Commons Library briefing paper on Taxation of road fuels

This note discusses the approach of Labour, Coalition and Conservative Governments since 2010 to taxing road fuels. Figures for the tax take since 1990, as well as duty rates over this period, are given in a statistical appendix.

Excise duty is charged on most hydrocarbon oils. The two main categories of road fuel – ultra-low sulphur petrol and ultra-low sulphur diesel – are charged duty at 57.95p per litre.^[1]  When VAT is included, tax represents 64% of the final pump price for petrol, and 63% of the final pump price for diesel (as of February 2018).  Fuel duties are estimated to raise £28.1 billion in 2017/18; by comparison duties on all other excisable goods – tobacco products, beer, cider, wine and spirits – are set to raise £20.3 billion in this year.^[2]

A commitment to increase the rates of excise duty in real terms each year is often termed a ‘duty escalator’. Over the period 1993-1999 Conservative and Labour governments operated such a policy. By January 1999 tax on both petrol and diesel represented 85% of the final pump price. Over the 1990s, despite regular peaks and troughs, the trend in oil prices was a sustained long-term increase, and by the end of the decade government policy toward taxing road fuels had become highly unpopular. In 1999 the Labour Government suspended the duty escalator, and over the next nine years it increased road fuel duties sporadically, often deferring or cancelling proposed changes in duty rates when oil prices were relatively high. 

In his 2009 Budget statement the then Chancellor Alistair Darling announced that in future years fuel duties should rise by 1p a litre above inflation,^[3] and in the Budget the following March he proposed the escalator should apply at least until 2014/15; the duty rate rise for 2010/11 would be phased in over the coming tax year in 3 stages to “ease the pressure on businesses and family incomes at a time when other prices are increasing.”^[4]  Fuel prices continued to rise over the next two years for a number of factors: this increase in duty rates, rising oil prices, a decline in the value of sterling, and the new 20% standard rate of VAT which took effect from 4 January 2011. 

In the first Budget of the Coalition Government in June 2010 the Chancellor George Osborne did not change duty rates, but said the Government would be exploring options to stabilize road fuel prices, and to have a duty discount for remote rural areas. In his Budget on 23 March 2011 Mr Osborne proposed three changes to duty rates: an immediate cut in the rate by 1p, a suspension in the previous Government’s duty escalator, and a delay in the two duty increases set for April 2011 and April 2012, to keep duty rates in line with inflation.  These changes – estimated to cost around £1.9 billion in 2011/12 – would be funded by an increase in the supplementary charge paid by companies in the North Sea on oil and gas production.  Mr Osborne stated that if oil prices fell back down ‘on a sustained basis’, this extra supplementary charge would be removed, and the duty escalator would be re-imposed.^[5] 

However, for the remainder of its period in office the Coalition Government kept fuel duty rates frozen, and in its Autumn Statement in December 2014 announced that “the price based trigger point for changes to both the supplementary charge and fuel duty, set by the Fair Fuel Stabiliser in 2011, will be abolished.”^[6] In a review of the Government’s tax policy before the 2015 General Election, the Institute for Fiscal Studies (IFS) noted that “in April 2015, fuel duties will be 15% (10p per litre) lower than if the April 2010 duties had simply been uprated in line with the RPI (a £3.9 billion tax cut) and 22% (16p per litre) lower than if the Coalition had continued with the fuel duty escalator inherited from the previous government (a £6.2 billion tax cut).”^[7]

The Conservative Government has continued to keep duty rates frozen, most recently in its Autumn 2017 Budget. The Budget report noted that “fuel duty freezes since 2011 will have saved the average driver a cumulative £850 by April 2019, compared to what they would have paid under the pre-2010 escalator plans.”^[8] The decision to freeze duty rates in the Autumn 2017 Budget is estimated to cost £0.8 - £0.9 billion a year,^[9] and the IFS estimates that the totalannual cost of duty rate freezes over this period is now over £6 billion.^[10] Despite the Exchequer cost, this approach to taxing road fuels appears to have cross-party support, and none of the three major parties made any proposals to increase fuel duties in either the 2015 or 2017 General Elections.^[11] The Office for Budget Responsibility has suggested that in the longer-term rising fuel efficiency is likely to reduce duty receipts over time, though continuing to freeze duty rates would have a larger impact.^[12]

Two other Library notes discuss the application of the duty escalator in the 1990s, and the Labour Government’s decision to rescind it.^[13]

Notes : 

[1]    HMRC, Excise Duty - Hydrocarbon oils rates, January 2014

[2]    OBR, Economic and fiscal outlook Cm 9572, March 2018 p104 (Table 4.6)

[3]    HC Deb 22 April 2009 c244.  In addition to the 1p real terms rise set for future years, duties were increased by 2p a litre in September 2009 (Budget 2009 HC 407 April 2009 p153).

[4]    HC Deb 24 March 2010 c254

[5]    HC Deb 23 March 2011 cc964-5; Budget 2011 HC 836 March 2011 para 1.145-49

[6]    Autumn Statement, Cm 8961, December 2014 para 1.127

[7]    Stuart Adam & Barra Roantree, The Coalition Government’s Record on Tax: IFS Briefing Note BN167, March 2015 p19

[8]    Autumn Budget 2017, HC 587, November 2017 para 3.40

[9]    Economic and fiscal outlook Cm 9530, November 2017 paras 4.67-9

[10]   “Tax and benefit measures”, IFS Autumn 2017 Budget, 23 November 2017

[11]   See, IFS, General Election 2015: Taxes and benefits: the parties’ plans, April 2015 & General election 2017 manifesto analysis: tax and benefit policies, May 2017.

[12]   In 2014 the OBR suggested that rising fuel efficiency might cut duty receipts from 1.6% of GDP in 2013/14 to 1.1% by 2033/34, while a continued freeze in duty rates would see receipts fall to 0.7% of GDP over this period (Fiscal Sustainability Report, July 2014 para 4.43-8).

[13]   Taxation of road fuels: the road fuel escalator (1993-2000), CBP3015 & Taxation of road fuels: policy following the ‘fuel crisis’ (2000-2008) CBP3016, 21 January 2011.