Ignore the howls around pay-per-mile, chancellor. We can’t afford not to tax electric cars | Nils Pratley

IIf you want a document that will give you sleepless nights, the Office for Budget Responsibility’s Biennial Fiscal Risk and Sustainability Report is a must-read publication. It’s one that looks to the horizon and covers everything from demographic trends to state pension promises to the climate crisis.

The conclusion to the title of this year’s July release was truly stunning. The UK’s public finances are on an unsustainable long-term trajectory, as public debt would reach a remarkable 270% of GDP by the early 2070s – up from almost 100% today – if current policies remain unchanged.

The “if nothing changes” qualification is important because some of the risks to public finances are so obvious – and have been for ages – that it is surprising that successive governments have ignored them. The first is the certainty that government revenue from fuel taxes will shrink to almost nothing once we all drive electric vehicles.

The July paper explained arithmetic. From the expected revenue of £24.4 billion from fuel taxes in 2024-25, a halving is expected by the 2030s and revenues will be close to zero by 2050. “This represents an average loss of £15.5 billion per year in fuel tax revenue, driven by the assumption that all new cars and vans will be zero emissions by 2035 and that the new heavy goods vehicles will be zero-emission. [heavy goods vehicles] by 2040,” the OBR said.

The sums, obviously, are enormous. Indeed, fuel taxes alone represent three-quarters of the revenue that will be lost to the government due to the decarbonization of the economy. It’s clear that something needs to change when it comes to car taxes.

And here – finally – a proposal. Rachel Reeves plans to use this month’s Budget to announce a proposed per-mile tax for electric vehicles from 2028. A 3p per kilometer tax for electric vehicles, on top of other road taxes, would offset falling revenues from petrol and diesel cars.

Above all, from a transition point of view, the figures would remain in favor of electric vehicles. The suggested rate would equate to an average of £250 a year, far less than the average £600 that petrol and diesel drivers pay in fuel tax, which can itself be considered a per-mile tax. Enforcement remains an unanswered practical problem if Reeves’ system relies on EV drivers estimating their mileage themselves. But the principle is good: the Treasury cannot afford to let car taxes disappear.

Naturally, the idea caused howls from all around. The Society of Motor Manufacturers and Traders said that at such a crucial time in the UK’s transition to electric vehicles it would be “the wrong move”.

Car salespeople need to be realistic. It is their sort of “this is not the right time” thinking that has made the problem of evaporating fuel taxes so urgent. It would have been preferable to start the reform gradually fifty years ago, as recommended at the time by the Institute of Fiscal Studies. From its 2019 report: “The government needs to rethink how it taxes autos. This should start now, before revenues disappear and expectations of low-tax autos take root.” Enough. The question has been avoided for too long.

Reeves’ proposal is too heavy-handed to tackle the costs of congestion, the other problem identified by the IFS, but it is better than letting the pressure on Treasury revenues build and grow.

If the UK fails to restructure car taxes to keep pace with changing technology, it has no hope of alleviating the most serious problems linked to the OBR’s book of frightening projections, such as rising pension and healthcare costs. Reeves should implement his pay-per-mile idea. It is expected that most electric vehicle drivers will see the fairness.