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Fuel duty review – necessary as part of a growth strategy

    The Government has claimed that it seeks to reduce obstacles and barriers to growth. Today MPs will debate Rob Halfon’s e-petition calling for the Government to curb the upcoming rise in fuel duty. The motion reads:

    "That this House welcomes the 1p cut in fuel duty at the 2011 Budget, the abolition of the fuel tax escalator, the establishment of a fair fuel stabiliser and the government's acknowledgement that high petrol and diesel prices are a serious problem; notes that in the context of the government's efforts to tackle the deficit and put the public finances on a sustainable path, ensuring stable tax revenues is vital for sustainable growth; however, believes that high fuel prices are causing immense difficulties for small and medium-sized enterprises vital to economic recovery; further notes reports that some low-paid workers are paying a tenth of their income just to fill up the family car and that high fuel prices are particularly damaging for the road freight industry; considers that high rates of fuel duty may have led to lower tax revenues in recent years, after reports from leading motoring organisations suggested that fuel duty revenues were at least £1bn lower in the first six months of 2011 compared with 2008; and calls on the government to consider the effect that increased taxes on fuel will have on the economy, examine ways of working with industry to ensure that falls in oil prices are passed on to consumers, to take account of market competitiveness, and to consider the feasibility of a price stabilisation mechanism that would work alongside the fair fuel stabiliser to address fluctuations in the pump price."

    It should be obvious that stable and relatively low fuel prices are important for economic growth. Many of the costs surrounding small and medium-sized enterprises entail the need for entrepreneurs to travel or to transport their goods and services. Likewise, large haulier firms enable the ease of movement of food and goods vital to ensure smooth transactions. But more than that, stability and certainty of fuel costs – which represent a necessity living cost for many – are vital to ensure consumer confidence.

    Data from the ‘Effect and extent of taxes and benefits on household incomes’ going back to 1979 shows us that fuel duty costs occupy a much larger proportion of disposable income for the poorest 20% of households than the richest 20%. In 2009/10 the poorest quintile spent 3.6 per cent of their disposable income on fuel duty costs, compared to 1.6 per cent for the richest. And though the proportion of disposable income being spent on fuel duty has declined somewhat for all groups since the turn of the century, the real cost of fuel duty for the poorest quintile has increased by 20 per cent since 1997 (from £318 to £383 in 2009/10 prices).


    How is this justified? Though fuel duty has never been claimed to be a hypothecated tax, there is a clear assumption that its revenues (coupled with other vehicle duties and car taxes) are designed to offset potential negative externalities that vehicle travel might induce. But this link is being increasingly hard to justify. Recent research from the Taxpayers’ Alliance showed, using the Government’s own figures, that Fuel Duty and Vehicle Excise Duty combined raised a total of £31.5 billion in 2009, whilst expenditure on road building added to the social cost of emissions totalled just £13.4 billion. Clearly, motorists are getting a raw deal.

    The rise in VAT to 20% has further compounded their misery. With today’s inflation figures showing that increasing prices are still vastly outstripping increases in wages, the proposed hikes in fuel duty in January and August next year will be particularly difficult for working households.


    But the suggestion by the Labour party that the answer is to lower VAT at this time is fanciful. The tax is proving one of the most effective mechanisms in attempting to close the Budget deficit, with £10 billion more having been raised so far (to September) in 2011 compared to the same period in 2010. And our VAT rate is not uncompetitive across Europe – our current 20 per cent rate is exactly the same as the OECD average for European countries.

    No, re-examining fuel duty would be both more highly targeted (as part of a growth strategy) and would help to address an increasingly uncompetitive duty compared to our European neighbours. A recent report for the House of Commons library showed that 60% of our pump prices are now made up of our taxes and duties – the highest in Europe, whilst the UK has the highest petrol fuel duty and the third highest diesel duty of the whole continent.


    Fuel duty rates

    I have deep doubts about a fuel stabiliser as a long-term solution. Not only would this lead to variable government revenues (which should worry any fiscal conservative), but it would also almost be a direct government intervention to effectively set a price of a commodity product.

    Much better would be just to scrap the planned hike and examine the case for cutting fuel duty further. Given that the Government is finding resources to bring forward various spending projects, the argument that (at the very least) reversing the planned fuel duty hike would amount to an unfunded tax cut simply will not wash. With the Government’s own evidence suggesting that fuel duty increases have a negative impact on aggregate GDP, coupled with the uncompetitiveness of our duty rates and the strain on working families, supporting the motion should be a no-brainer for Conservative MPs.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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    Anonymous - About 2319 days ago

    But having just returned from Spain, the pump prices there are just as high, if not higher than ours. The position elsewhere in Europe is similar. It's all very well quoting the duty/tax alone, but most of us are interested in the pump price, which is the most meaningful of indicators.

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    Ryan Bourne - About 2319 days ago

    Of course the pump price is important - but its made up of two factors (the Government taxes and some underlying price of petrol/diesel). If the underlying price is higher in Spain than here (because of exchange rate factors, supply source etc), then that's a good thing for us. Are you saying that the Government should just insist that taxes are used to equilibrate our pump price with that of Europe? And if so, why?