Rishi Sunak has resisted the protests and promised a fuel duty freeze – for now. The government is under huge pressure to reduce the deficit, and this is the way some want it to do so. But if that happens, an already-fragile UK economy will become even more crippled. The Chancellor must ensure this rumour does not become reality, at this Budget or any future one.
For a time, the Treasury reportedly had its eye on a 2p rise, a rise that would reduce employment by 8,000 jobs. After all, delivery firms operating in part with older fleets may find it simply isn’t profitable to carry on employing drivers in such vehicles. Across the economy, these small effects are calculated by the Centre for Economic and Business Research to wipe £600m off GDP.
This, after our worst recession in over 300 years.
The increase would also permanently damage future growth in employment. It’d discourage affluent individuals from commuting to higher-paid work, spelling for less tax revenue in the Treasury’s coffers. And, in some poor areas, where the best option out of unemployment is long-distance commuting, increased fuel duty would push them out of work altogether—persuading them to stay on benefits instead. Fuel duty for certain poor demographics can reduce the returns to entering employment by up to 40%. The result? A higher welfare bill and lower tax revenue for the Treasury.
Even the poor who choose to continue working will have a tough decision ahead: Spending way too much on fuel or simply walking to work? After all, the bottom 10% of car-owning earners spend proportionally twice as much on fuel taxes as the top 10%. But for most people across the country, walking simply isn’t a realistic option. The average commute is ten miles each way, at a walking pace you’d be commuting for six hours a day.
A fuel duty rise would also have an indirect effect on living standards. HGVs, which transport a huge array of products, would see their average fuel bill rise by £1,117.40 a year from a 2p tax increase. Since the haulage industry is incredibly competitive (profits were only 1% in 2018) higher costs are only likely to be passed onto consumers via higher goods prices, eroding real wages.
So why do this at all? They say it’s to give us a low-emissions future, but a fuel duty rise won’t help with that. Sure – in the short term, raising fuel costs will reduce emissions. But, in the long term, the comparatively smaller economy would generate smaller profits for investment.
And it is this investment that is driving energy efficiency. For example, thanks to the profit motive and reinvestment, from 2000-2018 average car fuel consumption per 100km decreased by 30%. BP is also planning on increasing their solar and wind energy generation by 400% on 2020 levels by 2025. Tax rises, by hampering economic growth, reduce green capital investment, which only prolongs our dependency on fossil fuels.
Anyway, according to various studies, fuel duty, currently 57.95p per litre plus VAT, more than covers the spillover costs of carbon emissions. And while it may not cover all external costs, e.g. congestion, a flat rate of increase in fuel prices will not help solve that problem properly regardless. Who decides not to go home at rush hour because fuel duty is too expensive?
No doubt many readers will still be asking how the government is supposed to deal with the expected £400bn deficit if not through raising taxes, fuel duty included. It’s a good question, but it’s important to remember the increase is only likely to raise £360m—a drop in the deficit ocean, justifying none of its negative effects.
The government could just as easily cut the £900m arts budget and make the same desired dent in the deficit.
An increase in fuel duty would reduce growth, lower employment and lower real wages, all at a time when the economy is already in a terrible state of affairs. For many businesses, an increase would be the straw that breaks the camel’s back. Sunak must keep fuel duty frozen; he must ensure the economy has every chance of a quick recovery.