Posts Tagged ‘fuel duty’

It is encouraging to hear that the Prime Minister, Chancellor and Chief Secretary to the Treasury are all so keen to see drivers benefit from lower pump prices.

So keen are they that falling oil prices are reflected on the forecourts that they have said to petrol and diesel distributors that they are watching them “very carefully”.

But whatever the imperfections of the commercial fuel market – and the OFT decided in January 2013 that they were not enough to result in a referral to the Competition Commission – would our political leaders not be better off spending as much time scrutinising their own actions as those of private companies?

The fact remains that well over 60% of the price of fuel at the pumps is down to taxation. Actually, because fuel duty is levied at a fixed amount, the proportion of tax increases as oil prices fall.

Drivers will be grateful that the Chancellor has frozen fuel duty over a number of years but that does not mean there is no more he could do. When compared to other EU countries UK pre tax fuel prices are amongst the cheapest. After tax they are amongst the most expensive.

In the UK, tax – levied for a reason that is not clear: is it an environmental tax, general revenue raiser, or designed to cover all the external costs of driving including congestion and road safety? – remains the biggest driver of fuel prices. This explains why significant drops in the oil price are not going to be similarly mirrored at petrol stations.

What’s more, the Chancellor said in the 2011 budget that if oil prices fall below $75 a barrel, then he will reintroduce a fuel duty escalator:

“The Government will abolish the fuel duty escalator and replace it with a fair fuel stabiliser. When oil prices are high, as now, fuel duty will increase by inflation only. UK oil and gas production is more profitable at such times, so it is fair that companies should contribute more. The Supplementary Charge on oil and gas production will therefore increase to 32 per cent from midnight tonight.

“In future years, if the oil price falls below a set trigger price on a sustained basis, the Government will reduce the Supplementary Charge back towards 20 per cent on a staged and affordable basis while prices remain low. Fuel duty will increase by RPI plus 1 penny per litre in each such year. The Government believes that a trigger price of $75 per barrel would be appropriate, and will set a final level and mechanism after seeking the views of oil and gas companies, and motoring groups.

“As the increased rate of Supplementary Charge will only apply when prices are high, the Government will restrict tax relief for decommissioning expenditure to the 20 per cent rate to avoid incentivising accelerated decommissioning. There will be no restrictions to decommissioning relief below this level over the course of this Parliament, and the Government will work with the industry with the aim of announcing further, longer-term certainty on decommissioning at Budget 2012. Recognising the importance of continued investment in the North Sea, including in marginal gas fields, the Government will also consider with the industry the case for introducing a new category of field that would qualify for field allowance.”

Not surprisingly the Chancellor has not been reminding people of these comments recently.

Yet, ironically, what drivers gain from falling oil prices, they are set to lose in above inflation rises in fuel duty. If the cost of oil drops just a few more dollars and the Chancellor sticks to those 2011 proposals then fuel duty could well rise by about 2p a litre.

The problem for Mr Osborne is that he is sending our mixed messages. At the Conservative party conference in 2013 he pledged that providing he could find the savings to pay for it he would freeze fuel duty until the election, but as we have seen he has also committed to hikes in duty above the rate of inflation if the oil price tumbles. Which is it to be?

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By Professor Stephen Glaister, director of the RAC Foundation.

It was the economist John Maynard Keynes who said that in the long-run we are all dead, so an initial response to the Treasury’s attempt to assess the “dynamic effects of fuel duty reductions” might be: what’s the point?

But this would be the wrong reaction. First off, in this analysis of the impact of a continued freeze in fuel duty the Treasury has defined the long-term as 20 years: still a long way into the future but not out of step with other modelling and predictive work such as the Department for Transport’s traffic forecasts for 2040 published last summer. Also, if policy makers are not prepared to think through the consequences of their actions then mere voters might well ask whether they are fit to be making such decisions at all. For these reasons this is a welcome initiative.

To be fair there have always been assessments made of at least the direct impacts of a fiscal change. For example the freeze in duty announced at Budget 2013 showed an immediate £480 million cost to the Exchequer. But now those in charge want to look more widely.

The difficulty of the task is underlined by the ‘ifs’, ‘buts’ and ‘maybes’ that litter the text but that is no reason to be dismissive of the attempt or the conclusion.

