The impact of fuel duty on the British economy is immense and destructive. A new report, Time to Excise Fuel Duty?, argues not only that fuel duty is unfair on motorists, but also that it puts British companies at a competitive disadvantage and acts as a disincentive to work, pushing up the welfare bill. The report sets out a plan to fund reducing fuel duty, to the point that it can be halved and then eventually phased out.
- Economically damaging
With taxes comprising 60% of the cost of a litre of petrol or diesel, fuel duty is contributing around £33bn a year to the Treasury. This tax burden is stifling economic growth by acting as a barrier to trade within the UK, with devastating effects on productivity and labour mobility. Private road transport is taxed far more highly than other sectors of the economy, creating major economic distortions and encouraging the misallocation of resources.
- Contributes to long-term welfare dependency
Fuel duty significantly increases travel-to-work costs and has a negative effect on incentives to enter employment, particularly for those people already facing high effective marginal tax rates. For example, a single person over 25 in low-cost rented accommodation would typically be around £70 per week better off in a full-time job paying the minimum wage than on benefits, which works out at £1.75 an hour. However, if average costs for those driving to work (about £20 per week) are applied, this means the person is now only £50 per week better off, or £1.25 an hour. When a realistic estimate of the time spent travelling is incorporated, the effective hourly rate falls further to around £1.10 an hour. Thus, in this case study, under plausible assumptions, travel-to-work costs reduce the returns from entering work by almost 40 per cent.
- Puts British companies at a major disadvantage
Fuel duty is higher in the UK than in any other major economy. Taxes on diesel for commercial use are particularly high, over 50 per cent higher than in France and Germany and over 500 per cent higher than in the USA. Industries heavily dependent on road transport in the UK are therefore at a major competitive disadvantage.
- Step 1: Cancel the 3p rise
Cancelling the 3p rise in fuel duty would cost around £1.5bn. This could be funded by reducing spending on counterproductive traffic management schemes and loss-making public transport services.
- Step 2: Halve fuel duty
Halving fuel duty, by reducing it to 29p per litre (this is the minimum fuel tax rate laid down by the EU Energy Taxation Directive), could be phased in over the medium-term with a ‘downward escalator’ funded by cancelling HS2 and phasing out train/bus subsidies.
- Step 3: Abolish fuel duty
Over the long-term the privatisation of Britain’s road network would enable the abolition of fuel duty. The initial sale of the strategic network of trunk roads and motorways would raise around £150bn that could provide a buffer for the Treasury to cut fuel duty rates, then over the longer term maintenance and investment in transport infrastructure would be financed by private business.
Commenting on the report, Dr Richard Wellings, Head of Transport at the Institute of Economic Affairs and author of the report, said:
“Fuel duty in the UK has risen to exorbitant levels. Motorists are being unfairly treated by the Treasury. It’s time politicians realised that when they tax so heavily they damage the economy. This is especially true when it comes to a tax like this which puts British businesses at a competitive disadvantage.
“Cancelling the planned rise in fuel duty should be a priority in the autumn statement. But this is not enough. Delivering on economic growth means reducing transport taxes over the longer term and bringing in more private sector investment.”
Notes to editors
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Time to Excise Fuel Duty? by Dr Richard Wellings, Head of Transport at the Institute of Economic Affairs, can be downloaded from www.iea.org.uk.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.