Election Special – who is offering what to the Retail Motor Industry?

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By now we all know that two factors make politicians sit up and take notice of the motor industry during an election: how many jobs (i.e. votes) depend on it and how much tax revenue it generates.

In addition to the estimated 950,000 employed in the industry directly and indirectly – 570,000 in motor retailing and after sales – it now generates an estimated £60BN a year in taxes and charges for national and local governments. 20% up on the figures shown in the table from the UK Parliament’s Transport Commitee for 2007/8.

Do any UK political parties care to woo such an important group….?

Fuel duty and VAT is the biggest revenue provider. In 2008 the UK used 16.7MN metric tonnes. At 1,333 litres per tonne, the UK government revenue (VAT and Fuel Duty say 71p/litre) was £16BN. Add to that 26.6MN tones of diesel at 1,176 litres per tonne. That gave an extra £22.5BN. Together, £38.5BN.

On top of that, there’s UK Vehicle Excise Duty (VED). In a written parliamentary answer (11 May 2009) Angela Eagle, a Treasury Secretary for the Chancellor of the Exchequer revealed that in the FY 2008 – 2009 VED raised £5.6BN.

While the TransportCommittee estimated that the total revenue raised exceeded £48BN in 2007-2008, later estimates are that the figure now tops £60BN at least, just under 5% of UK GDP.

While the tax take has risen every year since 1999, public expenditure on roads has stalled at £9BN a year. The UK now spends about 15% of the money it raises from motorists and hauliers on the roads. In the 1970’s the government spent 85% of the revenue raised from motorists and hauliers on the roads. Quite a turn-around.

No UK government ever pretended that all the revenue raised from motorists should be used on infrastructure in any case. Motorists and hauliers just form part of government’s general tax raising capacity. But, it is fair to say that successive governments have wrongly tried to justify some of their tax charges, such as VED or the Fuel Duty Escalator, by cloaking them as ‘green taxes’ or as being used for transport infrastructure. They aren’t.

In the run-up to the 2010 General Election it’s worth asking where does the money come from and what do the main parties intend to do about the costs if they get elected? You might also ask, if motorists or hauliers are expected to pay even more, how might that effect future demand for cars, vans and trucks?

There are 10 key areas where motorists, hauliers or their employers pay transport-related taxes and charges to either central or local government: Road Fuel Duty, VAT on fuel and vehicles, the Road Fuel Duty Escalator, Vehicle Excise Duty, Penalty Charge Notices, Parking Charges, Congestion Charging, Low Emission Zone Charges, Road Pricing and the Workplace Parking Levy. Take a look at what the parties have to say about them….or not.

The tax take on UK road fuel.1. Road Fuel Duty and 2. The Fuel Duty Escalator

While nobody enjoys paying taxes, surveys reveal that motorists  in general accept fuel duty  as a fair tax. Those who use the most, pay the most. It encourages the use of more fuel efficient cars and might even encourage some to drive less or at least more efficiently. But not every tax payer has a favourable attitude. Rural house owners are disadvantaged: rural fuel costs are often higher and public transport service is lower. They have to pay more and have no reasonable alternative option.

Road users are disenchanted with two other factors: the total tax percentage of a litre of fuel (VAT and Duty) can appear capricious and the attempts by government to ‘cloak’ the tax with an air of respectatbility, by suggesting that it is environmentally advantageous, are unconvincing. The tax raised is simply not spent on environmental solutions.

The Road Fuel Escalator suffers the same limitations, especially in relation to fuel prices. Because it’s a fixed sum, falling fuel prices make the tax take politically inconvenient. In early 1999, for example, the duty plus VAT rose to 86% of the price per litre. Current estimates are that, with fuel at £1.20/litre or more, it now stands at 65% – 70%, depending on whether you purchase unleaded or diesel.

One opinion does appear stable: motorists prefer fuel duty to road pricing. The trouble for governments  is that, as more fuel efficient vehicles appear on the market, the revenue generated could fall.

Politics: Labour has already set out its  intention to increase the fuel duty in the last budget. The Conservative Manifesto and their Shadow Transport Secretary’s page on the Conservative Party web site only promises to ‘consult’ on a ‘Fair Fuel Stabiliser’ – presumably one which links the fuel duty escalator to the retail cost of fuel. The Liberal Democrats are also silent on Fuel Duty and the Escalator although they have made clear their preference to eliminate fuel duty ( and VED) entirely and replace them with road pricing in a second parliament, if they were elected.

UK Vehicle Excise Duty3. Vehicle Excise Duty

Recent changes to Vehicle Excise Duty (VED) rates have not convinced motorists that they are justified. To begin with, most of the damage to roads is caused by trucks not cars, so upping charges on cars just looks like a ‘nice little earner’. The six new bands introduced in 2008 – linked to CO2 emissions – may also become ineffective in the future, as more efficient engines enter the fleet. The proposals were also cricised for being retrospecive and penalising owners of large engined, older vehicles. An associated financial penalty is the impact of higher annual VED charges on residual values. The BVRLA estimated that they could depress second-hand values by between £400 -£800 per unit, depending on vehicle age at time of sale.

