Expert Blog

Why would Osborne risk raising the rate of fuel duty? Here’s why

During the last Parliament, the Government’s policy on fuel duty fell into a familiar pattern. First they’d announce that they had postponed a rise that had been planned for the forthcoming year. And then, come the next Budget or Autumn Statement, they’d announce that they had postponed it again. The overall effect, according to the Office for Budget Responsibility, was to keep fuel duty about 20 percentage points lower than it would have been otherwise.

It’s going to be the same again during this Parliament, right? Erm, maybe not. According to the newspapers, George Osborne has a plan to sneakily increase fuel duty in his forthcoming Budget – and raise an extra £4 billion a year for the Exchequer. He’d do so by hiking fuel duty in line with inflation. This is known as a “real-terms freeze,” because the increase in duty would be frozen at the same level as the increase in other prices. Everything’s going up at the same rate.

But very few motorists would regard it as a freeze. After all, fuel duty may only go up with other prices, but it would still go up – from 58p a litre now to 65p by the time of the next election, if inflation continues as expected. This is very different from the freezes that Osborne delivered during the last Parliament. Back then, he generally kept the level of fuel duty the same, regardless of inflation. That was actually a real-terms cut.     

The question is why Osborne might risk provoking motorists when he has done so much to win them overpreviously. And the answer, if you don’t mind us being so bold, is probably contained within one of the posts on this blog. Basically, the Chancellor has foregone £billions over the past few years to contain fuel duty – and what for? The cost of a litre of unleaded still rose from about 118p in June 2010 to a peak of about 142p in April 2012, even if it has come back down again now. What matters are fluctuations in global oil prices, more than anything that the Chancellor can write into his Budget.

So, perhaps Osborne has decided not to try to hold back the black tide. He can’t do anything to stop oil prices rising and falling. But he can do something to reduce our national deficit – and he needs to, too, with the Conservatives promising to return the public finances to surplus over the course of this Parliament. That fuel duty money must suddenly look more attractive.

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