Blair's fuel tax options

by BBC News Online's Alex Hunt

As Chancellor Gordon Brown puts the final touches to his pre-Budget package, what are the facts about fuel tax as it stands and what can Tony Blair's government offer from the Treasury's overflowing coffers to head off further protests?

Current tax position

Fuel duty and VAT make up the vast majority of the price of petrol in the UK.

If a litre of unleaded petrol costs 85p, 21.7p will be the production costs and profit, about 51p will be duty and 12.5p will be VAT on top of all that.

The government forecasts that fuel duties will rise from £21.6bn in the 1998-99 financial year to £23.3bn in the year to next April.

How did it get so high?

Large rises in fuel duty began in 1979, when total tax as a percentage of a litre of petrol was 49%.

Fuel facts

£32bn will be raised from oil, fuel and road taxes this year.

Equals 6% of all government revenues

For every $4 on a barrel of oil the UK receives £1bn more from producers

The Conservative government introduced the fuel price escalator in 1993 - when British fuel was the third-cheapest in Europe.

The annual fuel escalator was set at 3% above the rate of inflation.

On its introduction it added 3p to a litre of fuel and raised the tax burden on unleaded petrol to 72.8% of the total cost.

By the time Labour came to power in 1997, the escalator was at 5% and had contributed a 11.1p rise to the cost of unleaded fuel. Tax as a proportion of total cost stood at 76.3%.

Brown's options

Charge all foreign truckers a fee to use British roads

Road tax rebate for motorists in rural areas

Fuel tax rebate for road hauliers

Variable rate of duty which would see tax on petrol at the pump cut as the oil price rise pushed up tax receipts from North Sea oil

Extend to truckers the scheme which allows farmers to buy fuel for off-road use discounted by 42p per litre

On taking office the new chancellor, Gordon Brown, increased the fuel escalator further and put 3p on a litre of petrol in his first budget.

That pushed taxes up to 81.5% of the total price of fuel.

Duty rose by a further 2p a litre in his last budget, but the chancellor, facing rising complaints from the road haulage industry, scrapped the fuel price escalator, saying that future increases should be decided on a year-by-year basis.

The AA said that it was the first budget in seven years in which "drivers can take some heart".

British petrol is the most expensive in Europe.

Because of the rise in world oil prices, the proportion of the total fuel cost that is tax has fallen from 85% (March 1998) to 72.3% today - something that ministers have sought to stress in interviews.

Tax as a % of price of petrol

France: 73%

Germany: 71%

Italy: 68%

Spain: 63%

Japan: 58%

Canada: 40%

USA: 25%

source: IFS

Still, it is one of the highest levels in the world - with tax in France and Germany at 71% of the cost of petrol, while in the United States it is only 25%.

Related taxes

The government taxes oil production, at 50% on existing fields. Companies also pay corporation taxes, with royalties on North Sea oil levied at 12.5%.

There is also road tax, or Vehicle Excise Duty, which costs £155 per year for most cars, or £100 for cars with engines below 1,100 cc.

Adding together the various different taxes on fuel and cars, the UK Treasury is expected to have raised £32bn this year - or 6% of total government revenues.

For every $4 extra on the price of a barrel of oil, the government receives an extra £1bn from producers.

What are the options?

Charge all foreign truckers a fee to use British roads, to ensure that UK registered vehicles are not disadvantaged.

Difficulty: may not be effective in discouraging competition

Introduce a fuel duty or road tax rebate for truckers and/or for motorists in rural areas.

Difficulty: may be hard to target rural motorists

Bring in a variable rate of duty which would see tax on petrol at the pump cut as the oil price rise pushed up tax receipts from North Sea oil.

Difficulty: complicated and may limit government revenues from a buoyant oil market

Extend to truckers the scheme which allows farmers to buy fuel with duty discounted by 42p per litre.

Difficulty: hugely expensive open-ended subsidy

Introduce a windfall tax on oil company profits to fund other concessions to road hauliers, farmers, and rural motorists.

Difficulty: may discourage oil exploration and drive oil companies to invest elsewhere