Fuel Duty: Fiscal forecast fiction

This is a House of Commons Committee report, with recommendations to government. The Government has two months to respond.

Eleventh Report of Session 2022–23

Author: Treasury Committee

Related inquiry: The Work of the Treasury

Date Published: 23 January 2023

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Contents

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

Number

Title

Reference

1st

Future of financial services regulation

HC 141

2nd

Future Parliamentary scrutiny of financial services regulations

HC 394

3rd

The appointment of Dr Swati Dhingra to the Monetary Policy Committee

HC 460

4th

Jobs, growth and productivity after coronavirus

HC 139

5th

Appointment of Marjorie Ngwenya to the Prudential Regulation Committee

HC 461

6th

Appointment of David Roberts as Chair of Court, Bank of England

HC 784

7th

Re-appointment of Sir Dave Ramsden as Deputy Governor for Markets and Banking, Bank of England

HC 785

8th

Autumn Statement 2022 - Cost of living payments

HC 740

9th

Appointment of Ashley Alder as Chair of the Financial Conduct Authority

HC 786

10th

The work of the Sub-Committee on Financial Services Regulations

HC 952

1st Special

Defeating Putin: the development,implementation and impact of economic sanctions on Russia: Government Response to the Committee’s Twelfth Report of Session 2021–22

HC 321

2nd Special

Future of financial services regulation: responses to the Committee’s First Report

HC 690

3rd Special

Jobs, growth and productivity after coronavirus: Government response to the Committee’s Fourth Report

HC 861

Session 2021–22

Number

Title

Reference

1st

Tax after coronavirus: the Government’s response

HC 144

2nd

The appointment of Tanya Castell to the Prudential Regulation Committee

HC 308

3rd

The appointment of Carolyn Wilkins to the Financial Policy Committee

HC 307

4th

The Financial Conduct Authority’s Regulation of London Capital & Finance plc

HC 149

5th

The Future Framework for Regulation of Financial Services

HC 147

6th

Lessons from Greensill Capital

HC 151

7th

Appointment of Sarah Breeden to the Financial Policy Committee

HC 571

8th

The appointment of Dr Catherine L. Mann to the Monetary Policy Committee

HC 572

9th

The appointment of Professor David Miles to the Budget Responsibility Committee of the Office for Budget Responsibility

HC 966

10th

Autumn Budget and Spending Review 2021

HC 825

11th

Economic crime

HC 145

12th

Defeating Putin: the development, implementation and impact of economic sanctions on Russia

HC 1186

1st Special

Net Zero and the Future of Green Finance: Responses to the Committee’s Thirteenth Report of Session 2019–21

HC 576

2nd Special

The Financial Conduct Authority’s Regulation of London Capital & Finance plc: responses to the Committee’s Fourth Report of Session 2021–22

HC 700

3rd Special

Tax after coronavirus: response to the Committee’s First Report of Session 2021–22

HC 701

4th Special

The Future Framework for Regulation of Financial Services: Responses to the Committee’s Fifth Report

HC 709

5th Special

Lessons from Greensill Capital: Responses to the Committee’s Sixth Report of Session 2021–22

HC 723

6th Special

The appointment of Professor David Miles to the Budget Responsibility Committee of the Office for Budget Responsibility: Government response to the Committee’s Ninth Report

HC 1184

7th Special

Autumn Budget and Spending Review 2021: Government Response to the Committee’s Tenth Report

HC 1175

8th Special

Economic Crime: responses to the Committee’s Eleventh Report

HC 1261

Session 2019–21

Number

Title

Reference

1st

Appointment of Andrew Bailey as Governor of the Bank of England

HC 122

2nd

Economic impact of coronavirus: Gaps in support

HC 454

3rd

Appointment of Richard Hughes as the Chair of the Office for Budget Responsibility

HC 618

4th

Appointment of Jonathan Hall to the Financial Policy Committee

HC 621

5th

Reappointment of Andy Haldane to the Monetary Policy Committee

HC 620

6th

Reappointment of Professor Silvana Tenreyro to the Monetary Policy Committee

HC 619

7th

Appointment of Nikhil Rathi as Chief Executive of the Financial Conduct Authority

HC 622

8th

Economic impact of coronavirus: the challenges of recovery

HC 271

9th

The appointment of John Taylor to the Prudential Regulation Committee

HC 1132

10th

The appointment of Antony Jenkins to the Prudential Regulation Committee

HC 1157

11th

Economic impact of coronavirus: gaps in support and economic analysis

HC 882

12th

Tax after coronavirus

HC 664

13th

Net zero and the Future of Green Finance

HC 147

1st Special

IT failures in the financial services sector: Government and Regulators Responses to the Committee’s Second Report of Session 2019

HC 114

2nd Special

Economic Crime: Consumer View: Government and Regulators’ Responses to Committee’s Third Report of Session 2019

HC 91

3rd Special

Economic impact of coronavirus: Gaps in support: Government Response to the Committee’s Second Report

HC 662

4th Special

Economic impact of coronavirus: Gaps in support: Further Government Response

HC 749

5th Special

Economic impact of coronavirus: the challenges of recovery: Government Response to the Committee’s Eighth Report

HC 999

6th Special

Economic impact of coronavirus: gaps in support and economic analysis: Government Response to the Committee’s Eleventh Report

HC 1383


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