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Monday, 14 May, 2001, 11:19 GMT
Fuel tax in the UK

Fuel price protests in 2000 were followed by Labour's most severe opinion poll wobble since 1992. What are the facts about taxation on fuel?


BACKGROUND

Fuel in the UK is a complicated business and its price changes month-to-month as the cost of crude oil rises and falls with international demand.

British drivers pay two taxes on the petrol they buy at the pump: Fuel Duty and VAT.


According to the Institute for Fiscal Studies, the price of unleaded petrol rose by 37% between May 1997 and September 2000. About three quarters of that rise was due to increases in taxation.

Figures show that the UK has the highest fuel tax rate in the European Union - around 77% of the retail price.

Treasury figures show that revenue from fuel duties will rise from 21.6bn in the 1998-99 financial year to 23.3bn by the end of the 2000-01 financial year - around 6% of total revenue.

While the fuel protesters in September last year attacked these levels of revenue, the IFS says that large rises in fuel duty really began as far back as 1979.

Protesters who blockaded refineries in September 2000 said they wanted the government to slash fuel duty - complaining that it was placing an unacceptably high burden on businesses and ordinary motorists.

They argued that VAT should be calculated only on the cost of the fuel - rather than on fuel and duty together.

This would save motorists about 8p per litre at September 2000 prices - but it's a proposal which none of the parties appears to support.

But environmentalists are horrified at any prospect of cheaper fuel.

They say that higher taxes are essential to deliver cuts in greenhouse gas emissions.


FUEL ESCALATOR

In 1993, the Conservatives introduced the Fuel Price Escalator as a way of both raising revenue and discouraging car use on environmental grounds.

The escalator, which annually raised petrol prices above the rate of inflation, was set in 1993 at 3% and later increased to 5%.

Its first effect was to add 3p to the price of petrol. When the Conservatives left office in 1997 the escalator had contributed a 11.1p rise to the cost of unleaded fuel.

Tax as a proportion of total cost stood at 76.3%.


LABOUR'S RECORD

When Labour took office in 1997, Chancellor Gordon Brown put a further three pence on to a litre of petrol in his first Budget, pushing taxes up to 81.5% of the total price of fuel.

He increased duty by a further 2p a litre in the 2000 Budget.

But at the same time he scrapped the fuel price escalator, saying that future increases would be decided on the basis of "due Budgetary process".

Following the fuel protests, the chancellor pledged a series of measures to be included in the 2001 Budget, saying they were the equivalent of a 4p cut in fuel duty.

These comprised:

  • Freezing fuel duty until 2002
  • Cutting duty on low-sulphur fuel
  • Reducing vehicle excise duty for hauliers
  • Proposing a "Brit disc" to levy charges on foreign lorries in the UK

    The government subsequently made a temporary 2p cut in the tax on unleaded fuel (to last until 14 June) on the grounds that low-sulphur fuel was still not nationally available.


    CONSERVATIVE CRITICISMS

    But the Conservatives are pressing for more cuts.

    One of their key election pledges is to cut fuel tax by 6p per litre in the party's first budget.

    They say that since Labour came to office, the pump price of unleaded petrol has risen by 16p - about 71%.

    This figure of 16p per litre is a combination of duty and VAT.

    The actual amount raised by VAT goes up as prices and duty increase.

    But it is calculated at the same 17.5% level which Labour inherited from the Conservatives.

    Putting aside VAT, fuel duty increases linked to the escalator under Labour amount to 12p per litre - compared to 11.1p under the Conservatives.


    CUTTING THE COST?

    Economists believe that cuts in fuel duty of at least 4p per litre are affordable because of the larger than expected budget surplus.

    But they urge caution.

    They say, for example, that if economic growth were to be worse than expected, and unemployment shot up, tax revenues would fall dramatically as government welfare spending increased - leaving a hole in the accounts.

    So the second question is: Why can't the oil companies cut the prices?

    Some of the biggest names in the oil business were roundly criticised earlier this year when they revealed record-breaking profits.

    Prices at the pump are about 4p higher than the wholesale price of fuel as it leaves the refinery.

    But the oil companies say that any drop in petrol pump prices must come from falls in the price of crude oil or from taxation - because they say they are making virtually nothing on the forecourts.

    While the whole idea of cutting fuel taxes is opposed by the environment lobby - indeed one of its biggest gripes is the lack of duty and VAT on aircraft fuel.

    That said, there is a question mark over whether increasing fuel tax on environmental grounds actually achieves its goal.

    Evidence from one academic study suggests that, at least in the short-term, the number of passenger miles travelled in a car does not fall greatly as taxes go up.

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