Fiscal Policy

Summary

Driver description
Interactions with the Economy Domain
Interactions within the Social Domain
Interactions with the Environment Domain
Interactions with the Technology Domain
Impacts on Mobility and Transport

Driver description

Fiscal policy addresses the strategy of reaching a sustainable equilibrium between public revenues and expenditure.  In the context of this report, this aspect basically concerns the implications for the fiscal policymaking in facing pension expenditures and involving accumulation of assets in order to meet the long-term outlook for public finances.

The sources for the review of the implications of a sustainable fiscal policy on mobility and transport are drawn from the European Commission outlook on the conditions for long-term sustainability of public finances, i.e. “The long-term sustainability of public finances in the European Union (DG ECOFIN, 2006) and the study “A new strategy for the single market”, drafted for the European Commission in 2010.

  • “The global economic and financial crisis that broke out in 2007 had only just started to show signs of being – at least partly – overcome when it returned with full force.” (Ref: CO_0235)
  • “The economic and financial crisis has led to an explosion of public debt in Europe and at global level. Within the EU, the massive stimulus packages undertaken by governments at the initiative and with the coordination of the Commission, generated a surge in government deficit and debts. Government headline deficits are forecast to reach, on a EU wide average, 7.5% in 2010 and 6.9% in 2011 while EU level debt will jump to 83.7% in 2011. It is realistic to assume that reduction of huge public debt will require in several countries not only expenditure cuts and fiscal discipline but also tax increases.” (Ref: CO_5052)

Interactions within the Economy Domain

GDP trends

  • “Fiscal policy is defined as sustainable in so far as it does not lead to increasing ratios of the public debt to the GDP or, conversely, to an increasing tax burden.” (Ref: CO_0236)
  • “In Hungary, Portugal, Poland and Greece, an adjustment of the structural primary balance of more than 2 % of GDP is required to avoid an unsustainable path for the public finances and in another five countries, the United Kingdom, Germany, France, Italy and Luxembourg, an adjustment of between 1 % and 2 % of GDP would be required. This implies that for these countries the initial budgetary position poses a risk to the sustainability of the public finances and a strengthening of the fiscal position is a matter of urgency, particularly for those which have a high debt/GDP ratio such as Italy and Greece.” (Ref: CO_1004)

Employment

Suitable fiscal policies tailored to reductions of labour taxation might stimulate employment recovery, if designed to reduce the fiscal burden on the production sector; it could benefit from a fresh investment stimulus.

Regional differences in economies

  • “Europe has a highly fragmented tax landscape. In many areas, the operation of 27 different set of rules implies significant compliance costs and administrative burden for citizens and business operating cross-border.” (Ref: CO_0235)
  • “In a regime of a single monetary policy, but still largely nationally determined fiscal policy the member states compete for capital investments, production locations and jobs.” (Ref: CO_0235)
  • “Tax competition is a widely used practice in an integrated market, as national systems may use the fiscal tool to increase their attractiveness for businesses and capital.” (Ref: CO_5052)
  • “A major tax coordination would limit regulatory and tax fragmentation that would distort competition within the single market and increase compliance costs for business. They would also reduce the chances of tax induced asymmetric shocks in the Euro-area, thus facilitating the conduct of monetary policy by the European Central Bank. In short, some measures of coordination have the potential to turn a negative sum game within the Single Market in a game where all actors obtain benefits.” (Ref: CO_5052)

Availability of public and private resources and investments in the transport sector

  • “A unit elasticity of each revenue item to the relevant tax base is a good proxy of unchanged policy for the long-term analysis of fiscal policy. The very detailed features of the current tax system are not necessary. More importantly it avoids the inflationary bias that for example could result from extending current tax brackets over the long run.” (Ref: CO_1004)
  • “(...) governments largely indebted can more easily adjust the dynamics of their debt through changes in the composition of their expenditures rather than through running primary surpluses that require a generalized reduction in spending and/or increases in taxation. This, however, is true only if the initial share of total revenue devoted to current spending is sufficiently large.” (Ref: CO_0235)
  • “Thus, for governments that have already a small share of their revenue devoted to current spending, it could be impossible to realize a large debt ratio reduction by leaving their primary budget ratio to GDP unchanged, even though they are largely indebted. In conclusion, there exist situations in which it is impossible to stabilize a fast increasing debt ratio through policies that do not affect the primary budget.” (Ref: CO_0235)