Politics:  Both The Labour and the Conservative Party Manifestos are silent on VED. Presumably they plan to retain it broadly in line with current levels. The Liberal Democrats are just inconsistent. In the run-up to the election they opted for VED to be graduated up to £2,000 per vehicle. In their Manifesto this is not mentioned. Instead, they  have made clear their preference to eliminate VED in favour of road pricing. Hopefully they don’t have plans to do both.

4. Congestion Charging

The London Congestion Charge has already been heavily criticised. According to Transport for London (TfL), introduced in 2003, the initial reduction in traffic (-18%) and congestion (-30%), were wiped out by 2008. Using TfL’s FY2007/8 figures, the scheme generated net revenues of £137MN, but these included £73MN in fines. Take those away and the scheme generates £64MN. If you then take away the loss of road fuel duty, VAT and Parking Fees you arrive at a net loss of £69MN. No wonder no other major city has taken it up!

The Congestion Charge was simply imposed on London by the then London Mayor, Ken Livingstone, without a public referendum. In other areas, such as Manchester, where voters were given a referendum on a Congestion Charge in 2008, it was heavily defeated. Voters in Edinburgh rejected a similar scheme in 2005.

Politics: Congestion is clearly an area where the parties want leeway to take action in the next Parliament. The Labour Party will introduce hard shoulder running on motorways, extending the scheme already in use on the M42 south of Birmingham. The Conservatives will give local authorities more scope to pilot traffic flow shemes but will also build roads where needed. While not in their Manifesto, other Liberal Democrats policy documents say they will presume not to build any additional roads at all.

5. Low Emission Zones

In a similar fashion to the London Congestion Charge, support for the London Low Emission Zone (LEZ) is ebbing away. Operators who comply with Euro 3 and above are exempt. TfL reported that the set-up costs were £50MN, annual operating costs are £80MN and the revenue generated is £5MN – £7MN. Hardly, the best use of tax-payers money. This excludes the costs of asset replacement, vehicle upgrades and replacement, estimated by TfL as an additional economic loss of £80MN – £110MN by 2015.

Politics: None of the major parties comment on this specific area, presumably because it has been such a miserable  failure! However, the Lib Dems are aiming for an EU-wide zero-emissions target for cars by 2040, while both Labour and Conservatives are silent on the issue of vehicle emissions. Presumably they are both content with existing measures.

6. Parking Charges

Based in Oxford, I have first-hand experience of how local authorities use parking charges to manage congestion. They reduce the provision of spaces and put up the charge per hour. However, parking charges per se do not impact on residents. To overcome this limitation, some boroughs – notably Richmond on Thames – charge for residents parking permits on the basis of CO2 emissions. Edinburgh plans to follow suit. Norwich charges on the length of the vehicle, arguably a fairer approach.

Politics: Both the Labour and Conservative Parties will increase penalties for utilities who overrun and cause congestion. The Conservatives will give more scope to local authorities which may be a cipher for hikes in parking charges. The Liberal Democrats have not commented on this issue.

7.Road Pricing

Road Pricing seems to be the favoured solution to managing congestion by many academics and policy-makers . It has some merit: those who value their time and can afford to pay, will pay the charges. It is “an economic no-brainer” for government for two reasons. First, you generate large additional revenues. Second, according to Sir Ron Eddington, you can save 80% of the annual new road-building budget. The problem is that, when the idea was floated in late 2006, 1.8MN people signed a Downing Street e-petition urging the then Prime Minister, Tony Blair, to abandon the idea. Since then its been “kicked into the long grass”.

Politics: Its hard to escape the uncomfortable feeling that – given the right technology – the Labour Party would join the Liberal Democrat party in favour of road pricing. Notwithstanding the opposition of the UK Freight Transport Association (FTA) and the UK motoring public, the Lib Dems intend to apply it in a second Parliament, if elected. Initially they said that they would only apply it to Freight. The Labour party has specifically ruled it out of their plans for the next Parliament, but their support for Nottingham’s Workplace Parking Levy may simply reflect what they believe is practically achievable at this time, rather than a long-term policy commitment. The Conservative Party, as so often, are silent on this issue.

8. Workplace Parking Levy

Under the Transport Act 2000 local authorities were given powers to raise a levy on workplace parking. Since then only one council, Nottingham City, has opted for it. It’s a transparent money-raising proposal: employers who provide free car parking for more than 10 cars will pay a graduated levy of £253 per space (rising to £350 by 2015). The cash generated will be used for an extension to the local tram system and enforcement. It could catch on elsewhere as an easier local tax raising measure than existing road pricing schemes.

