The multi-billion-pound cost of Government reforms to compensation payouts for life-changing injuries was revealed last night.
Drivers face a £2billion rise in car insurance premiums – equal to 10 per cent, or an average £50 each, the Office for Budget Responsibility revealed.
Meanwhile, the NHS will be hit with an extra £6billion to cover the cost of any compensation claims against it in the courts.
The massive costs follow the shake-up to injury payouts announced by Justice Secretary Liz Truss last month.
Drivers face a £2billion rise in car insurance premiums – equal to 10 per cent, or an average £50 each, the Office for Budget Responsibility revealed
Chancellor Philip Hammond also admitted that the revamp would cost the NHS dear, telling MPs: ‘We will protect the NHS from the effects of the changed personal injury discount rate, and have set aside £5.9billion to do so.’
The huge bill follows the first change since 2001 to the so-called discount rate, which is used to calculate how much insurers pay to victims of accidents.
Courts calculate compensation based on loss of earnings and the cost of care. But they also work out how much payouts should be adjusted based on the likely interest that victims with ‘catastrophic’ injuries would earn on the money during the long term.
It was set at 2.5 per cent in 2001 but has not been changed since, despite a huge fall in interest rates in the intervening 16 years.
Following the decision by Lord Chancellor Miss Truss, the rate will fall to -0.75 per cent on March 20. This means insurers will have to pay out more in compensation on the assumption that victims will actually lose money by investing the money every year.
Miss Truss’s change to the rate follows the threat of legal action by personal injury lawyers.
Officials defended her decision, saying that victims with ‘catastrophic life-changing injuries’ were getting a ‘raw deal’ under the current rate.
The massive costs follow the shake-up to injury payouts announced by Justice Secretary Liz Truss last month
Last night however, insurers said the decision taken by Miss Truss was ‘avoidable’. Huw Evans, director-general of the Association of British Insurers, said: ‘Today’s Budget confirms a massive £6billion hit to the NHS caused by the Lord Chancellor’s decision to cut the personal injury discount rate to -0.75 per cent.
‘This extraordinary bill for taxpayers – bigger than any other in this Budget – shows how absurd this avoidable decision was.
‘The OBR has also confirmed that this will lead to higher inflation for years to come as the effects of such a massive increase in claims costs are felt by customers.
‘This makes it even more urgent that the Government deliver a fair deal for consumers and claimants by bringing forward changes to the law this year.’
Backbench Tory MPs urged minister to reconsider.
Jacob Rees-Mogg told the Commons that ministers should ‘not proceed’ with the change, calling it a ‘mistake’ and an ‘undue cost to the Exchequer’. He called for a law to change how the discount rate was calculated in future.
The OBR said it expected the increased costs to insurers would be recouped in full from insurance premiums. The average driver pays a record high of £462 a year in vehicle insurance, meaning premiums are likely to rise by around £46 this year.
But older drivers are likely to face an even greater rise – estimated at up to £300.
Such is the size of the impact, that it will increase one of the official measures of inflation by 0.2 per cent by next year.
The OBR said: ‘We assume that these costs will be fully passed on to consumers, raising motor insurance premiums by around 10 per cent this year.
‘It may also have pushed premiums up in recent months, as the industry anticipated a change. We also assume that this change will raise the cost of public and employer liability insurance.’
As a result, consumers are predicted to reduce how much insurance cover they have.
Miss Truss has also announced a review of the policy to consider whether there is ‘a better or fairer framework for claimants and defendants’. This raised hope that it could be abandoned.
Families will also be hit with a rise in insurance premium tax – a levy on premiums.
As a result, the tax will raise £18billion over the next three years from car, home and private medical cover.
The increase – which will be the third in two years – is due to come into force in June.
Insurance premium tax was at 6 per cent for several years until former chancellor George Osborne raised it to 9.5 per cent in November 2015.
It is now 10 per cent, and will jump to 12 per cent on June 1 – meaning the tax will have doubled in less than two years.
