3 July 2018

Raising fuel and beer duty would be completely counter-productive


If the rumours are to be believed, then the Government is planning on funding an increase in public spending by lifting the freeze on fuel and alcohol duty. Even without considering the case against increasing public spending, this would be a bad idea for a number of reasons.

Vehicle emissions can be extremely damaging to both public health and the environment, so it’s right that government should look at how they can be tackled. There are several suggestions, one of which is some kind of Pigouvian tax to offset the negative externalities.

However, drivers already face a number of taxes such as fuel duty, VAT, vehicle excise duty, and insurance premium tax. These taxes dramatically increase the cost of driving for motorists in the UK. A fairer system needs to be introduced in which drivers are not disproportionately punished, but they still pay for any damage inflicted. A single carbon tax should be brought in to ensure emitters cover the costs to others of their emissions. Such a solution would be fair to motorists and to the environment.

There is a cost of living crisis in the UK. Many Brits struggle to make ends meet as a result of high prices for essential items, including fuel. The price of petrol is far higher here compared to other EU and OECD countries. Yet the price of petrol in the UK would be one of the lowest in the EU and the OECD if it were not for the Government levying fuel duty and VAT on petrol and diesel. Again, when compared to other countries, total duty as a proportion of the price of petrol paid by consumers is the UK is one of the highest in Europe and is the highest in the OECD.

This kind of taxation often hits the poorest hardest. For example, a recent report from the RAC found that around 960,000 of the very poorest car-owning households spent approximately one-fifth of their disposable income on buying and running a vehicle. It is not just motorists who are negatively impacted by fuel duty. It also affects bus passengers by pushing up fares. Again, this hurts those on the lowest incomes, who are more likely to travel by bus.

Access to affordable transport has a huge impact on quality of life and life chances. This has long been recognised by those in power. For example, a white paper issued by the Department for Transport in 1998 stated:

“Being unable to afford transport can limit everyday life. Job, training, and education opportunities are more limited and there is less choice in shopping, adding to family budgets of those least able to bear the cost”.

In addition, the guidance to the Child Poverty Act 2010 stated:

“Transport infrastructure, and accessibility to local service for children and parents, and employment opportunities for parents, are important in all local areas and are likely to be particularly so for those living in more remote or rural areas where the effects of growing up in poverty may be compounded by poorer access to services”.

People rely on transport to get to work, to go shopping, to see friends and family, and to engage with all that life has to offer. Any increase in fuel duty would hamper the chances of the poorest people in the country to do these things, exacerbating inequality and social injustice.

Proposals to increase alcohol duty are similarly misguided. As with carbon emissions, excessive alcohol consumption can create negative externalities, such as drinkers needing treatment from the NHS. Equally, drunken loutishness imposes serious costs on the police and criminal justice system. As such, some form of Pigouvian tax is appropriate.

However, beer duty in the UK is already incredibly high. It is 14 times higher than in beer-loving Germany, for example. To put things into context, people in the UK pay 40 per cent of the beer taxes in the EU, but only drink 12 per cent of the beer.

As with fuel duty, alcohol duty also has negative consequences. Christopher Snowdon’s research has demonstrated the regressive nature of alcohol duty and how it hurts the poor. What’s more, the beer industry provides nearly 900,000 jobs across the UK, many of which are in areas where unemployment is relatively high.

Research conducted by the TaxPayers’ Alliance demonstrates the correlation between beer duty and employment opportunities. Under the period of the beer duty escalator of 2008-2013, duty rose by 42 per cent. Over the same period 7,000 pubs closed and 58,000 people lost their jobs. Conversely, scrapping the beer duty escalator resulted in there being 21,000 more jobs than if it had continued.

The evidence points to an unavoidable conclusion: increasing beer duty destroys jobs. Therefore, the Government risks imperilling the livelihoods of hundreds of thousands of people if it raises beer duty. Not only will it damage the economy, it is also likely to be counter-effective.

The Government’s rationale for increasing alcohol duty is to bring in more tax revenue. In reality, raising beer duty could mean less money for the Exchequer, as all those people put out of work will no longer be paying income tax and national insurance contributions. Add to that the increased pressure placed on the public finances by more people claiming out of work benefits as a result.

Freezing beer duty has led to more investment in the British economy. The beer industry has invested billions more since the beer duty escalator was scrapped in 2013. Investment in 2016 was £1.96 billion – £800 million more than in 2013. Breweries alone are estimated to have invested £325 million. Increased investment means more jobs, more businesses, and economic growth, all of which means that the Treasury has more money to spend on essential public services.

So, the Government’s rumoured proposal to increase fuel duty would exacerbate the cost of living crisis, hit the poor hardest, and further hamper social mobility. As for the plans to increase beer duty, this would place hundreds of thousands of jobs in jeopardy, reduce investment, and ultimately mean that the Treasury would have less money than before.

Ben Ramanauskas is a researcher at the Taxpayers' Alliance.