Politics: Labour are in favour: they enacted the primary legislation. Following David Cameron’s initial opposition to the Nottingham City scheme the Conservative party have recently said that they will not dismantle the scheme, arguing that it’s a local decision. However, the Tory idea of local referenda could scupper any other schemes in the pipeline. Nottingham City Council have been inundated with voter protests and complaints! According to their local web sites, the Lib Dems appear to be in favour  – at least  until something better turns up, such as improved technology for road pricing or a national congestion charge.

9. Penalty Charge Notices (PCN)

Motorists and hauliers have long been aware that revenue-driven local authorities have placed greater emphasis on issuing and collecting parking fines in the last decade or two. Research by the Tax Payers Alliance using the Freedom of Informatiion Act showed that in 2008/9 councils collected £328MN in fines, excluding the parking charge itself. In the case of the London Congestion Charge, the collection of £73MN worth of PCN’s appears to be an inherent design feature that helps justify the cost-benefit analysis of the scheme itself!

The FTA estimate that the total cost for them of administering the fines, appeals, etc exceeds £600MN. The costs are now so high and frequent, that it’s cost-effective for larger firms to employ full-time staff to manage the task.

Evidence from TfL is that the most heavily charged are visitors to the capital, especially foreigners, suggesting that their reliance on the revenue may be self-defeating by undermining London’s future tourist business.

More worrying is the widespread view that little or none of the revenue raised is used to resolve issues, such as unclear road-markings, inadequate loading facilities and poor signage. Interestingly, while this is a significant cost to industry and private drivers, central government take little or no responsibility for the impact of PCN’s.

Politics: No party has undertaken to issue guidance on this issue to local government. Presumably, because any reduction in local authority income would simply increase demands for more central funds. However, the Conservative Party’s local referendum idea could scupper any future extensions of such plans.

10. VAT

No party has made clear its plans for Value Added Tax in general or for vehicles in particular. The Labour Party has pledged not to extend VAT to food, children’s clothes, books, newspapers and public transport fares. There have been no comments from the either the Liberal Democrats or the Conservatives on this issue.

Auto Industry Support Initiatives

Except for road pricing comments from the Lib Dems, the main UK political parties have been tight-lipped on their future plans for most revenue taxes and charges for motorists and hauliers. But what about other initiatives, such as the Scrappage Scheme, the Automotive Assistance Programme (AAP), Block Exemption, Finance Credit Assistance, support for Hybrid Cars and Business Rates. Arguably, these programmes could offset some of  the  impact of increased charges.

In May 2009 the UK Parliament’s cross-party Business and Enterprise Commitee reported on government policy on the motor industry. They reported that 90% of all passenger journeys were by car and 90% of freight movements were by van or truck. In the next decade, road will remain the transport solution of choice. Nonetheless, their first conclusion was that governments of all shades have been ambivalent and that there is no strategic framework for the industry.

The most spectacular success of recent times was the Scrappage Scheme. Albeit belatedly, the Labour Party followed the rest of the EU in pledging funds to a Vehicle Scrappage Scheme in 2009 – and increased the funds available when it proved to be a clear winner. Pundits claim that the object of the scheme was to assist manufacturers, not retailers, but – with few restrictions in place – it helped all dealers , especially budget brands. 

But, with that exception, little targeted help has materialised and none of the parties appear very bothered about it. Support touted for LDV arrived too late. The government guarantees for Jaguar Land-Rover took over 6 months to materialise. Automotive Assistance Programme (AAP) offered £2.3BN in support loans to vehicle makers at the start of 2009. By the end of the year not a single loan had been approved. The Finance Credit Scheme, backed by complex, Bank of England sponsored  financial instruments are still in the pipeline. Requests for direct financial support for short-time working got nowhere but, to be fair, extra cash was provided for schemes such as ‘Train to Gain’ and ProAct.

Politics: It is true that the Labour Party’s ‘Time to Pay’ scheme has helped small firms defer business rates for a year, easing their cash flow, and they have pledged to continue it. The Conservatives have pledged to give local authorities the power to give business rate discounts and citizens the right of veto on supplementary business rates, if a local referendum majority agree. The Lib Dems initially signaled their intention to lower rates for small businesses. But, in their Manifesto they say that the decision should be delegated to local councils and should be based on site values. not rental potential.

Summary

It seems as if current politicians of all parties are fixated on a single justification for either penalising or helping the motor industry: environmental improvement. For example, the Conservative Party’s pledge to support electric cars by ensuring a nation-wide infrastructure of charging points. The Liberal Democrats plan to switch the road budget to spend it on rail. In contrast to the UK’s global competitors, some UK political parties seem more prone to populist punitive measures. These are  unlikely to support the strategic development of the vital UK Motor industry.

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