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Authors: Andrew Leicester and Peter Levell
Rapid increases in pump prices have sparked renewed debate on the level of fuel duties, with calls for the Chancellor to cancel April's planned real-terms increase in the forthcoming Budget. There is also continued speculation about the prospect of a "fair fuel stabiliser" (FFS) - a formal mechanism to cut duties at times of high oil prices (and to raise duties when oil prices fall). During Prime Minister's Questions on March 2, David Cameron made it clear the FFS was still under consideration, saying: "...we will look at the fact that extra revenue comes to the Treasury when there is a higher oil price, and see if we can share some of the benefit of that with the motorist. That is something that Labour never did in all its time in government." What are the facts and how should we assess these proposals?
Day-to-day changes in fuel prices are highly visible and fuel is an important share of spending for many households, so the salience of the issue is unsurprising. In 2009, vehicle fuel made up on average 4.9% of household spending, and more than one in five households spent over 9% of their budget on fuel. As prices have risen since 2009, fuel's prominence in household budgets has probably grown further.
In real terms, fuel prices are now about 17% higher than they were in autumn 2000, the period of the fuel price protests. Taxes now make up around 61% of the price of a litre of diesel and 63% of the price of petrol (for petrol, 46% of the price is duty and 17% VAT). The total tax paid for a litre of petrol amounted to around 80.2p in January 2011 following rises in both duty and VAT, though this is below the real-terms peak of 82.5p/litre seen in July 2000.
Fuel duties are set to rise by one penny above inflation each April up to 2014-15 as part of a duty escalator introduced by Labour in the 2009 Budget and extended in the March 2010 Budget. Even with no real increase, duties would rise by just over 2p/litre to reflect inflation (the inflation rate used is the expected RPI in the third quarter following the Budget , currently forecast at 3.5% by the Office for Budget Responsibility, OBR). Cancelling the one penny real increase would cost about £500 million. Freezing duties in cash terms would cost just over £1.5 billion. The latter figure would be higher if inflation forecasts for the third quarter are revised upwards in the Budget (RPI inflation was 5.1% in January 2011). If oil prices remain high, future planned increases in duties would also come under pressure. Cancelling all the real rises to 2014-15 would leave revenues about £2 billion lower each year from then. Cancelling all inflation-adjustments as well would leave revenues about £6 billion lower.
Given the scale of the deficit, the government has little room for manoeuvre to make any concessions on tax that are not paid for through tax rises elsewhere, or deeper than planned spending cuts. One particular consideration for fuel taxes must be that reductions in fuel duties would also make the government less likely to meet its objective to raise the share of total receipts generated from environmental taxes.
Beyond the fiscal issues, there are two particular problems with a FFS:
That said, one could argue that while no formal fuel stabiliser policy has been in place before, the previous Labour government did informally help to stabilise pump prices with their fuel taxation policy. The chart shows real-terms petrol pump prices and duty rates between January 1990 and January 2011. Aside from the autumn 2000 protest period, there was a relatively steady upward trend in pump prices throughout much of the 1990s and 2000s. This was caused first by the previous duty escalator introduced in 1993.During this period oil prices were relatively low and stable and so higher prices were driven by higher taxes. The escalator was abandoned in 1999 as oil prices began to rise, and duties were frozen in cash terms for a number of years, meaning higher prices were driven by the pre-tax cost of fuel.
Source: Calculated from DECC energy price statistics (http://www.decc.gov.uk/assets/decc/statistics/source/prices/qep411.xls)
It may be that a formal stabiliser policy would be preferable to ad-hoc adjustments to duty rates made Budget by Budget, adding (hopefully) more transparency and predictability to the process. But it should not be sold on the basis that it would stabilise the public finances: a formal stabiliser would - at least according to the OBR's estimates - lock in even more uncertainty to the overall fiscal position.
View all Observations in the series
Does offering higher teacher salaries improve pupil attainment?
In new work published today, IFS researchers analyse the impact of offering higher teacher salaries on pupil attainment. We examine salary scales and pupil attainment in primary schools in and around London. For these schools, and for the salary differences of just under 5% that we observe, we do not find evidence that higher salary scales for teachers have much impact on pupil attainment. This suggests that if individual schools offered salary differentials on this scale across-the-board, they would not necessarily attract more effective teachers.
The next five years look better but tough fiscal choices remain for Scotland
The latest public finance forecasts published by the Office for Budget Responsibility (OBR) in December presented a better outlook for the UK than had been suggested by their March forecast. This is good news for the UK and Scotland in the short-term but much of the improved short-term outlook comes at the expense of reduced scope for economic recovery after 2018–19. Also the one area of greater weakness in the OBR’s latest forecast – revenues from oil and gas production – has substantially more adverse consequences for Scotland’s fiscal position than for the UK as a whole. In short, the new forecasts do little to diminish the tough choices that will face Scotland (and, to a lesser extent, the UK) if it is to achieve long-run fiscal sustainability.
50p tax – strolling across the summit of the Laffer curve?
Ed Balls and Ed Milliband have cited recent HMRC statistics which show those paying the 50% income tax rate are estimated to have paid some £10 billion more in tax over the three years 2010-11 to 2012-13 than was projected to be the case back in 2012 when HMRC analysed how much the tax was raising. Is that an indication that the 50p rate was more successful in raising revenue than HMRC concluded in their analysis?