I guess one obvious question is, what are people buying in the cheap/small ICE category?
The smaller an ICE engine is, the less efficient it is.
The reason people assume small ICE are more efficient is because they are put in smaller cars. It's the 'smaller car' that is more efficient, but it is fighting the less efficient engine.
Consider the Smart cars, with their 800cc engines, which managed .... 40mpg. 50~60 on a good day.
With no VED advantage, no 'benefits' of insurance, parking, licence age, nothing, no incentives at all, on top of 40mpg, why would you by a two seater Smart?
The reason for the inefficiencies is that as the cylinder size goes up, the ratio of combustion volume to swept surfaces (meaning, friction and unburned hydrocarbons) goes down.
So, homologating and making efficient a small ICE becomes more and more difficult. But big engines in small cars make for a problem suspension, which are already bad on smaller cars.
Whereas small electric cars both the 'body' (aero) and drivetrain can just get more and more efficient.
'Microcars' are more popular on the Continent than here, so it'd make sense such a move happened there first.