Fuel Duty Black Hole

Fuel, and Vehicle Excise duty raises around £38 billion per annum for the exchequer.  By 2029/30, according to the OBR (Office for Budget Responsibility), revenues from these taxes will be some 0.9% (of national income) lower than today.  This would equate to a £13 billion shortfall, which would represent a 3½p increase to the basic rate of income tax, an increase in VAT to 23%, or a 50% rise in fuel duty.  The predicted fall in income relates to the improved fuel economy of modern vehicles and moves to alternative fuels.

The Fair Fuel UK campaign has been successful in this parliament in holding any increase in fuel duty, by presenting reports from the CEBR that fuel duty increases are inflationary, and would hamper the UK’s recovery from deep recession. The success of Fair Fuel UK’s campaign can clearly be seen in the graph below, and the table showing the % tax take from fuel since 1990.

Any real terms reduction in the cost of fuel is useful to a Road Haulier in providing a cost efficient service to customers.  The argument being that this has a positive economic effect, applying downward pressure on retail and other consumer prices and results in increased sales (and tax take).  Any increase, of course, has to be passed on to the customer, and then passed on to the consumer of the product that needs to be moved.  Theoretically then, at least, a government in its right mind would never seek to increase fuel duty.

The problem with that, however, is that the government needs to get the revenue from somewhere.  Any reduction in take in one area will likely to lead to an increase in take in another.  I’ve discussed previously here in my blog on Fair Fuel? how fuel duty is used by governments to control use of fuel; a reduction in usage results in a reduction in Carbon emissions.  I have also argued in my Fuel Matters blog that Road Haulage (business use) should be treated differently from personal use in terms of taxation.  The essential user argument.  This was an angle that the RHA and industry bodies tried to push as part of a review in the last parliament.  At that point the relevant Minister, Angela Eagle, felt that special treatment for the industry was not justified based on profit margins of hauliers (around 2.2% average).  In comparison to other industries, such as construction with similar reliance on fluctuating ‘raw material’ prices there was little case for a divisive policy.  It was also felt it would be difficult to categorise different users of fuel as essential or not.

Looking forward there are three key factors that will define government policy and the approach to fuel duty going forward:

(1)    Carbon

Following on from 2013’s IPCC report on climate change, there is likely to be continually increased pressure on governments to focus, and implement policy to make real improvements on emissions.  An obvious way of limiting fuel usage and reducing Carbon footprint is to increase taxation.  The balance between the competing interests of government revenue, carbon savings and majority public opinion is a difficult challenge.  The approach appears, in the past, to have been to increase duty where they can get away with it and suspend increases when pressure builds.

(2)    Competitiveness

Road haulage operating costs around the European Union are not the level playing field that you would think that a single market should foster.  As you can see from the table from the FTA’s Annual Report (2013) there is a vast differential there.  The Road User Levy that has recently been implemented will have a slight positive effect on this, but it will not create a completely level playing field.  Any further disproportionate increase in fuel price in the UK just increases this differential.

Coping with increased fuel price is something that UK hauliers have been experiencing for some years now.  The graph below shows the increase in bulk diesel price in the UK since 2003.  Fortunately this has been relatively stable for some time now.  The table below the graph shows the comparative cost of fuel across European nations and taxation levels.

It is always surprising just how different the price per litre is across different countries.  It is clear that it is very difficult for hauliers to compete against vehicles buying their fuel on the European mainland and working in the UK.

(3)    How motoring is paid for

A fuel duty increase has a significant effect on the private motorist.  They have to pay more for every mile that they drive to the local convenience store and then have to pay more for their bread and milk when they get there (after the transporter and end customer have increased their prices).  The alternative, to duty increases if the government wishes to maintain revenue levels, is increased taxation elsewhere.  It would seem a more sensible, and fairer approach that there was charging for actual road use rather than a tax on fuel purchased.  The concept of toll roads does seem to have gained some traction in recent times and maybe this is the start of a new direction.  A more expansive approach to road charging could make significant strides in reducing congestion.  Road users travelling at peak hours in and around cities or major roadways could be charged an enhanced rate; whereas users in rural areas or overnight, where congestion is not a problem could be charged a base rate.

It would appear inconceivable that the cost of motoring will reduce over time.  The decisions and policy directions the government take on fuel duty will be crucial for the industry, and its ability to compete with operators from other EU nations and continue to be a positive driver for the UK economy.





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