Foreign trade, globalization

  • “There is an important aspect that gives to the taxation issue a systemic importance for the economic integration process. The functioning of the single market – coupled with the wider globalisation process - places a growing challenge for the operation of domestic tax systems and may erode in the long term their revenue raising capacity, as well as their ability to pursue social and redistribution policies at the national level.” (Ref: CO_5052)
  • “An important advantage from more tax coordination would come from minimising the impact on competitiveness when taxation would target products that constitute input for industrial production, as it would be the case for energy taxation.” (Ref: CO_5052)
  • “Tax competition, to some extent, serves a healthy purpose of putting pressure on governments to keep spending under control. However, it presents a disturbing asymmetry. The liberalisation of financial markets and the expansion of the single market allow companies to pursue strategies of tax minimisation and regulatory shopping in search of the most convenient taxation area. In response to this phenomenon, the burden of taxation within EU Member States has progressively shifted from more mobile tax basis (capital income a corporate income) towards a more extensive taxation of less mobile tax bases, notably labour.” (Ref: CO_5052)

Interactions with the Social Domain

Households structure and distribution

  • “Many high-earning families opt for the considered appeal of more rural peripheral locations, while accepting the consequences of long commuter journeys. Those on lower incomes are frequently forced out by the large differential in prices between central and out-of-town land. Taxation schemes taking greater account of public contributions (such as infrastructure and utilities) to land values could mitigate this situation.” (Ref: CO_0260)

Income structure and distribution

  • “Rising incomes became increasingly unequally distributed since the distributive power of states and trade unions or employees was weakened by global competition for tax revenues, production locations, investment and jobs in favour of corporations, asset holders and investors. In practice, a rising profit share and a falling wage share can be discerned in all countries, as well as a widening gap between rich and poor as a consequence of the extremely unequal distribution of the fruits of globalisation.” (Ref: CO_0235)
  • “So, despite the amazing things that were predicted to happen if taxes on high income groups and big corporations were to be cut, what actually happened (as Krugman reminds us) is further evidence that “when you cut taxes on the rich, the rich pay less taxes; when you raise taxes on the rich, they pay more taxes – end of story.” (Ref: CO_0303)

Planning

  • “Potential options for urban authorities to limit traffic flows into and through their city centres range from traffic restrictions and the development of ‘green zones’ favouring low emission vehicles; through congestion charging schemes and other forms of road pricing; to parking policies, prioritisation of public transport and strategic infrastructural changes.” (Ref: CO_0260)

Interactions with the Environment Domain

GHG mitigation

  • “It is also realistic to imagine that consolidation efforts will entail a shift from income taxation towards indirect taxation and a greater emphasis on less growth distorting taxes, notably environmental taxes.” (Ref: CO_5052)
  • “An area of relevance for coordination is that of environmental taxation. This is likely to play a key role in the future. It would be of great help to frame discussions on environmental taxation in the broader context of tax coordination so that the benefits in terms of relieving the tax burden on labour would also emerge clearly. ” (Ref: CO_5052)
  • “The application of more sustainable consumption patterns, i.e. the attitude of people to consume less carbon-intensive products and services, would be been primarily facilitated by the introduction of carbon tax systems, in particular in North America and in the core group of EU countries (EU15). Carbon taxes are based on fossil fuel carbon content and therefore tax carbon dioxide emissions.” (Ref: CO_5048)
  • “Although the regulation mode of governing is the least popular approach adopted by municipal governments, it can be very effective in terms of reducing GHG emissions. (...) different sets of mechanisms are deployed in this mode. First, and least common, local governments may use taxation and charge user fees.” (Ref: CO_0147)
  • “Although some low-carbon and energy-efficient technologies are competitive today, many others are considerably more expensive than their fossil-based alternatives. Carbon pricing will be important in helping to redress this gap, but it will not be sufficient on its own.” (Ref: CO_0154)

Scarce resources of fossil fuels

  • “The EU’s average annual subsidies for fossil fuels accounted for almost 75% of total EU energy subsidies, with Italy, the Netherlands, and the United Kingdom providing the highest level of support to the oil and gas sector. Subsidies are also significant in Russia.” (Ref: CO_0159)

Interactions with the Technology Domain

Technology development and innovation diffusion

  • “Technologies at different stages of development need different types and levels of support:
  • For promising but not yet mature technologies (Stage 1), governments need to provide financial support for additional research and/or large-scale demonstration and to start to assess infrastructure and regulatory needs.
    • For technologies that are technically proven, but require additional financial support (Stage 2), governments need to provide support with capital costs, or to introduce technology-specific incentives such as feed-in tariffs, tax credits and loan guarantees, and appropriate regulatory frameworks and standards, to create a market for the relevant technologies.
    • For technologies that are close to competitive (Stage 3), governments need to move towards technology-neutral incentives that can be progressively removed as technologies achieve market competitiveness.” (Ref: CO_0154)
Figure 1‑56 Funding options for different stages of technology development

