Policy instruments (4) - Transport Policy and Planning in Great Britain - page 239

In this chapter we provide a description of the fiscal measures which are of policy
significance in various transport fields. As with the other instruments we have discussed
these have evolved in a fragmented, incremental manner over many decades. Changes
which might be seen as desirable in the interests of greater coherence and effectiveness
from the viewpoint of transport policy have to be set in a wider context and weighed
against issues of legal and administrative practicality and political acceptability.
We begin by explaining the key topic of motoring taxation (15.2) and related issues
of parking charges and road pricing (15.3 and 15.4). We then deal with fare regulation
and service subsidy on the national rail network (15.5), the subsidy of bus services
(15.6), concessionary fares (15.7) and finally (because of its significance and close
links with subsidised bus services) with transport for the journey to school (15.8).

15.2 Motoring taxation
Motoring taxation comprises two main elements. The first, represented by VAT (Value
Added Tax), is simply the application of a general form of taxation to all transactions
involving motor vehicles and to transport goods and services (with an exemption
for public transport fares). The second, more controversial, element comprises taxes
which are specific to motoring. This is represented by fuel duty and vehicle excise duty
(VED - the annual licence fee). Until 1992 there was also a special purchase tax on
the list price of new cars.
Duties are levied as a fixed charge (e.g. pence per litre of fuel) whereas taxes are
levied as a percentage of the sale price. This explains why fuel and vehicle duties -
along with duties on tobacco and alcohol - feature regularly in Budget day statements.
It is necessary to raise them periodically in order to maintain their real value (unless
the Government makes a policy decision otherwise) whereas the real value of VAT
rises automatically with retail prices.
As explained in Chapter 4, fuel duty and VED originated as a means of generating
revenue to pay for road improvements to cater for motor vehicles. Although a separate
Road Improvement Fund was abandoned at the end of the 1930s there remains a
commonly held view that the level of motoring taxes is, or should be, linked to public
expenditure which benefits motorists. In the post-war decades fuel duty and VED were
retained as part of a group of taxes imposed on 'luxury' consumer items as a means of
general revenue raising.
In the early 1990s there was increasing Government interest in the idea that the
pattern of taxation might be utilised more creatively in contributing to public policy
objectives, and specifically in relation to sustainable development (what we would
now refer to as 'green taxes'). Three linked decisions were made:

1 the phasing out of the remaining special purchase tax on new vehicles (an

economic response to lobbying by the motor industry then experiencing a slump
in sales)

2 more generally, a policy of shifting the balance of motoring taxes from taxes on

ownership to taxes on use (i.e. from fixed to variable costs). As a result they would
become 'fairer' (in that the overall amount motorists would pay would relate more
closely to miles driven) and also act as an incentive to improve fuel economy

3 the introduction in the 1993 Budget of the 'fuel duty escalator' - an annual 5%

increase above the rate of inflation in the level of duty. This was a means of
gradually restoring the tax revenue lost through the ending of the special purchase