UK government could bring in monthly rises in fuel duty from next year

Posted By: TMC - 18th October 2018

By Paul Hollick

Despite the Prime Minister’s high-profile party conference promise to keep fuel duty frozen in the Budget, higher rates may still be on their way.

A highly influential think-tank, the Institute for Fiscal Studies, has just said the government should look at uprating fuel duty in line with inflation every month.

The IFS says its idea would allow the government to steadily – others might say stealthily – recoup the £9bn a year business and motorists currently save due to the eight-year freeze on fuel tax.

The Institute’s Green Budget report says that monthly ‘uprating’ of fuel duty would:

“…separate out routine inflation uprating from policy decisions, rightly taken in the Budget, as to whether real rates of duty should be increased or reduced.”

And

“… reduce the political pressures currently associated with sharp annual uprating.”

Clearly too sharp for the Prime Minister. With forecourts already charging over £1.50 per litre for diesel in some places, it was pretty bold of the Chancellor to suggest ten days ago that he might axe the tax freeze. And it was a racing certainty, in the current political climate, that Mrs May would scotch any such plan.

On the other hand, Philip Hammond must be strongly tempted at the prospect of using fuel duty to trickle-charge the Treasury’s decidedly flat fiscal batteries. And where did the financial figures Mr Hammond wheeled out in support of his case for ending the duty freeze come from? You guessed it – the Institute of Fiscal Studies.

So I would not be at all surprised if, in the autumn Budget, the Chancellor rounds off the announcement of yet another fuel duty freeze with the caveat that there will be a review of the duty regime next year.

Estimates of the size of the hole in the UK public finances range from £20bn to £60bn. There is only likely to be one outcome of a fuel duty review.

The IFS solution would take the political sting out of increasing fuel taxes. But it will be a sting with a very long tail.

Whether the Government applies an annual inflation uprating of, say, 2 per cent in one go or does it at 0.17 per cent per month, we will still be on a path for duty to rise with CPI from just under 58 pence a litre today to nearly 67 pence in 2025, and so on.

And don’t get me started on the opportunities that such an arrangement will present the government with for applying stealthy rate adjustments in its favour.

What no-one can argue is that fuel tax is possibly the worst thing you can link to inflation; because fuel prices themselves are one of the strongest contributors to higher prices.

This is something all sides of the fleet industry need to keep a close eye on next year.