Treasury report: fuel duty reductions boost GDP
Road transport industry representatives have welcomed conclusions of a report released by HM Treasury, which suggests that more than half of the tax revenue lost through cuts and freezes to fuel duty may be offset by a consequent boost to the economy.
In formulating the report, entitled Analysis of the dynamic effects of fuel duty reductions, the Treasury used an HMRC tax policy analysis model to estimate the dynamic macroeconomic effects of its real-terms cuts in fuel duty.
The logic is that the money saved by businesses and individuals as a result of lower fuel duty allows them to spend more elsewhere, thus delivering an economic boost.
The report concludes that fuel duty is “one of the most distortive taxes, with a reduction in rates generating significant dynamic effects.” Key factors in calculating the positive effect on gross domestic product (GDP) include the proportion of the tax falling on business inputs, and a high initial rate at the beginning of the analysis period in 2010.
“Modelling work suggests in the long-term reductions in fuel duty will result in an increase in GDP against the baseline of between 0.3 and 0.5 per cent,” the report stated – a boost of up to £7.5 billion over 20 years.
“This leads to between 37 and 56 per cent of the static cost [to the Treasury] of the reductions being recovered.”
However, the report also points to a “diminishing GDP impact as the tax rate falls further for subsequent cuts,” suggesting that the most substantive macroeconomic benefits of fuel duty cuts may already have been reaped.
The report claims that the government will have eased the burden on motorists by £22.5 billion over this parliament to 2015-16 through its policy of fuel duty cuts and freezes, with duty forecast to have fallen by 13 per cent in real terms over the course of the parliament.
Said the Treasury: “Had the government implemented the fuel duty escalator [planned by the previous government], rates would have increased by seven per cent.
“As a result, from 1 April 2014, pump prices will be 16 pence per litre lower than if the government had implemented the fuel duty escalator, and will be nearly 20 pence per litre lower by the end of the Parliament.”
The Freight Transport Association (FTA), which has called on numerous occasions for the Chancellor of the Exchequer to further reduce fuel duty, said it was pleased the Treasury had ‘caught up’ with the positive impact the measures could have.
FTA has estimated that every penny of fuel duty costs CV operators £116 million anually, and has repeatedly argued that reducing the tax would stimulate economic growth as well as easing pressure on operators.
Theo de Pencier, FTA Chief Executive said: “FTA is pleased that the Treasury has accepted our key arguments that fuel duty can be cut without harming the economy.
“From the conclusions in this report today, it does appear as though the Chancellor has caught up with our findings, and there is now every chance for him to go further and boost growth by cutting three pence per litre from current rates.”
The Road Haulage Association (RHA) also welcomed the report’s conclusion that fuel duty cuts had boosted the economy.
RHA policy director Jack Semple commented: “The important thing to ensure now is that this economic and tax reality becomes imbedded as core Treasury and political thinking as we look ahead to the next parliament.”
Meanwhile, critics warned of limitations in the HMRC model – including its failure to account for social and environmental impacts that could adversely affect the economy.
