A chancellor desperate for ready cash, as Rachel Reeves finds herself, has one immediate source of new funds: increasing the tax on petrol again.
More than 14 years have passed since fuel duty was last increased, in 2010. That’s a legacy of concessions by the Conservatives to the car lobby. Now it’s time to tell drivers that the days of annual freezes are over, and that the UK’s car mileage tax needs to be higher to reduce emissions and limit climate change.
And what a moment for Labour to raise an extra £1bn a year over the next six months, as well as £2bn a year from next April that is pencilled into government forecasts but recent history tells us was likely to be cancelled.
A weak global economic outlook means oil demand is down, and so are prices at the pumps. If ever motorists were going to be able to carry on driving without feeling the pain of a tax hike, that time is now.
Since April, petrol prices have fallen from an average £1.49 a litre to £1.36. Diesel costs an average of £1.40 a litre when five months ago the price was £1.57.
Further evidence of the good times we are enjoying can be found in the RAC Foundation price tracker, which shows petrol and diesel prices falling from £1.87 and £1.96 respectively since the post-pandemic peak in the summer of 2022. If Reeves adds 5p a litre to the cost, motorists will still be 7p a litre better off than they were in April.
The Tory administration had a plan to reverse a 5p emergency cut made in 2022 which was always considered temporary. Reverting to a tax level of 57.95p a litre was supposed to take place next April, which convenient left this tricky decision to the current government.
Reeves could easily go ahead with that plan, but bring it forward to budget day on 30 October, and in the same breath announce that she is restoring an inflation link to ratchet up fuel duty each year in line with average price increases. Such a move would have the added benefit of helping revive the switch to electric cars, which has stalled this year after playing a big part in new car sales early in the decade.
Consumers always consider relative prices, and the declining cost of petrol and diesel will have played a significant role in their decision to delay the jump to electric.
Data from the Office for Budget Responsibility shows that fuel duty was worth 2% of national income in 2000; 24 years later it is worth just 1%. So while the tax still makes up a large proportion of the cost of petrol at the pump, it has become a smaller slice of average household incomes.
That’s not to say it will be an easy sell, especially to businesses affected by transport costs. And oil prices on international markets can jump, which would see motorists facing a double whammy at the pump.
That looks unlikely at the moment. Much of the reason for the drop in oil prices this year lies in China’s economic slowdown. Despite having invested in renewables, China remains by far the world’s largest consumer of oil, and whenever its economy falters, as it is doing now, oil prices fall.
There is, however, likely to be a backlash from the haulage industry, which is suffering hugely in the post-Brexit era. Higher diesel prices are the last thing owners of big lorries, coaches and industrial equipment want right now, when they are already coping with a shortage of drivers, and rising prices for parts, repairs and replacement vehicles.
The transport industry will say that a combination of taxes and charges will feed through to higher prices in the shops and put them at a disadvantage compared with foreign competition.
It is always difficult to calculate the relative position of transport costs in the round from one country to another. But the fact that inflation is low and heading downwards will offset higher transport prices.
There is also a danger that Reeves will be portrayed as a Scrooge-like figure, scrimping and taxing while much of the nation struggles on meagre rations.
She will need to portray a positive outlook when delivering her budget speech, even though she will feel like a shopkeeper staring into an empty cash register.
Car drivers complain about the defunding of local authorities and how it has triggered a dramatic increase in potholes (to such an extent that DIY chains now sell buckets of ready-to-use tarmac for filling said holes).
Promising that Labour will do what the Tories only talked about and fix the nation’s potholes will go some way to lighten the mood and mitigate the effect of higher fuel tax. Potholes are even more of a problem for electric cars than for their petrol cousins, which gives urgency to a project that is good for the planet.
