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The COVID-19 Car Tax Government Bond Idea

Monday, 20th April 2020

The COVID-19 Car Tax Government Bond Idea Image

The dent in Gibraltar’s public finances will run into £10m’s for sure, possibly, probably more.  In our article Who pays the Bill? we proposed a number of measures which might be used post pandemic to raise additional revenue to restore the gaping government deficit.  Based upon responses from readers to my article, a car tax was the most popular amongst those stated.
 
One reader, Paul Church, went further and developed a COVID-19 CAR TAX GOVERNMENT BOND idea.
 
The idea is for government to raise an immediate £35m from Gibraltar resident investors (including Gibraltar resident companies).  Investors would receive a 3% per annum return with annual repayments akin to a mortgage repayment loan and with the outstanding capital inflation-adjusted annually.  The sum borrowed would be fully repaid in 12 years.  This government backed bond could be freely traded, perhaps on the Gibraltar stock exchange which would enable this new idea to be tested in the markets.
 
It's a higher rate than government usually pays for debt, but, the interest and capital paid will be received in Gibraltar and is more likely to be spent in Gibraltar which positively impacts the local economy.  Government debt is usually paid overseas and hence has no local benefit.  We are entering into an era where local expenditure is to be encouraged more than ever before.   
 
The 3% coupon would be funded by the re-implementation of a new car tax (which Gibraltar abandoned in 2007).  The car tax would be imposed in a manner consistent with most other European countries and heavily weighted so that the more expensive and higher carbon emission vehicles incur the highest tax in a graduated levy.  The net income generated (£3.6m pa after collection costs in this model) would be ringfenced in the public finances and pay off the £35m over 12 years, assuming 2% inflation
.

 
For example:
 
Raise £35m
Interest after a year is £1.05m
Inflation £0.7m
Repay from car tax receipts £3.6m
Net outstanding end of year one £33.15m
 
Roll this model out for 12 years with the car tax income also increasing by inflation then the debt is repaid in 12 years.
 
The impact on this revenue raising idea has a strong environmental message which will accelerate the move to more environmental purchase decisions (and already in force in most advanced economies) and broadly falls mostly upon those who can afford to pay.  Hence it should be socially acceptable.  A car tax also improves compliance with MOT and annual insurance requirements.
 
With an average of 15,000 non electric cars @ £175 (from £100 for small family cars up to £300 for ones over 3,000cc) commercial vehicles @ £200 and 18,000 motorbikes @ £70, £4,385,000 would be raised which would allow a sufficient resource (and new jobs) for collection costs and a reduction in overall vehicles on the road which might follow these measures.
 
Could be a novel idea. 

Contributed by Mike Nicholls