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Transport and the budget: a pre-budget briefing

2 July 2015

Next week the Chancellor of the Exchequer, George Osborne, will deliver the budget statement and this briefing looks at what is likely to be covered on transport taxation and spending.

The Government wants to reduce spending and as transport is not protected it offers an easy way of raising cash to contribute to cutting the deficit. The Treasury expects to see the Department for Transport (DfT) make savings of £545 million – the worst hit department in terms of additional savings - and the Department for Communities and Local Government (DCLG) make savings of £230 million for the 2015/16 period.

The major areas of interest for transport will be:

  • Roads
  • Public Transport – Rail & Bus
  • Transport taxation
  • Aviation

Roads

Part of a £30bn road building programme, the DfT's £15bn Road Investment Strategy (RIS) raises serious concerns over affordability and timing of proposed road building along with its impact on safety, landscape, climate change targets and air pollution. Revising the RIS to make it more achievable while significantly reducing its negative impacts would save in the region of £3.8bn in the period to 2021 (analysis available on request).

The Chancellor is likely to take the opportunity to refer to some of the planned schemes in the RIS, especially to offset disappointment in the impact of Network Rail’s performance on the development of rail in the north of England (see below). This could include announcements of  “Smart Motorway” projects, where the hard shoulder is opened up to general traffic.  There are a number of other schemes with significant impacts on heritage and environmental resources that could get a mention:

  • Dualing sections of the A303 and A358 in the South West, with the very controversial short tunnel at Stonehenge
  • A27 Arundel bypass within the South Downs National Park
  • Additional lanes on the A628 in the Peak District National Park, including areas with the highest level of protection at European level
  • Widening of the A47 Acle Straight through the Norfolk Broads National Wetland
  • Eighty miles of ‘smart motorway’ planned for the North West over the next five years as part of a £1.5bn investment programme in the region's roads.

Rail 

The recent announcement that problems at Network Rail could curtail overdue improvements to the north of England's rail network will likely dominate the Chancellor’s references to rail, and he will seek to reaffirm the Government’s commitment to the “Northern Powerhouse” by promoting investment in the franchises for Northern Rail and TransPennine Express and the commitments to HS2 and HS3.

To support rail users, we expect to see the Chancellor refer to his party’s manifesto commitments including keeping regulated rail fares pegged to RPI inflation until 2020 and the introduction of part-time season tickets. There has been slow progress with the latter because of on-going negotiations with train operators and the lack of a coordinated approach to the roll-out of smart ticketing technology across the network.

The railways continue to carry record numbers of passengers. An estimated 1.65bn journeys were taken in 2014-15 – an increase of nearly 70 per cent since 2002-03. This growth is despite regulated rail fares (for example, season tickets) rising by over 20 per cent over the course of the last Parliament and annual ticket prices on some popular south east commuter routes now standing at over £5000.The Government needs to maintain clear public support for growing the railways. . A timetable for replacing outdated rolling stock, upgrading services and simplifying ticketing are all a necessary part of this.

Buses

The Chancellor might seek to address the public dissatisfaction with local bus service withdrawals which are being felt all over England and Wales due to Local Authority budget cuts.

Buses continue to be the most widely used form of public transport with 4.7bn journeys made in 2014-15. The cost of travelling by bus continues to rise sharply, however, with average fares up by 4.5 per cent a year during the last Parliament, and by 61 per cent between 2005 and 2015.

During the last Parliament, local authorities withdrew £44m from support for bus services (15 per cent of the total), with 2000 services being cut or withdrawn as a result and over £9 million is already earmarked to be cut next year around the country

There are some signs that the Government is willing to act to prevent further services being lost. The Queen's Speech included an as yet unpublished Buses Bill, which will give large city authorities the power to re-regulate their buses, and could be extended to give other authorities similar controls.

Although cuts are also expected to the DfT’s Bus Service Operators Grant (BSOG) - money paid to operators of eligible local bus services and community transport organisations to help them recover some fuel costs – these are more likely to take place as part of the forthcoming Comprehensive Spending Review.

Transport taxation

On road transport, the main tools at the Government’s disposal are fuel tax and Vehicle Excise Duty (VED).  Since March 2011, the Government has frozen fuel tax at 57.95 pence per litre on petrol and diesel, with five planned rises deferred and then abandoned. The 13 bands of VED are raised annually by RPI inflation. 

Between 1997 and 2013 the real cost of motoring, including the purchase of a vehicle, declined by 9 per cent. During the same period, bus and coach fares increased by 28 per cent and rail fares by 22 per cent in real terms.

Despite this, freight industry lobby groups such as Fair Fuel UK continue to campaign for fuel duty to be lowered by up to 3p per litre. Such a move would cost the Treasury in the region of £1.3bn a year.

In reality, the Chancellor will need to consider raising fuel duty. In March 2012, he announced the so-called Fair Fuel Stabiliser (FFS). This is designed to counter high crude oil prices with above inflation rises in fuel duty only to be made if the price of crude oil falls below $75 per barrel on a sustained basis. Crude oil has now been below the $75 trigger since November 2014, currently trading at around $63 per barrel having been as low as $50 per barrel in February.

In the longer term, the Chancellor will need to carry out significant reform of motoring taxes as they fail to tackle policy objectives around reducing the impact of reliance on cars – for example, health, environment and congestion. In March 2015, the Office for Budget Responsibility (OBR) predicted that Treasury income from VED will fall from £6.1bn in 2014-15 to £5.1bn in 2019-20 and Treasury income from fuel duty grows more slowly than GDP, increasing from £27.2bn to £28.8bn over the same period. It is also notable that the OBR has repeatedly revised down the expected income from both Fuel Duty and VED in its Economic and Fiscal Outlook reports.

Aviation

Following the Airports Commission announcement of support for a third runway at Heathrow, the Government will be expected to plough on with plans for further airport expansion in the South East, although the prospect of expanding Heathrow might prove too politically difficult. The Chancellor could announce an internal review to assess the Airports Commission’s report.

Campaign for Better Transport believes further expansion is totally unnecessary and the demand for flights can be reduced by replacing air passenger duty with a much fairer frequent flyer levy, where those who fly several times a year will be taxed on an increasing level and will reduce the need for any more runways. Instead of spending billions on airports the savings made can be used to invest in improving public transport such as new rail links.

Notes to Editors

Campaign for Better Transport is the UK's leading authority on sustainable transport. We  champion transport solutions that improve people's lives and reduce environmental damage. Our campaigns push innovative, practical policies at local and national levels. Campaign for Better Transport Charitable Trust is a registered charity (1101929).