Mark Sinclair’s Blog: 25 March 2008

Budget adds index to injury

Alistair Darling had barely introduced £1.2 billion-worth of road tax increases in the Budget before the Treasury announced that this move would make “the majority of drivers better or no worse off”.

Well, that’s a relief. In fact, it’s splendid news: gain for the Government without pain for the taxpayer! Thanks to this magic formula, Darling can presumably pay off the national debt next year and we the people won’t feel a thing.

But wait. According to the SMMT, the average car sold in the UK in 2007 emitted 165g/km of CO2. That puts it in VED band D, where a year’s road tax will cost £145 in 2008-09. In 2009-10, such a car will move into the new band H, where annual road tax will cost £30 more.

After 2010, owners of new band H cars will have to pay a whopping £250 in road tax for the first year of ownership. In what kind of looking glass world does paying £110 more than today make the average owner – let alone the majority of owners – either “better or no worse off”?

But a lot of vehicle owners will get hammered.

As the UK’s fleet and business sector is the largest market for and owner of new cars, it will bear the brunt of this billion pound duty increase. What’s more, changes to company car tax, fuel benefit and capital allowances are scheduled to net the Exchequer a further £225 million over the same period.

All this comes at a time when Government says it must tread a tightrope between stimulating the economy and curbing inflation. On cue, consumer inflation ticked up to 2.5% this week – half a percent above the Government’s target.

Fuel price inflation, on the other hand, is running at about 20% – as every fleet knows to its cost. The effects of more expensive fuel spread inexorably throughout the economy, pushing up the price of almost everything.

So what did the Chancellor do last week? Next year (and probably thereafter), he will tie fuel duty to inflation; lifting fuel duty by 0.5% above the price index.

That is bound to cause a dangerous multiplier effect, with index-linked tax increases magnifying the impact of the huge rise in fuel costs.

It will literally fuel the inflationary fire that the Government claims it is fighting. Coming on top of the steep hike in road tax, this decision adds index to injury.

All in all, the Budget certainly was not a case of “green rewards for drivers,” as the Financial Times hinted optimistically beforehand. If anything, businesses and working drivers have plenty to see red about.