Fuel duty: Would no further freezes mean more money?

Since the Government announced extra funding for NHS England questions have arisen as to where the money is coming from. As specifics have not yet been released by the Government, the media has been speculating about potential revenue raising moves.

Bringing the eight year freeze on fuel duty to an end is the latest idea being discussed in the media.

Here we explain how this would actually require no change in Government policy. It’s already Government policy for fuel duty to increase in line with inflation. (Although politically it might not be so straightforward). Most importantly we explain how putting an end to fuel duty freezes will impact on Government revenues.

Hang on – are fuel duty freezes not Government policy?

It is true that fuel duty has not risen since 2011, but strictly speaking this has been the result of a series of announcements made at Budgets or Autumn Statements, rather than as the result of a specific policy to freeze fuel duty. Such announcements overrode the Government’s stated policy that fuel duty should rise in line with inflation – essentially the Government cancelled each of the expected rises. To this day it remains Government policy that fuel duty will increase by inflation.

Government policy to increase fuel duty by inflation has not been implemented. This means successive policy assumptions about fuel duty rates have not happened in reality.

Fine – no need to change policy, but more money will come in, great!

Not quite. The Government’s official tax forecasts – produced by the independent public finances watchdog, the Office for Budget Responsibility (OBR) – are based on stated Government policy. So the OBR’s tax forecast is already produced on the assumption that fuel duty will rise by inflation in the future. In short, this means no additional money from allowing fuel duty to rise by inflation as an increase is already built into the OBR’s forecast.

How does ending the freezes raise money then?

Strictly speaking it doesn’t, but it means that keeping the public finances on track doesn’t become harder for the Government.

If the Government announced another freeze fuel duty receipts would be around £0.8 billion lower than currently forecast each year – so not huge amounts, at least in the context of the additional £20 billion for NHS England in 2022/23. However, if each subsequent year brings another freeze the cost soon adds up and you could be looking at quite a significant amount of forgone revenues.

OBR figures suggest that introducing more annual freezes to fuel duty will result in revenues being £3 billion lower than would otherwise be the case in 2022/23. The Institute for Fiscal Studies – an economic think tank – estimates that not increasing fuel duty rates since 2011 currently costs the Government more than £6 billion per year.

While introducing no further fuel duty freezes won’t create additional Government revenues, it may bring to an end a convention that if continued, could cost the public finances significant sums.