23 March 2022

Why cutting fuel duty is not the best way to tackle the cost of living crisis

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It looks highly likely that Rishi Sunak will use the Spring Statement to announce a cut to fuel duty. No doubt such a move will be greeted by cheers in Parliament and praise in the papers and from pressure groups. It would, however, be a mistake.

It ignores the fact that, in real terms, fuel duty has been cut since 2011. So although it is expensive in the UK compared to many other countries to top up a car or van, the last decade or so has not been the ‘war on motorists’ some might claim.

Such a cut is also going to be expensive. Fuel duty is a reliable and substantial revenue raiser, bringing in over £28 billion for the Treasury. Given that the Chancellor likes to portray himself as a fiscal hawk, we have to ask how he plans to make up that shortfall. Will it be with extra borrowing, other taxes going up, or cuts to public services? No solution is perfect, given the state of the economy and the pressures and uncertainties being felt by many people in the country.

Sunak will no doubt argue that the cut is needed to tackle the increasing cost of living. but it’s a pretty poorly targeted way of doing so. A cut will certainly help some people on low incomes, but it will disproportionately benefit higher earners – especially as the majority of the very lowest earners don’t own a car. A much more effective way to help low income households would be to temporarily increase Universal Credit payments.

There’s also an element of generational unfairness here, in that cutting fuel duty tends to benefit older people who are more reliant on cars. Younger Brits are already seeing their taxes increase, real wages decrease, all in a housing market seemingly designed explicitly to preserve the Boomers’ wealth at literally all costs. If anyone deserves a tax cut, it’s young adults, not the relatively affluent older generations.

This kind of tinkering is also an example of the vicissitudes of our tax system, with Chancellors endlessly playing around with our myriad tax rates and exemptions to produce politically favourable headlines. What we need is not just tax cuts – welcome though they often are – but a tax code cut, reducing the complexity of our system to make life easier for businesses and individuals. It’s not a sign of strength that many people feel they need to pay an accountant just to make sure they don’t make a mistake on their return, nor that the very wealthy can game the system and end up paying a lower proportion of tax less than ordinary workers.

If the Government really wants to help tackle the cost of living, it too should keep things simple: remove the lowest earners from taxation, while providing the worst off with more support. A cut to fuel duty might garner approving front pages, but it’s an expensive, badly targeted way of helping the worst off.

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Ben Ramanauskas is a Research Economist at Oxford University and a former adviser to a government minister.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.