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Budget: Osborne’s surprise package for motorists

Written by | Posted on 10.07.2015
Fuel costs

Budgets have become a familiar charade. The first policies start getting leaked to the newspapers weeks in advance of the statement itself. And then the leaks keep on leaking every day until we’re knee-deep in ‘secret’ tax cuts and ‘likely’ spending plans. By the time the Chancellor stands up to the despatch box, we know almost everything that he will say.

But Wednesday’s Budget was different. The run-up to it was the same as usual: the papers were stuffed with speculation about its contents. But the outcome was different: it turned out that the speculation didn’t really match what was actually in George Osborne’s statement.

This Budget’s headline-grabbers – such as the announcement of a National Living Wage – were surprises. And so were many of its motoring policies. Here’s our rundown of them:

No fuel duty hike (yet).

A lot of the speculation ahead of Wednesday concerned fuel duty. Would the Chancellor go back on what he did in the last Parliament, and start increasing it? This is certainly what the Sun and the Sunday Times suggested, as we noted in our own preview of the Budget. They reckoned that Osborne might raise fuel duty in line with inflation, meaning that it would go from about 58 pence a litre now to about 65 pence in five years’ time. But, as it was, all he said was that ‘there will be no changes to the plans for fuel duty I set out in March – fuel duty will remain frozen this year.’ So, no increase yet. But it’s worth noting how equivocal the Chancellor’s words were. Fuel duty may remain frozen this year, but he didn’t make any promises about next year.

Vehicle Excise Duty reforms..

The newspapers didn’t get this one wrong; they barely saw it coming at all. Osborne announced a new Vehicle Excise Duty arrangement for all cars registered on or after 1 April 2017. In their first year, these cars will be charged according to which of 12 bands of carbon dioxide emission they fall into. In the years afterwards, they are effectively separated into three other bands. Those cars emitting 0 grams of carbon dioxide per kilometre will face no annual change. Those costing more than £40,000 will pay £450 a year for the first five years, and then £140 after that. Those in between will simply pay £140 a year. This system may sound pretty complicated – but it’s simpler than what came before, so is probably necessary in some respects. Yet it does throw up some oddities: only those cars that emit no carbon dioxide and are below £40,000 will avoid a VED charge completely, meaning that low-emission hybrids will be charged at the same rate as standard gas guzzlers from year 2. That doesn’t seem to be the best way of encouraging cleaner motoring.

…and hypothecation.

Another surprise! Osborne also announced that, once the new VED system has settled in for a few years, the money that it raises will be put into a special Roads Fund for renovating Britain’s highways and byways. This isn’t surprising just because it was unforeseen, but also because the Treasury has tended to resist this sort of ‘hypothecation’ in the past. It’s certainly rife with potential problems, as we’ve explained before now. What happens to the Road Fund if the money raised from VED declines, say, if people switch to zero-emission vehicles? And how is it fair for motorists to pay into this fund when other roads-users, such as cyclists and pedestrians don’t? Will arguments ensue over who really owns the roads? The Chancellor may hope that the £15 billion he’s spending on roads in the meantime, before the Fund is created, will help qualm some of these calamities – but it’s unlikely to be that simple.

Higher insurance costs.

On 1 November, the standard rate of insurance premium tax will be increased from 6 per cent to 9.5 per cent – which affects car insurance payments. According to industry experts, the cover for a two-car family will increase by about £35. Uh-oh. Although Osborne has also been careful to give motorists’ wallets a bit of respite: the time before a car needs its first MOT test has been extended from 3 to 4 years.

Diesel taxes.

Perhaps the biggest surprise of the Budget was one its omissions. Despite the recent entreaties of the Supreme Court, it said nothing about diesel vehicles and the nitrogen dioxide they give off. Whilst odd given the current ‘mood’, what is welcome is that the Chancellor has not gone back on his commitment to remove the 3% Diesel surcharge from 2016. Some of the policies that were announced, such as the new VED bands, may encourage motorists away from diesel. But many analysts expected something more specific, such as new taxes or even a scrappage scheme. Perhaps they’re being saved for future Budgets.

Guest blog by Matthew Walters, Head of Consultancy Services, LeasePlan UK

Matthew Walters

Matthew Walters

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