VED­­ and the National Road Fund – the wrong fence in the wrong place

Recent issues of LTT report a surprisingly wide range of criticisms of the proposed ring-fencing of Vehicle Excise Duty (VED) revenues in England to a new National Road Fund, challenging its principles of allocation of funds, governance, quantum, control and strategic effects. There is no thoughtful engagement or defence, nor recognition that the fuss is profound.  

Or is it surprising? A cynic might say that the Government must surely always have expected a row, but didn’t mind. I think that the Government genuinely expected more wholehearted support, having been persuaded too easily of the arguments in favour. It accorded with the assumption that investment in more road capacity would assist economic growth, jobs and prosperity. The proposition ‘the tax is collected from motorists and therefore ought to be returned to them in the form of better roads’ had the air of a principle rooted in natural justice. Ring-fencing an existing revenue stream would make more, or more secure, funding available at no evident cost. So: efficient, equitable and cost-free. Win, win, win. Surely it would be popular. 

A better sense of history would have helped to detect the flaws. 

A vehicle tax whose income was to be reserved (‘hypothecated’) for roads was set up in 1920. That this was a fundamental principle was asserted in 1932 by Moore-Brabazon (later to become a minister of transport): “This vote is different from any other because the money that goes to the Ministry of Transport is motorists’ money. It is not Imperial taxation. It is money that comes from the motorists, to be spent on one definite thing, namely, the roads.”

But this principle was neither universally agreed nor firmly based. After 1936 the money progressively became part of the general tax revenue of the country, to be used for such purposes as Government determined was in the best interests of the country at the time. This was not an accident, being based on a different principle, deeply embedded in Treasury officials’ thinking, that hypothecation caused poor projects to be favoured over better ones, and therefore led to an overall reduction in welfare and tax efficiency. The conflict between two principles left a very long-lasting resentment, especially in the public affairs departments of motoring organisations, that they had been cheated, with motorists’ own private money improperly used by the Treasury.  

Continual repetition of the comparison “motorists pay more in taxes than is spent on the roads” was factually true but did not of itself prove any impropriety. 

One never sees statements starting “drinkers and smokers pay more in taxes than is spent on…”  Similarly, there are few claims to the sectional “ownership” of revenue from taxation on insurance, or banking services, or house sales, or books, or biscuits, or  legacies. 

It would be wrong – indeed impossible – to construct a system of public finance if the benefits of all taxes had to accrue precisely to the same people, in the same amounts, as their source. 

Similarly, it is not possible to devise a road fund in which the spending precisely returns to its sources. The apparent moral basis of the case that revenue from all motorists must be returned to all motorists breaks down if in fact money from some motoring individuals will be returned to different individuals, living in different places, redistributing between rich suburban motorists, poor service providers, commuters to town, leisure drivers, long-distance travellers using motorways, parents driving children to local schools, and so on. 

In practice, large numbers of motorists and their representatives will inevitably be faced with the realisation  “yes, but that doesn’t help me much, because I don’t make so much use of the journeys on the specific roads, at the specific times, which are promised for improvement”. 

Motorists are not a homogenous category. Nor are the interests of any citizen identified solely, or even mainly, by being a motorist. It is politically naïve to expect drivers in one area, or the representatives they have elected, to be happier about return of their VED to a distant bypass than to their local public transport. (Or indeed their own families’ health or children’s education).

Which leads to another blemish. The claim that more is collected in tax than is spent on roads slides into a claim that by reallocation a greater budget will be available for roads without leaving less for anything else. This cannot be true. If more public funds are spent on roads, then either some other spending must be less, or other sources of tax must be increased. 

The Treasury’s long-standing official opposition to ring-fencing was always that it militates against choosing the best use of available funds. Logically this must be valid, unless the fencing rules are in precisely the right place.  This then becomes an empirical question. For a decade we have known that there are many local, small-scale and sustainable projects that give benefits far greater than major road building. 

I am not a hardline defender of the old Treasury official opposition to hypothecation in all circumstances. There are important exceptions, in making new ways of raising money more acceptable, or changing market prices that are not well aligned with economic or environmental costs, such as when there are monopolies or congestion or environmental damage, or when the ring-fencing and the charging reinforce each other to achieve the compatible strategic objectives. 

Consider the Labour experience in 1998-2000, seeking to charge motorists in proportion to use, mostly either by new charges for movement or for workplace parking. The political logic led to power being given to local authorities responsible to their own electors, and an indispensable condition for doing so was that they would retain control over the revenue, implying geographical ring-fencing. But it was clear that a hypothecation purely for roads would be rejected by most if not all authorities, whereas a more balanced inclusion of public transport and the new priorities for walking and cycling would be more effective and command a bigger public support. That sat sensibly within a strategic planning approach based on the interaction between all important methods of transport, which is now so well-established – and properly so – that its abandonment would certainly cause opposition.  

In that case, the advantage of aligning the charging with strategic transport improvements based on a local political mandate outweighed the theoretical argument against hypothecation, and the ground rules of ring-fencing were agreed at the highest level, after much technical and professional discussion. In the event, of course, hypothecated road user charging simply did not happen on the scale envisaged. That’s for another discussion. But where it did, notably in London, the outcome has been much more beneficial, because the fence is in the right place. 

It seems to me that the flaws in equity and efficiency are such weaknesses in the National Road Fund as currently proposed, that criticisms were inevitable, and the fault lines must become more and more controversial. Ring-fencing can only be a unifying idea if the fence is in the right place, and in this case it is not.  

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Phil Goodwin is emeritus professor of transport policy at both University College London and the University of the West of England, Bristol. Email: philinelh@yahoo.com