The subject of fuel duty is perhaps one of the most contentious in British society. We already pay one of the highest proportions of tax to fuel in the world, indeed a 2014 study by the RAC Foundation showed that UK motorists were paying some of the highest proportional tax in the EU, second only to Sweden.
Chancellor Philip Hammond hinted at scrapping the freeze on fuel duties in a speech to MP’s in Treasury questions yesterday, saying that the impact of the policy, “must be looked at again.” Maintaining the freeze is predicted to cost the Treasury £38bn over the next three years, twice as much as we spend on NHS doctors and nurses.
Impact on the government and households
Since the fuel duty freeze in 2011, it is estimated the freezes have saved the average car driver £850 and the average van driver £2,100. However, in that process, it has cost the Exchequer over £46bn in revenue for the financial year ending 2019 and will continue to cost them if they do not increase the fuel duty.
Fuel duty, which currently stands at 57.95ppl, has remained the same since 2011 as successive ministers have not lifted the freeze for one reason or the other. This has been, in part, attributed to the promise of “blue-collar Conservatism” as outlined by David Cameron after the 2015 election. Any proposal to increase fuel duty would likely prompt a rebellion from a large group of Tory backbenchers who feel it would harm their prospects amongst some working-class voters.
Robert Halfon, a former Conservative minister, asked Mr Hammond to agree that the fuel duty freeze was beneficial to the economy, which Mr Hammond deflected by outlining the cost for the government and highlighting the savings for the motorist.
Mr Halfon, speaking to the Independent on the issue, said “The parliamentary arithmetic would make it incredibly difficult to introduce such a huge tax rise hitting millions of working people, it would also be a tax rise for businesses when they need financial stability in terms of leaving the EU, while lower fuel duty gives an impetus to economic growth which offsets the loss of tax revenue.”
There are, of course, questions as to whether the economic benefits of the freeze on fuel duties do, in fact, compensate for the significant loss of government revenue.
Impact on the motorist
Based on a rise of 2ppl a litre, we did some arithmetic to try and establish how much extra it would cost the motorist each year and what the economic effects would be.
With a 2ppl rise, motorists could expect to pay £30 more at the pumps. Based on the average UK price from this year so far, which is 128.7ppl, a rise of 2ppl in fuel duty would take it to 130.7ppl. Based on our predictions of a 2ppl rise, this could generate £927 million income for the government to go towards NHS funding, and removing the deficit, as promised by the Conservatives in their manifesto.
This, however, is not the only thing to take into consideration. By increasing the fuel duty, all companies would either have to take a hit in profits or increase the list price of items. It would cost an extra £800 a year to fuel a lorry at the price of 130.7ppl as well and so for companies that rely on road haulage, this could mean a huge increase in already astronomical costs for fuel for companies.
Rather complicated maths led us to approximate an extra £100 annual costs to the motorist if the government chose to up the cost of fuel duty, due to haulage costs and also for personal expenses. With the average UK salary hitting £27,271, according to the National Office for Statistics, and the average weekly budget for transport being £79.70, any increase here would be monumental, especially for low-income families, who are already struggling. Even the smallest of increases could push ‘just about managing’ families over the edge.
Aside from pushing for a rise in fuel duty, the government has a few other ways that it could potentially fund the £20bn for the NHS, including raising income tax for the first time since 1970 and others taxes on goods such as alcohol and tobacco. Conservative ministers hope that raising fuel duty would be the least contentious of their rather limited options and enable them to give much-needed funding to the NHS and other essential public services.
As Theresa May said earlier in the year, the money has to come from somewhere and so “fair and balanced” tax raises are a viable solution. Mr Hammond needs to find a way to fund the NHS without reneging on manifesto promises, and at the minute, one of the most feasible, but unliked, ways seems to be increased taxes on the motorist.
However, if a rise in fuel duty is on the cards, one way in which the government could offset the impact on business would be the introduction of subsidies to firms who invest in alternative fuels and electric vehicles. The government announced on Tuesday at the first ever zero-emissions summit in Birmingham, plans to increase funding for Zero Emissions vehicles, and also plenty of funding for Research and Development in the area.
Do you think a fuel duty rise could be justified? How much would you expect a fuel duty rise to be? Let us know below