15 Nov 2011

Putting the brakes on 4p fuel duty rise

Can the government afford to give in to pressure from campaigners and scrap its planned 4p rise in fuel duty? Channel 4 News speaks to the experts.

It’s the latest e-petition to reach 100,000 signatures and so win the right to be heard in parliament – and it urges the government to waive a windfall for the cash-strapped Treasury and scrap the planned rises in fuel duty.

Fuel duty is set to go up by 3p in January next year and another 1p in the summer of 2012.

The IFS told Channel 4 News the rise will bring in a significant cash injection to the state’s beleagured finances.

A spokesman said: “The 3p increase in fuel duty planned for January 2012 is to maintain the real level of fuel duties – it adjusts the existing rate for the economy-wide inflation. It will raise approximately £1.5bn in cash terms.

“It was previously planned to be introduced last April but was postponed at the time of the March budget. That budget also cancelled a 1p above-inflation increase in fuel duties that had been planned by the previous government and cut the level of fuel duty by 1p.”

Radical action needed

Set up by the Conservative MP Robert Halfon, the “cheaper petrol and diesel” e-petition calls for urgent action to halt rises in the cost of fuel. It suggests that the high cost of fuel is costing the government money in terms of lost tax revenues, “because fewer people can afford to drive”.

It calls for the planned fuel duty rises to be scrapped.

The petition states: “High petrol and diesel prices are crippling our economy. Many motorists now pay a tenth of their income just to fill up the family car, and millions of families are suffering. Businesses are under immense pressure, especially the road freight industry.”

Supporters say the government must look at pressuring oil companies to pass on cheaper oil to motorists and setting up a commission to look at market competitiveness. It also suggests the coalition should think about “radical ways of cutting fuel taxes in the longer term”, among other measures, to try and cut prices.

But the question of whether or not the government will listen to these arguments could be swayed more by economic fact than democracy in action.

The IFS told Channel 4 News: “A cancellation or a reduction in the planned inflation increase in fuel duty would require one of: additional taxes elsewhere, greater spending cuts or more government borrowing.”

So if the government were to agree to scrap duty rises, it would need to raise £1.5bn by other means – unless it were willing to change its economic policy and run a bigger budget deficit. Some of the most obvious means for raising the cash could be by increasing income tax or VAT.

However this may carry its own costs for consumers, hitting revenues elsewhere.

It was estimated that the 2.5 per cent VAT rise in January 2011 may have cost households around £390 a year with the additional economic knock-on impact of reduced consumer spending and drop in retail sales.

But the impact of the £1.5bn loss to the government is disputed by Mr Halfon’s campaign. It argues that revenue which would be created by keeping the £1.5bn in the pockets of motorists and business would outstrip the initial loss to the government’s coffers.