For the first time in fifteen years, fuel duty is set to rise. The Chancellor is planning to raise the rates paid on petrol and diesel fuel by as much as 7p in this month’s budget, under the context of tight public finances and strained services. Doing so is a no-brainer.
For most of the New Labour era, fuel duty just about kept pace with inflation, but the Coalition government and George Osborne broke with that precedent. Between 2012 and 2022 successive governments kept fuel duty frozen. In real terms, this meant rates fell by more than a third.
Figure 1: Fuel duty has fallen 34% in real terms between 2010 and 2022
Source: HMRC, ONS, and SMF analysis
Then, in 2022, Chancellor Jeremy Hunt made the largest cut to fuel duty in recent history, reducing the main rate by 9%, from 58p to 53p per litre. That reduction was supposed to be a temporary response to higher energy costs, but it has been extended twice, leaving Rachel Reeves with a choice over whether to let it expire in March.
The gradual erosion of the real value of fuel duty means that she could raise the rate to 80p per litre and it would still be lower than it was in 2010. It’s improbable that the Chancellor will go that far (the Mail claims even a 15p rise is off the table) but it does indicate how much flexibility she has available.
The policy of recent years has certainly been costly. The cumulative impact of these cuts and freezes means that as of today, the exchequer has foregone over £130 billion subsidizing fuel duty, with losses set to rise to over £200 billion by 2028. And that is presuming the Government doesn’t freeze rates any further.
Figure 2: Fuel duty freezes and cuts will have cost the exchequer over £200 billion by 2029
Source: OBR and SMF analysis. Note that losses from future freezes were calculated by assuming inflation of 2% annually
The stated objective of holding down fuel duty is to protect hard-pressed drivers, but our research shows that the richest fifth of households have benefited twice as much as the poorest. Richer households tend to drive more, own more vehicles, and buy less fuel efficient SUVs. As a result, the richest 10% of households would save £157 a year if Reeves were to maintain cuts and freezes, compared to £57 among the poorest.
Figure 3: The richest tenth of earners would save nearly three times as much as the poorest tenth if the Chancellor maintains the 2022 fuel duty cut and continues to freeze rates
Source: OBR, ONS, and SMF analysis. Note that losses from future freezes were calculated by assuming inflation of 2% annually
Poorer households tend to spend less on fuel duty. This is why after spending over £200 billion on various electoral gimmicks, these cuts and freezes have only managed to decrease poverty by 0.3 percent.
So what should Reeves do? Allowing Hunt’s 5p cut to expire this Spring would save £10 billion over the next four years. Letting fuel duty rise with inflation would add an additional £5 billion. If the Chancellor wants to help those on low-incomes, that revenue could be invested in buses, trains, walking, and cycling. These are cheaper options than driving, more common among poorer households, but which have been neglected over the past fifteen years.
Admittedly, none of this new income will help to plug the £22 billion fiscal black hole Reeves warned the last government left in unfunded commitments. The Office for Budgetary Responsibility makes calculations based on the policy of the day, and because cuts and freezes to fuel duty have always been presented as temporary policies, the organisation’s long term fiscal projections assume they will expire and that duty will be allowed to rise.
On the other hand, if the Chancellor is indeed committed to balancing the books, adding £15 billion to the Government’s deficit would be a step in the wrong direction.
The Chancellor will never get back the money that’s been wasted subsidising rich drivers, but she can break the cycle of subsidizing the rich and neglecting the transport modes of the poor. Chancellor, if you really a balanced budget with good public services, raise fuel duty.