Source: The transition from present to 2050 (Ref: CO_0154)

  • “Government support through financial contributions, tax credits, standard setting and market creation is important for effective technology development, innovation and deployment.” (Ref: CO_0146)
  • “The full potential of new technologies – particularly information and communications technology to impact on transport demand remains to be understood. Policy and technological innovations are often mutually reinforcing. For example, ITS have facilitated the implementation of road-user charging, passenger information systems, integrated fare systems, and bicycle sharing. Also, technologies can determine how services are delivered and therefore can impact heavily on the public policies and regulation applied in the sector.” (Ref: CO_0293)

Traction technologies

  • “Improved efficiency and better demand-side management, fostered through CO2 standards and smart taxation systems, should also advance the development of hybrid engine technologies and facilitate the gradual transition towards large-scale penetration of cleaner vehicles in all transport modes, including plug-in hybrids and electric vehicles (powered by batteries or fuel cells) at a later stage.” (Ref: CO_0194)
  • “Subsidies and financing programmes that counterbalance higher initial vehicle costs are needed to support the development of sustainable markets for new transport technologies. Vehicle efficiency strategies should identify and address potential rebound effects, whereby drivers travel farther due to fuel cost savings.” (Ref: CO_0154)
  • “(...) CO2 abatement should not be the main rationale for putting a fleet renewal scheme in place. The contributions towards CO2 reduction vary with the class and age of the scrapped vehicles, but unfortunately the analysis does not clarify which age of vehicles to target – replacing younger vehicles delivers more CO2 reductions, but at higher societal economic cost.” (Ref: CO_5017)
  • “(...) about a quarter of electric cars in Japan are sold in cities and are driven less than 20 km per day. For this type of use, electric cars are well suited; public procurement and graduated ownership taxes can help diffusion.” (Ref: CO_0284)

Energy efficiency

  • “Fiscal measures can be used to promote fuel-efficient vehicles and address the second and third elements of the transport challenge – namely using the vehicle at optimum efficiency and reducing overall vehicle use. Several studies show that taxing on the basis of vehicle use is a cheaper way to reduce vehicle fuel consumption than fuel economy standards.” (Ref: CO_0247)
  • “Car taxation can be used to encourage more widespread purchasing of more fuel-efficient vehicles. Credits for exceptionally efficient vehicles with refunds related to cost savings from reduced fuel consumptions could stimulate the demand for efficiency technologies. Their production rate would be sped up, and therefore the costs would be reduced by scale effects.” (Ref: CO_0017)
  • “Fuel efficiency regulations for passenger cars can help to push more fuel efficient vehicles onto the market and – to avoid rebound effects – they should be combined with increased fuel taxes.” (Ref: CO_0017)

Impacts on Mobility and Transport

Fuel taxes should be increased to rise government revenues

  • “It is realistic to assume that reduction of huge public debt will require in several countries not only expenditure cuts and fiscal discipline but also tax increases.” (Ref: CO_5052)
  • “A fuel tax is a levy on the consumption of fuel in proportion to its pre-tax price (Gupta and Mahler, 1994). Traditionally it is introduced for several purposes, such as to raise government revenue with low administrative costs; to conserve foreign exchange, and to generate revenue to finance road maintenance, etc. (Gupta and Mahler, 1994).” (Ref: CO_0212)
  • “Although the fuel tax is introduced mainly to generate government revenues, it could have significant impact toward the reduction of emissions and traffic congestion. A number of existing studies (e.g., Eltony, 1993; Hirota et al., 2003; Sterner, 2006) demonstrate how the fuel tax reduces travel demand, fuel consumption, and emissions.” (Ref: CO_0212)
  • “In the short-run, a fuel tax results in an increase in fuel price, which in turn, discourages utilization of vehicles and thus over-consumption of fuel and release of emissions. In the long-run, fuel taxes also alter consumers’ purchasing behavior, thereby causing them to switch to more fuel-efficient methods (Acutt and Dodgson, 1997).” (Ref: CO_0212)
  • “Costs for motorised individual transport are likely to increase, due to an ongoing increase in the price of oil. Additionally, it is likely that tax burdens, as well as insurance and maintenance costs, will rise. Therefore, especially for low-income groups, the attractiveness of motorised individual transport may decrease.” (Ref: CO_0079)

Some fiscal policies can optimise demand management

  • “Demand can also be optimised by ensuring the external costs of transport are internalised. This is particularly true in the case of road transport, for which there is increasing evidence that climate change, air and noise pollution, and health impacts outweigh existing taxes and charges (DfT, 2009) (Defra, 2010). It is accentuated by the fact that whereas access to most roads is free at point of use, many of the costs for private vehicle owners are fixed: depreciation, servicing, maintenance, circulation taxes and insurance.” (Ref: CO_5030)
  • “Further possibilities include fiscal stimuli for employers to support workers’ use of public transport, and to make greater provision for flexible working hours and tele-working.” (Ref: CO_0260)

