The Impact of Imposing an additional 2p on Fuel Duty

November 18, 2020

Cebr founder Douglas McWilliams presented the findings of our report for Fair Fuel UK and RHA to the All-Party Parliamentary Group on Motoring.

The full report is available here and a summary can be found below.

 

Rumours in Whitehall have been rife as to how Rishi Sunak will pay off the huge Covid deficit. No surprises that UK’s 37m drivers have been at the top of possible tax income hike suggestions to help out with the onerous task the Chancellor faces. The arguments being, drivers have had a 10-year fuel duty freeze and with the pressure to improve air quality, it is now sensible to put the pandemic pay back burden onto the internal combustion engine.

 

Howard Cox of FairFuelUK with the generous backing of the RHA commissioned the CEBR to assess the impact of a rise in Fuel Duty. Boris Johnson has already ruled out earlier rumours leaked to FairFuelUK of a 5p increase. But latest credible mutterings suggest 2 to 3p is still in the Chancellor’s mind.

 

Here are the key findings of the CEBR report as to why any duty hike would be folly:

 

• Any rise in fuel duty would generate very little revenue.

 

• A rise in fuel duty would create economic damage, cutting GDP by about £600 million and reducing employment by about 8,000 jobs. It would add 0.6% to the CPI (inflation).

 

• Despite the recent freeze, UK diesel taxes are the highest in any major economy while UK petrol prices are amongst the highest.

 

• A rise in fuel duty would hit the poorest motorists most. Motorists in the poorest 10% of the population spend proportionately twice as much on fuel as the richer groups. A rise in fuel duty is regressive.

 

• A rise in fuel duty is a tax imposed by London on the regions. Londoners spend only half as much on fuel as the rest of the UK.

 

• The impact of any rise in fuel duty will be cumulative. Essential vehicle users, especially LGV and HGV drivers, have already been hit recently by closed roads, closed lanes, speed restrictions, increased traffic jams and increased charges and enforcement penalties as a result of recent government action. The effects of a rise in fuel duty will be hitting sectors that already feel that they have faced an excessive increase in the burdens on them that result from government policy.

 

• With growth in the online sector, vans are critical to the economy. The increase in the burdens on van drivers, like those on other road users, has already started to impact on their willingness to service clients. If this continues a critical link in the service chain could break.

 

• The HGV sector is in a fragile situation. The average age of drivers is 55 with 13% over 60 and only 2% below 25. Profit margins are estimated at 1% only. The number of owner operators has been falling away. It is conceivable that a rise in duty could be the straw that breaks the camel’s back of this essential service.

 

• Cebr research has shown that the policy of freezing fuel duty, in place since 2011, has been highly successful, reducing the CPI by 6.7% compared with where it would have been and boosting household expenditure by £24 billion. With a policy that has proved successful, it would be bizarre to change it.

 

• By 2040, fuel duty receipts will probably be less than a fifth of current levels, updating the projections above to take account of the likely ban on sales of fossil fuel based vehicles. The current fiscal crisis is long term and will need up to 50 years of revenue raising and expenditure constraint. Given that any revenue gains from higher fuel duties will be only temporary and will evaporate over time, it seems unnecessary to take the political and economic damage from raising fuel duty in return for very little long-term revenue. The balance of advantages seems adverse.

 

• This means that even the relatively small short term revenue gains from a 2p rise in the rate of fuel duty, estimated at £250-470 million from the analysis in the previous section, would dwindle to £50- 90 millions only (at 2019 levels of activity and prices) within 20 years. As the fiscal crisis is a long term crisis, this indicates that a rise in fuel duty has a miniscule role to play in sorting the nation’s fiscal position.