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 particul