Does Fuel Duty Work?

The cost of filling your tank has risen by another 1p per litre.

The increase - unchanged by George Osborne when he took the economic reigns in the Spring - is the second of three rises in less than a year. The Labour Government added 1p per litre in April 2010, legislated for another penny in October, plus a further 0.76p on 1 January 2011.

Image caption Drivers and companies will soon be facing a double-whammy of fuel cost rises

Fuel is also subject to VAT, and the rise next January from 17.5% to 20% will effectively lead to a double tax hike for road users.

Government income from fuel duty in expected to total more than £26bn this year.

This is more than twice the expenditure of the entire Department of Business and almost double the amount the Government earned in 1995/6.

So what is the justification for continuing to raise fuel taxes?

Both the coalition and Labour governments view fuel duty as a good way to decrease the deficit, as well as a form of environmental taxation - by making it increasingly expensive to be on the roads, people would cut back on using polluting cars and embrace other means of getting from A to B.


Indeed, the Green Party would go even further by raising fuel duty by 8% per year and introducing domestic carbon quotas.

"The aim of these policies is both to provide incentives for people to use alternative forms of transport rather than private cars, and also to provide incentives for car manufacturers to produce smaller, more efficient cars," a spokesperson explained. Their plans are supported by numerous environmental charities.

But is this the real effect? Do people stop driving and catch the bus when petrol gets too pricey? Or is driving essential for so many people that they will keep on paying and driving regardless?

And, should fuel duty continue to escalate, is there a tipping point when people will stop filling up?

Driving slowdown

In the UK there is a significant slowdown in the number of people behind the wheel.

At the end of 2009, there were 34.3m vehicles registered in Great Britain. This is an increase of about 52,000 vehicles, or 0.1%, on the number licensed at the end of 2008. It is the lowest year-on-year growth since 1991 when there was a fall in the number of licensed vehicles.

In terms of traffic - a measure of the distances covered - Britain had seen a huge increase of 85% between 1980 and 2008, from 277bn to 514bn vehicle kilometres. But most of this growth occurred between 1980 and 1990 and has plateaued since then. Between 2007 and 2008 total road traffic actually fell by 3.6bn vehicle kilometres, or 0.7%.

Image caption Could rising costs force drivers off the road?

We can also look at fuel consumption.

UK petrol sales dropped 5.8% in the second quarter of this year compared to the same time last year, according to the Department of Energy and Climate Change. Since the previous fuel duty increase in April the Petrol Retailers Association has seen a 7-8% slump in unleaded petrol purchases, while diesel sales were flat, giving an overall reduction in fuel sales of just over 4%.

All of which suggest people are using their cars less.

But is this a result of fuel duty increases?


Many people have had their income stability threatened or reduced by the recession, few have managed to get away without at least a little belt-tightening in recent months. Meanwhile, environmental campaigns have encouraged us to think more about the journeys we take by car and use other means where possible.

Add to this the fact that the car industry itself has experienced a downturn, and the cars that are being built are more fuel-efficient than any before, and you have a whole list of factors contributing to a drop in motoring.

Petrol Retailers Association chairman Brian Madderson believes that fuel duty hits those in rural Britain hardest and therefore damages the business of his smaller, independent retailers.

"My members are very worried - particularly in rural areas where the tax on fuel is a particularly harsh tax because there is limited, or even no, public transport provision in these areas. This is not luxury motoring, these are essential trips for motorists."

He estimates that the combination of fuel duty and VAT could generate around £38bn a year for the government and that it is an easy tax to levy. "It is debatable whether this revenue is going directly to transport investment," he added.

Real cost

Undeniably it is a good income stream for the government. But if duty rises do succeed in getting people off the road, it could be counter productive - less money will be spent on forecourts and so government income will drop.

Image caption Fuel price hikes have sparked protests in the past

According to the AA, the 5.8% drop in petrol sales this year represents around 228,000 tonnes of fuel. Translated into its taxation value, the fall deprives the Treasury of £237.6m in tax (a loss of £73.25m in petrol-derived tax, plus the VAT).

Could the government be shooting themselves in the foot?

Edmund King, President of the AA, seems to think so: "This increase could backfire as it will hinder economic growth."

And it is not just motorists affected, but business too. For a typical articulated lorry, diesel duty amounts to a 25% tax on operation, according to the Road Haulage Association (RHA).

This increase is passed onto everyone else, says RHA director of policy Jack Semple. "UK diesel duty is the highest in the EU and double that of some key competitors - amounting to £12,000 to £13,000 per truck per year. That makes UK hauliers less competitive in the UK domestic market against foreign competition, increases costs to UK business and pushes up prices of everything the UK public buys."

Reducing the deficit, and carbon emissions, could come at a price.

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