The 3p rise in #fuelduty that never was? #Budget2013 Good for drivers but not as good as we might think

This morning the media has – rightly – hailed the good news that the rise in fuel duty planned for 1 September has been abandoned.

But what exactly was the size of the rise due to have been?

Much of the media has gone for a 3p rise, and indeed were doing so well ahead of yesterday’s statement. Yet in the Budget 2013 document released yesterday by the Treasury, the Chancellor said the rise foregone was in fact 1.89p (P53) to which VAT would have been added:

“Budget 2013 announces that the 1.89 pence per litre fuel duty increase that was planned for 1 September 2013 will be cancelled. This means that fuel duty will have been frozen for nearly three and half years, the longest duty freeze for over 20 years.”

In the grand scheme of things there isn’t much – in absolute rather than percentage terms – between the two, but where might the confusion have come about?

The previous increase was due on 1January 2013 and this was abandoned completely. The amount of this increase was set to be 3.02p – 3p to you and me.

The next cost of living increase was due for 1 April this year but had already been delayed to 1 September. It was this planned increase that the Chancellor shelved completely yesterday. Prior to yesterday no figure had been set for the level of the hike. All that had been said was that the amount would be confirmed in Budget 2013. And it was, but only so it could then be announced that it was never going to be implemented.

According to the Fair Fuel Stabiliser that the Chancellor introduced in Budget 2012 future annual rises in the level of fuel duty would be in line with inflation so long as the price of a barrel of crude oil was above £45 a barrel – it is currently much higher than that. If the price of oil should fall below £45 over a sustained period then the rise in the rate of fuel duty would be inflation plus 1p per litre.

So where does the 1.89p quoted yesterday derive from? Earlier this month we heard that the cost of living as measured by RPI (and this was the benchmark figure outlined in the original FFS formula) was about 3.3%. If you take 3.3% of the current rate of duty of 57.95p per litre you end up with 1.85p; markedly close to the figure of 1.89p mentioned in the Budget yesterday.

Of course this is all academic now because the rise did not go ahead, but while yesterday was undeniably a good day for drivers, it was not quite as good as many of us might have thought.

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A reminder to the Chancellor. Why George Osborne is likely to freeze #fuelduty in #Budget2013 tomorrow.

If the Chancellor was looking for reasons to freeze or cut fuel duty he need only look at two sets of data:

1) The work on motoring poverty recently carried out by the RAC Foundation.

2) The current pump prices which are nearing record highs despite a supermarket price war.

The latest fuel prices are as follows:

	Current price (18th March 2013)	Record high
Unleaded	137.6p	142.17p (16th April 2012)
Diesel	144.8p	148.04p (16th April 2012)
Oil (Brent crude per barrel)	$109	$148 (11th July 2008)

The current rate of duty is 57.95p per litre of petrol and diesel. It has been at this level since March 2011.

As a proportion of the price of unleaded fuel, tax (fuel duty + VAT) makes up 59% of the total.

A proposed 3.02p per litre increase in the level of fuel duty was scheduled to take place on 1^st January 2013. In the Autumn Statement 2012 the Chancellor cancelled this increase.

The next fuel duty increase was scheduled for 1^st April 2013 but that was postponed (also in the Autumn Statement 2012) to 1^st September 2013. It has not been formally announced what the level of this increase will be.

Two weeks ago the RAC Foundation published analysis on the impact of high motoring costs on the poorest ten percent of car-owning households, showing just how deeply they are mired in motoring poverty.

Our work showed that roughly 800,000 car-owning households are spending at least 27% of their disposable income on buying and running a car.

Of a total maximum weekly expenditure of £167, these households saw £44 go on vehicle related purchasing and operating costs, including:

£16 on petrol and diesel.

£8.30 on insurance.

The complete breakdown of these figures, plus figures for other income groups is available here.

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The extent of #transportpoverty. Figures show cost of motoring is more nightmare than headache for least well off.

At first glance the numbers seem incredible, but there they are in black and white, courtesy of the Office for National Statistics. The poorest car-owning households in the UK spend at least 27% of their weekly disposable income on buying and running a vehicle.

Scaling up the figures, this suggests that some 800,000 of the least-wealthy homes in the country are mired in transport poverty. If we are concerned, rightly, about fuel poverty, then we should be extremely worried about this.

The previously unpublished data, collected as part of the Family Spending survey, show that of a maximum total weekly expenditure of £167, these households spend £44 on purchasing and operating costs related to a vehicle.

£16 of this is used to buy petrol and diesel, another £8.30 goes on insurance.

For those families who regard it so important to run a car that they are willing to make an outlay of such staggering proportions – and we have always argued that for most of us car use is an absolute necessity – it is clear that every rise in costs merely adds to an already mammoth burden.

Yet for many, what choice is there? In metropolitan London people might be well served with buses, tubes, railways and taxis – but out of the capital, for most people, most of the time, the car is public transport. It is what most of us, rich and poor alike, rely on to access vital services. The difference between groups is that while owning and running a car is merely a financial headache for most, for a significant minority it is an economic nightmare, the proportions of which this data reveals.

Surely if there was a viable alternative (convenient and reasonably priced) then people would take it. To suggest that people happily pay 27% of their income to have a car because they are in any way addicted seems farfetched. They must do it because there is no option.