... but other policies still work on the contrary, leading to inefficiency or uncertainties

  • “Governments must ensure their policies do not actively work against achieving cleaner, more seamless transport by 2030. Road and maritime cabotage rules, for instance, encourage empty-running and cause inefficiencies. Poorly aligned fiscal and regulatory instruments create uncertainty in the private sector regarding investments in greener and seamless transport.” (Ref: CO_0284)
  • “Satellite-based road pricing systems, which can adjust prices according to location and time, can address this, allowing price to be used to optimise demand at peak congestion times. Charging schemes which take into account the actual use of the car, replacing existing charges such as registration and circulation taxes, would be supported by half the EU citizens (Eurobarometer, 2010).” (Ref: CO_5030)
  • “Another policy option to reduce total vehicle kilometres travelled is to encourage increased occupancy. Data on average car occupancy across Europe are limited, but available evidence indicates a figure of 1.5 for EU-15 Member States since 2004, and that figures for EU-12 Member States are declining towards these levels. In Europe, policies have not generally been aimed at reducing single-car occupancy rates, but in the United States it has been given much greater attention. A review of American workplace travel plans found that direct financial incentives or subsidies were a very important factor in reducing single-car occupancy rates (Potter et al., 2006) alongside introducing parking permits or charges (UKERC, 2009).” (Ref: CO_5030)
  • “Policies to encourage car-sharing could also be effective in optimising transport demand.” (Ref: CO_5030)

Subsidies can promote the uptake of clan fuel, or electric vehicles

  • “A subsidy is a traditionally-used, and probably the most common, fiscal instrument in the transport sector, particularly in developing countries.” (Ref: CO_0212)
  • “Various types of subsidies exist in the transportation sector, e.g. infrastructure subsidies, fare reduction subsidies (railway sector), differences in taxation (the aviation sector is exempted from fuel tax and VAT), etc. The application of subsidies influences traffic volume, vehicle fleet composition, route planning and environmental performance.” (Ref: CO_0144)
  • “Subsidies are key fiscal policy instruments designed to promote clean fuel, particularly the use of biofuels. Subsidies on biofuels are common practice in countries where their production is significant (e.g., Brazil, United States, and Germany).” (Ref: CO_0212)
  • “In the European Union, twenty one countries grant a tax exemption (full or partial) for each liter of biodiesel supplied on the market, whereas twenty countries grant tax exemptions on bioethanol (Kutas et. al., 2007).” (Ref: CO_0212)
  • “From 2006 to 2008 the EU share of renewable energy in the petrol and diesel consumption of transport increased from 2 % to 3.5 %. (...)The increase in renewable energy consumption, mainly based on the use of biofuels, reflects the widespread introduction of support systems at national level. Member States use tax rebates or biofuel obligations to promote renewable energy consumption in road transport.” (Ref: CO_0197)
  • “Subsidies, the provision of special facilities, and tax and charge exemptions can all be used to reward users of eco-friendly forms of transport.” (Ref: CO_0260)
  • “Subsidies can facilitate market penetration of High Efficiency Vehicles (HEV) such as hybrids.” (Ref: CO_0212)

...but there is the need to compensate revenue losses from fuel taxes

  • “The introduction of vehicles powered by alternative fuels and the greater use of public transport will reduce revenues from excise duties on gasoline and diesel.” (Ref: CO_0089)
  • “To compensate for revenue losses from taxes to petrol, if a growing percentage of vehicles are electric (or hybrid in the short term), Member States will have to obtain new income from Eurovignette (pay per use of heavy good vehicles on roads in a first phase that will be extended to light vehicles in a second phase) and urban congestion pricing.” (Ref: CO_5005)
  • “<Governments make a lot of money on fuel duty, and this would be displaced by electrons if electric vehicles were mainstreamed – so there will have to be a profound shift in terms of how governments generate income, and structure tax and incentives.> Tom Briggs, Vice President, Policy and Communications, BP Alternative Energy.” (Ref: CO_5018)

Impacts on the use of most polluting transport modes

The likely increase of environmental taxation would lead in the near future to the reduction of the use of the most polluting and intensive carbon-use transport means, e.g. cars, and airplanes.

  • “Fiscal measures to internalise the external costs of air travel would be an important element in rationalising demand, although they alone will not guarantee an absolute reduction in aviation travel.” (Ref: CO_5031)