It does however raise the real issue of how far out you try to measure the ripples and at what stage they get so interfered with by other policy interventions that they are impossible to distinguish.

The work says externalities such as increased traffic jams and air pollution have not been considered, though the report concludes that “it is not expected that the impacts on congestion would have a material effect on the main findings of the report”. Of course to draw this conclusion someone must have done a calculation and if that has been done shouldn’t it have been included?

The modelling does show “fuel duty to be one of the most distortive taxes.” The implication of this is that shifting the taxation balance to other goods and services which currently attract lower rates of tax would be preferable if the aim is to maintain constant revenue for the Exchequer.

More generally, what this research does potentially allow for is a strict financial assessment of proposed tax changes. It is similar to the principle of standardised Benefit Cost Ratio (BCR) calculations which allow a useful way of comparing apples with pears.

However the architects of this new Computable General Equilibrium (CGE) model will ultimately face the same reality those in the DfT encounter when they present the BCRs of competing transport schemes to ministers. Whatever the numbers say, the decision on what goes ahead and what doesn’t will be as much about politics as anything else.

From an intellectual point of the view, the real test of CGE will come somewhere down the line when the next generation of Treasury officials revisit these forecasts and testify to their accuracy, or not. Retrospective evaluation is a key component of most public projects. It should be here too.

The real disappointment would not be that this modelling turns out to be wrong but that nobody bothers to find out.

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The latest ‘Family Spending’ report from the Office for National Statistics published earlier this week says that the average UK household spent £489 per week in 2012. Approximately 13% (£64.10) of this went on transport.

Interestingly, this was the first year since 2001/02 (when the data were first collected in a comparable form) when transport wasn’t the biggest single area of household expenditure.

Housing and fuel costs rose from £66.40 in 2011 to £68 in 2012 to ‘top the poll’, whilst transport spending fell from £67.20 in 2011.

So why are people spending less on transport? Probably not because it is getting any cheaper to run a car but rather the opposite; transport remains expensive but the cost of domestic heating is also rising significantly and hard choices have to be made.

The ONS says:

“Prices of domestic energy, such as electricity and gas, have increased in the UK over recent years. Households may have had limited opportunity to reduce their usage of these fuels, leading to higher expenditure over a period of price rises.”

Looking at transport spending in particular, the ONS suggests:

“A significant factor is likely to be spending on petrol and diesel. The prices for both types of motor fuel have increased over recent years, and there is evidence that households have taken steps to reduce the amounts used. The 2011 Census showed that fewer people are driving to work, compared with 2001, and more were using public transport, while the National Travel Survey reported a fall in the number of journeys taken by private transport between the mid 1990s and 2012. Furthermore, fuel efficiency in car engines has improved and there is evidence more people are using diesel engine vehicles in an effort to reduce spending.”

This is not quite right. Actually, as our report out earlier this month showed, a record 16.7 million people are now driving to work or getting a lift. What is true is that the proportions have fallen slightly over the past decade but this has been offset by a rise in population. These are the commuting by car (or van) figures:

1981 10.6 million

1991 13.1 million

2001 14.5 million

2011 15.8 million

2011 16.7 million

Spending on transport did not just drop in 2012 but has been in more or less continuous decline since 2001/02, when the average UK household spent £87.10 (in 2012) prices. This is equivalent to a drop in spending of over a quarter over the past decade. Commenting on this, the ONS reiterates that:

“The price of petrol increased substantially over this period, and it’s likely that motorists have responded to this by reducing journeys.”

There we go. In the short term demand for fuel is relatively price inelastic. But faced with long term price rises, over time people try to adapt behaviour at the margins to cut back on usage. (There is also another factor at play. While the day to day running costs of owing a car have far outstripped inflation, the cost of buying a car – new and second hand – has fallen over recent years. Of course day to day running costs are for many a largely unavoidable expense while forking out large sums for a car – and even with price reductions car purchases are still major pieces of expenditure – is something that most of us can defer.)

But adapting travel habits only goes so far and in spite of these likely cutbacks the latest data indicate that the average UK household is still spending almost two fifths (38%) of its total transport expenditure on fuel. No wonder the chancellor used the recent Autumn Statement to confirm the freeze in fuel duty he had proposed at this year’s Conservative conference.

