Fuel duty 'could rocket' to reduce Treasury shortfall

The gap in public finances will come from increasing use of more fuel-efficient cars and a switch to electric vehicles, the RAC Foundation-commissioned report, which was prepared by the Institute for Fiscal Studies, says.

Key Points

• Fuel duty could rise, says report

• Needed to cover £13 billion hole in Treasury coffers

• Future governments face motoring tax income drought

It adds that while the fuel duty collected by the Exchequer stands at 1.7% of gross domestic product (GDP), this rate will tumble to 1.1% of GDP by 2029.

The report says vehicle excise duty (VED) would also drop over this period, from 0.4% of GDP to 0.1%, with the combined fall leading to the £13 billion shortfall.

RAC Foundation director Professor Stephen Glaister says: "If the Chancellor was faced with a £13 billion shortfall in motoring tax revenue today, he would need to push the rate of fuel duty up from 58p per litre to 87p per litre to fill the financial black hole.

"Clearly there is no guarantee that future rises in duty rates will be limited to inflation, as is current policy."

Record pump prices

He adds: "As drivers endure record prices at the pumps they might be surprised to learn that future governments face a drought in motoring tax income.

"The irony is that while ministers encourage us to buy greener, leaner cars, they are being forced to look at ways of clawing back the money motorists think they will be saving.

"This isn't scaremongering. The Treasury has already announced a review of VED bands to ensure drivers make a fair contribution to the public finances even as cars become more fuel-efficient."

Institute director Paul Johnson says motoring taxation does not reflect the costs drivers impose on others and that revenue from petrol is set to fall.

He adds: "A national system of charging related to mileage and congestion, largely replacing the current system of fuel taxation, would help solve both those problems."