It is true to say that in real terms buying a vehicle has fallen slightly over the past decade, yet replacing a car is often a discretionary spend, running it is not. People have to buy fuel. They have to insure their vehicle. They have to tax and MOT it. And all these costs have risen far above the rate of inflation.

When the Chancellor makes his Budget statement on March 20^th he would be well served by looking at this official data. In a way it doesn’t matter whether the figures are completely accurate or not; whether it is 27% of income that goes on car ownership, or 37% or 17%. All are of such large proportions as to be of concern.

Fuel costs are clearly only part of the equation, but it is a significant part. We would hope George Osborne remembers this when he makes his next pronouncement on the level of duty.

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Drivers saved from January fuel duty rise – next one due in September

This is what the Autumn Statement document statement says about changes in fuel duty:

“The Government will provide further support to businesses and motorists by cancelling the
3.02 pence per litre fuel duty increase that was planned for 1 January 2013. The
2013-14 increase will be deferred to 1 September 2013. This will mean that fuel duty
will have been frozen for nearly two and a half years. For the remainder of the Parliament,
subsequent increases will take effect on 1 September each year, instead of 1 April.”

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Isn’t it ironic. Treasury needs to tax #green cars to stave off looming financial black hole…

The irony won’t be lost on motorists.

Even as we cope with an era of high fuel prices, and with predictions of significant traffic growth in the future, the Chancellor is confronted with a worrying drop off in fuel duty and VED revenue. The reason? The greening of the vehicle fleet brought about by more frugal petrol and diesel engines and the expected take-up of electric cars.

By 2029 the shortfall in motoring taxation will be about £13 billion (in today’s terms).

Unfortunately motorists should also be worried. Because however much we might like to think we are getting one over the Chancellor it seems implausible that he won’t come after with armed with a plan to maintain his income. Essentially there are three ways he could do so:

1)      Push up the rate of fuel duty significantly over and above inflation, perhaps by as much as 50% by 2029.

2)      Start taxing battery powered cars, but at the risk of stalling the decarbonisation of road transport as drivers take offence at paying large sums for new technology only to see the anticipated savings from lower running costs shrink.

3)      Introduce a whole new system of motoring taxation based on the idea of Pay As You Go (PAYG). That is, impose charges that are distance related but also bear some relation to levels of congestion. This would be an alternative to the current VED and fuel duty levies, not an addition to it.

The Institute for Fiscal Studies has no doubt that this third option is the one to go for. In a report commissioned by the RAC Foundation – Fuel for Thought: the what, why and how of motoring taxation – the IFS says PAYG would more closely associate charges to drivers with the ‘externalities’ they impose on the rest of society: air pollution, accidents, traffic jams, CO₂ emissions amongst them.

This is a thorny subject but one which needs to be tackled. To be fair to the Chancellor he has already taken some tentative steps, announcing in Budget 2012 that the VED bandings would be reviewed to ensure drivers continued to make a ‘fair contribution’ to the public finances even as cars become more eco-friendly.

Amongst the 35 million drivers in Great Britain the price of fuel is arguably as common a talking point as that other national obsession, the weather. Given the recent record pump prices and the fact that transport is the single biggest area of household expenditure, this is unsurprising. It would be good if politicians devoted as much time to the subject as voters.

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Chancellor drives through #fuelduty rise in #Budget2012 but what would Adam Smith think?

So that’s that then.

After a cut in fuel duty in the March 2011 Budget and the postponement of the January 2012 3p rise until August this year, it was always going to be hard to convince the Chancellor to once again tinker with fuel duty rates even if there are pressing and convincing reasons to do so, as George Osborne himself appeared to recognise today.

What was surprising about Mr Osborne’s Budget speech was that contained the rationale for amending the way motorists are taxed. Referring to the work of the 18^th Century economist Adam Smith, Mr Osborne said that a tax system needs to be four things: fair, predictable, simple and supportive of work. Yet it is quite easy to argue that fuel duty is no more than one of those things.

The premise behind fuel duty has never been entirely clear: varyingly it has been described as an environmental tax, general revenue raiser and method of covering the externalities drivers impose on others (who are often other road users). Nor have the changes in fuel duty rates over many years been smooth or consistent. Fuel duty is also a regressive tax, hitting the poor harder than the rich.

Therefore the single area where fuel duty might fit the bill under Smith’s criteria is the ease by which it is collected.

Mr Osborne did recognise that drivers are likely to be hit by things beyond his control. Early in his speech he said a risk to the economy identified by the Office of Budget Responsibility “is a ‘further spike in oil prices’, and there is no doubt that the high oil price – driven both by real demand and the Iranian situation – is of great concern across the world.”

While it is a dangerous game to predict the future from the past, it is hard to see oil prices falling significantly, which does at least mean that rises in fuel duty – at least during the life of this Parliament – will be inflation only. In the unlikely event that oil prices drop below $75 a barrel for a sustained period of time then the Treasury will raise duty rates by inflation plus one percent per annum.

Many of the nation’s 34 million drivers will be feeling disappointed tonight that the price of fuel remains were it is with the prospect that it will jump markedly later this year. The cost of motoring is a real drag on the finances of the majority of households. In the absence of more, effectively arbitrary and politically driven postponements in duty rate rises, perhaps the Chancellor will at least turn his attention to making motoring taxation more closely fit the principles outlined by Adam Smith more than two hundred years ago. That would be progress.

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