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So we have today been told by the DfT that the Treasury collects about £27 billion from drivers each year in fuel duty and another £6 billion in VED. But what do motorists get in return? Well, helpfully, the DfT has also published data on UK road spending going back several years.

UK public expenditure on national roads

UK public expenditure on local roads

The big question is where do we go from here? We know that capital spending on Highways Agency roads is set to expand in the next parliament (though this will back  loaded towards the end of the five year period from 2015) yet local authorities continue to warn of road maintenance spending on the vast majority of the road network that is there responsibility will be under serious threat as budgets are trimmed and obligations in other areas grow.

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The Department for Transport has published a whole raft of data today including the Chancellor’s take from fuel duty between 1987 and 2012.

The numbers are not insignificant. Unadjusted for inflation the revenue rises from £7.7 billion back in 1987 to a peak of £27 billion in 2010. In 2012 the Treasury’s income from duty on hydrocarbons was £26.7 billion. The graph below tells the story.

Fuel duty revenue - 1987 to 2012

Over the same period annual VED payments by drivers have grown from £2.6 billion to £5.8 billion.


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Just so we remember exactly what the Chancellor said about fuel duty and motoring costs during the Autumn Statement:

“That brings me on to fuel duty.

“Instead of those rises, we abolished the escalator, and we have cut and then frozen fuel duty.

“I’ve had further representations from many Honourable Friends, from the Member for Blackpool North and Cleveleys, to the Member for Argyll and Bute, and of course, the Member for Harlow who is such a champion of the people he represents.

“I said earlier this autumn that if we could find the money, I’d like to go on freezing duty.

“Today I can report that because we have taken difficult decisions to control the public finances, I can deliver on that promise.

“Next year’s fuel duty rise will be cancelled.

“Instead of petrol taxes going up by 2 pence a litre, they will stay frozen.

“That means compared to the previous government’s plans, petrol will be 20 pence a litre less.

“That’s £11 less every time you fill up.

“A saving for drivers over this Parliament of £680.

“Double that for a small business with a van.

“Cancelling fuel duty rises has been a major priority of the Government.”

That might well be right and drivers will be grateful for today’s confirmation of  the freeze trailed by Mr Osborne in his party conference speech. However, as shown by Fuel for Thought, written for the RAC Foundation by the IFS, motoring taxation accounts for about 7% of all the tax income the Chancellor receives and 60% of the pump price is still tax.

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So there appears to be more good news for drivers. Or at least for those in the following locations:

:: Acharacle, postcode PH36 (Scotland – Lochaber),

:: Achnasheen, IV22 (Scotland – Ross & Cromarty)

:: Appin, PA38 (Scotland – Argyll and Bute)

:: Carrbridge, PH23 (Scotland – Badenoch and Strathspey)

:: Dalwhinnie, PH19 (Scotland – Badenoch and Strathspey)

:: Gairloch, IV21 (Scotland – Ross & Cromarty)

:: Hawes, DL8 3 (England – North Yorkshire)

:: Kirkby-in-Furness, LA17 (England – Cumbria)

:: Lynton, EX35 (England – Devon)

:: Strathpeffer, IV14 (Scotland – Ross & Cromarty)

For these are the locations for which the government is seeking permission from the European Commission to cut the rate of fuel duty and hence provide cheaper petrol and diesel at the pumps. The benefit is likely to amount to 5p per litre.

The move is not unprecedented. Already the discounts are in place on the Scottish islands and Isles of Scilly. They are also to be found in other island communities in Europe.

According to the Press Association part of the reasoning for choosing these areas is that they are “more than 100 miles by road from the nearest refinery, and have a population density lower than 135 people per square kilometre.” Extension to these ten places would mean more than 120,000 people in Britain benefiting from the scheme.

These communities are also likely to be the ones who are furthest from supermarket fuel, as work from the RAC Foundation demonstrates:

Supermarket fuel access

Even for the vast majority of drivers who won’t be entitled to a discount there is good news: according to DECC unleaded fuel is currently averaging about 131.7p a litre, a price which has not been seen on a sustained level since the start of this year.

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