Fuel Duty: Fiscal forecast fiction

Forecasting fuel duty

Scope of this report

1. The Office for Budget Responsibility (OBR) will now be in its usual 10 week preparation period for the forecast to accompany the Budget on 15 March 2023.¹ This Report deals with the ongoing Treasury policy assumption that Fuel Duty² will rise with inflation, which is then used by the OBR as a policy basis for its fiscal forecasts. It makes no comment on what the current or future level of fuel duty should be.

The fuel duty assumption

2. Fuel duty is set as a cash charge per unit of fuel, meaning its real value will fall unless it is uprated with inflation. For almost 30 years, successive Governments have held varying policy assumptions about the future annual increases in fuel duty.³ For example, in March 1993, the then Chancellor, Norman Lamont, stated that “We intend to raise road fuel duties on average by at least 3 per cent. a year in real terms in future Budgets”.⁴ However, in November 1999, Gordon Brown removed the so-called “fuel duty escalator”, saying only that fuel duty would be decided Budget by Budget.⁵ The Pre-Budget Report 1999 noted that “From [Q2 2000] the forecast adopts the conventional assumption of fuel and tobacco duty increases in line with RPI inflation, instead of previous escalator uprating, to maintain inflation neutrality”.⁶ In Pre-Budget Report 2004, while announcing a continuing freeze on fuel duties, the then Government noted that “It remains the Government’s policy that in future years, fuel duties should rise at least in line with inflation […].”⁷ Alistair Darling’s 2009 Budget announced “an increase in fuel duty of 2 pence per litre on 1 September 2009, and of 1 penny per litre in real terms each year from 2010 to 2013”.⁸ In George Osborne’s Budget 2011, the new Government set out a ‘fair fuel stabiliser’, which was to see fuel duty rise by inflation alone if oil prices were determined to be ‘high’.⁹

3. The current underlying policy of the Treasury is that fuel duty will rise in line with inflation (as measured by the retail price index, RPI).¹⁰ This does not have a statutory footing—any change to the rate of fuel duty requires legislation. But because it is the official policy of the Government, the OBR undertakes its fiscal forecasts with annual uprating as their underlying assumption.

4. However, the last fuel duty rise in cash terms was 12 years ago on 1 January 2011, when the duty on unleaded fuel rose from 58.19p per litre to 58.95p per litre.¹¹ Since then, successive Chancellors have refrained from raising fuel duty. The Treasury went further in the 2022 Spring Statement, announcing “a temporary 12-month cut to duty on petrol and diesel of 5p per litre”.¹²

5. Because Governments have consistently not raised fuel duty with inflation, contrary to the underlying policy assumption provided to the OBR, the OBR considers fuel duty a risk to its fiscal forecast. In its November 2022 Economic and Fiscal Outlook, the OBR noted the assumption as one of its “main adverse economic and fiscal risks”:¹³

The planned 23 per cent increase in the fuel duty rate in late-March 2023, which adds £5.7 billon to receipts next year. This would be a record cash increase, and the first time any Government has raised fuel duty rates in cash terms since 1 January 2011. It is expected to raise the price of petrol and diesel by around 12 pence a litre.¹⁴

6. Paul Johnson, Director of the Institute for Fiscal Studies (IFS), commenting on the 2022 Spring Statement’s temporary reduction in fuel duty, noted that:

Not only do the public finance forecasts depend upon the 5p cut being reversed, they assume an increase in line with the RPI on top of that. The odds against the former feel long. I reckon an RPI increase on top is about as likely as my winning the National Lottery. And I don’t play the Lottery.¹⁵

7. When it was put to the Treasury’s Permanent Secretary that the continued underlying assumption was a “mockery of forecasting”, given that rises in duty were assumed but never materialised, Mr Bowler replied that it was “a reasonable point”.¹⁶

8. The repeated failure of Governments to follow their own stated policy on fuel duty undermines the credibility of the OBR’s fiscal forecasts.

9. We recommend that the Treasury, for the purposes of providing the OBR with a policy assumption for future forecasts, should assume there will be no inflation-linked rise in fuel duty over the forecast horizon. This would more accurately reflect the recent path of fuel duty and make for a more credible forecast. As ever, the Chancellor would be free to propose changes in duty rates at fiscal events.

Formal minutes

Monday 16 January 2023

Members present:

Harriett Baldwin, in the Chair

Rushanara Ali

John Baron

Dame Angela Eagle

Emma Hardy

Danny Kruger

Alison Thewliss

Draft Report (Fuel Duty: Fiscal forecast fiction) proposed by the Chair, brought up and read.

Ordered, That the Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 9 read and agreed to.

Resolved, That the Report be the Eleventh Report of the Committee to the House.

Ordered, That the Chair make the Report to the House.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

Adjourned till Tuesday 24 January at 9.30 am.

Witnesses

The following witnesses gave evidence. Transcripts can be viewed on the inquiry publications page of the Committee’s website.

Wednesday 01 December 2021

Sir Tom Scholar, Permanent Secretary, HM Treasury; Charles Roxburgh, Second Permanent Secretary, HM Treasury; Cat Little, Director General, Public Spending, HM Treasury; Anna Caffyn, Finance Director, HM TreasuryQ1–98

Monday 12 December 2022

James Bowler CB, Permanent Secretary, HM Treasury; Beth Russell, Second Permanent Secretary, HM Treasury; Cat Little, Second Permanent Secretary, HM Treasury; Anna Caffyn, Finance Director, HM Treasury; Phil Duffy, Director-General, Growth and Productivity, HM TreasuryQ99–226

List of Reports from the Committee during the current Parliament

All publications from the Committee are available on the publications page of the Committee’s website.

Session 2022–23

Session 2021–22

Session 2019–21

Footnotes

1 HC Deb, 19 December 2022, col 6WS; Letter to the Chair of the Treasury Committee from the Chair of the Office for Budget Responsibility, Potential Emergency Budget, 26 August 2022

2 Duties charged per litre of unleaded petrol and diesel, under s6 of the Hydrocarbon Oil Duties Act 1979

3 For a detailed narrative, see House of Commons Library, Research briefing: Taxation of road fuel, By Antony Seely, Published 24 June 2022

4 HC Deb, 16 March 1993, col 183

5 HC Deb, 9 November 1999, cols 889–890

6 HM Treasury, Pre-Budget Report, Cm 4479, November 1999, para A33

7 HM Treasury, Pre-Budget Report, Cm 6408, December 2004, para 7.32

8 HM Treasury, Budget 2009, 22 April 2009, para 1.36

9 HM Treasury, Budget 2011, 23 March 2011, para 1.146

10 Oral evidence taken on 22 November 2022, HC (2022–23) 740, Q345, and most recently HM Treasury, Autumn Statement 2022: Policy Costings, November 2022, Annex A

11 HM Revenue and Customs, Historical hydrocarbon oils duty rates, Updated 28 October 2022

12 HM Treasury, Spring Statement 2022, para 2.13, p24. The temporary reduction was given statutory effect by the Excise Duties (Surcharges or Rebates) (Hydrocarbon Oils etc.) Order 2022.

13 Office for Budget Responsibility, Economic and Fiscal Outlook, November 2022, p52

14 Office for Budget Responsibility, Economic and Fiscal Outlook, November 2022, pp52–53

15 Institute for Fiscal Studies, Spring Statement 2022: Paul Johnson’s opening remarks, 24 March 2022

16 Qq173-174