Counting the cost: Student Lesley Buckeridge, 53
Lesley Buckeridge faces yet another increase in her travel costs if car insurance goes up by 10 per cent.
Travel is the biggest expense for the 53-year-old mature student, who drives a 12-year-old Mercedes-Benz SLK.
She pays around £360 for insurance after ‘fierce haggling’ with online companies to get the best deal – but could face paying £400 following the expected premium increase.
This will come on top of the recent rises in insurance premium tax introduced by former chancellor George Osborne and continued by his successor.
Miss Buckeridge, from Marlow in Buckinghamshire, said: ‘I shopped around a lot while getting insurance as I wanted to ensure I had the best deal.
‘I have to insure fully comp as I couldn’t afford to buy another car if anything went wrong.
‘I wouldn’t want a new car as I bought it brand new, I know its whole history. We have to pay what we have to pay for insurance, but it’s hard when there’s little choice.’
She believes the sort of over-zealous litigation seen in America is heading to Britain and is ‘driving up costs’.
Miss Buckeridge regularly drives to see her partner in London, and to university in Reading to study for her psychotherapy degree. She spends around £30 a week on petrol.
She bought her car when she was a company director, but no longer has the income to cover its running costs.
She lives off her savings and rents out a spare room to help fund her studies.
And watch out if you’ve got a diesel
By JAMES SALMON
Ministers are considering tax hikes on diesels, it emerged last night.
In a statement buried in the Budget documents, the Government confirmed it was looking at the ‘appropriate tax treatment’ for cars that use the fuel.
It said it would ‘engage with stakeholders’ ahead of making any changes in the autumn budget. The Government said it was looking at options alongside plans to improve air quality but refused to give any more details.
Last night motoring campaigners raised fears that measures could include an increase in car tax or fuel duty for diesel drivers.
In a statement buried in the Budget documents, the Government confirmed it was looking at the ‘appropriate tax treatment’ for cars that use diesel
A new clean air plan is expected to be published in the spring as the Government strives to meet EU emissions targets.
Ministers are particularly concerned about diesel cars which emit less of the greenhouse gas carbon dioxide than petrol engines, but produce more dangerous nitrogen oxides which can cause respiratory diseases.
Last month Transport Secretary Chris Grayling said motorists should think carefully before buying a diesel and look at hybrid or electric cars instead.
Ministers are said to be reluctant, however, to raise taxes on diesel drivers because it will penalise many on low incomes and prove deeply unpopular with voters.
They are said to be more receptive to the idea of a diesel scrappage scheme which would provide incentives for drivers to swap their cars for lower emission vehicles.
There are currently around 11million diesel cars on the roads. The same fuel duty – 57.95p per litre – is also applied for petrol.
Last month, Transport Secretary Chris Grayling said motorists should think carefully before buying a diesel and look at hybrid or electric cars instead
Car tax, or Vehicle Excise Duty, is based on carbon emissions and can actually favour diesel engines, which tend to be more fuel efficient and emit less CO2.
Motoring campaigners complain that millions of diesel drivers were encouraged to buy them by the previous Labour government because ministers and scientists said they were better for the environment.
Howard Cox, founder of FairFuelUK, said: ‘11million diesel owners with no affordable choice cannot be punished by a taxation scheme that will not reduce usage or pollution. And in no way should more fuel duty be added to diesel at the pumps.
‘The UK already pays the highest levy in the world. Carrot not stick please.’ Tory MP Charlie Elphicke said: ‘It is wrong to demonise drivers of diesel cars – people who thought they were doing the right thing when they bought them. There should be more taxes on all new gas-guzzlers and support for electric cars.’
Figures published on Monday showed sales of new diesel cars fell almost 10 per cent in the year to February as motorists appear to be heeding health warnings.
But Mike Hawes, of the Society of Motor Manufacturers and Traders, said: ‘The Government should be very wary of penalising motorists who have invested in diesel cars and helped drive down CO2 emissions.’
The British Lung Foundation last night expressed disappointment that the Chancellor had not announced an immediate tax hike on diesel drivers along with a scrappage scheme.