has averaged £600 million a year. But that is just 6% of the annual amount spent on UK roads (£10.2 bn. in 2018/19), and a bit less than the share of walking and cycling in total distance travelled by private means of transport (6.7%). The Government accepts that society gains £13 in benefits for every £1 invested in cycling. This ratio of benefits to costs it would be even higher if health benefits were included. It is anyway higher than for road investment (and much higher than for rail). So the case for investing in cycling looks strong, as proper appraisals according to the Treasury rules would show.
But investment in roads, properly appraised taking into account all the environmental costs, is sensible too. From 2018/19 to 2020/21 the cumulative share of roads in transport infrastructure investment is 15%. In 2018/19 total public expenditure on roads was just £10.2 bn. Total maintenance expenditure on the road network has fallen by more than 50% since 2010/11. Total (investment and maintenance) expenditure per vehicle km travelled has fallen by 25% from 2010/11.
Any investment in infrastructure will have to be paid for. Given the recent rapid increase in public borrowing, tax increases are inevitable. At the same time, the net-zero 2050 carbon target now required by law makes it imperative that all transport investment is green. Decarbonising road transport means moving to battery electric vehicles (BEVs).
Under current road taxation, BEV’s are heavily subsidized as they do not pay fuel duty and hence do not contribute to the cost of the road network. Fuel duty is a significant source of revenue for the Government. Total UK revenue from road fuel duty and Vehicle Excise Duty (excluding VAT) was £34.7 bn. If the switch to BEVs is successful, that lost tax revenue will need to be replaced, and the logical choice is road pricing.
Five reasons for raising fuel excise duty now
Until road pricing can be introduced to replace this revenue, though, there is a strong case for raising the road fuel duty, for five reasons.
The first is that it is currently well below the tax that would charge correctly for the costs of pollution, accidents, and congestion due to driving. The estimates provided in the paper suggest raising petrol fuel duty for this reason alone by a factor of 1.55 and diesel by a factor of 2.15. Duty per litre has fallen in real terms by 17% since 2010. Higher pollution costs and higher distance travelled per litre of diesel argue for higher duty than petrol.
The second reason is that pre-tax fuel prices have fallen over time, and recently dramatically so with the fall in demand due to the pandemic. The pre-tax petrol price has fallen by 38% since 2010, leading to a fall in the pump price of petrol of 24%. The best time to raise taxes is exactly when the pre-tax prices have fallen, so the rise in the pump price compared to the past will not seem so high. The tax rate could immediately be raised to 99p/litre for petrol, higher than all the external costs (of 90p/l). A tax of 90p/l would restore the petrol pump price to somewhat less than its recent real level. Higher pollution and congestion argue for a rate of 124.5p/l for diesel.
The third reason is that the Budget this autumn will need extra tax revenue, soon, in very substantial amounts to pay for supporting the economy during the pandemic. Better to tax in ways that brings prices closer to their economically efficient level than increase other taxes. In a green future, taxes on fossil fuels have an obvious political attraction.
The fourth reason is that people are wary of exposure to Covid-19 on public transport and prefer the self-isolation of private cars. Congestion charging and/or higher fuel taxes will counterbalance this by encouraging more use of public transport, generating the revenue to finance a more frequent service that in turn will make the service more attractive. The same goes for encouraging bike use as discouraging road traffic makes bike use safer, raising its appeal and inducing more motorists to switch to cycling.
The fifth reason is that it should help an eventual switch to road pricing, as this policy could be pre-announced with an offsetting future reduction in road fuel duty. At present many people see road pricing as another tax on motoring, so linking it to a reduction in fuel duty would makes sense as part of gaining public support for it. The change from fuel taxes to road pricing could be designed so that a considerable majority of car users paid less in total under road pricing than fuel taxation.
Much has been made (mostly by the Government itself) of its claimed ambitious plans for more road building. To date the ambition looks underwhelming. The Eddington Report on transport investment, back in 2006, said: “Incremental improvements will not be sufficient. … road pricing is an economic no-brainer. However, a sensible road pricing regime will still require additional road build.” This conclusion is still true. We also need to redress the underinvestment in walking and cycling. If decisions are guided by a proper social cost benefit analysis, that is what we will get.
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
