£1bn loss in fuel duty? Really?

Wednesday 5th October, 2011
The UK is buzzing with news from the AA that drivers are using 15% less petrol than three years ago in 2008 which has led to a number of media outlets putting in their usual political spin on the numbers. The BBC even claim that  “the fall in sales has deprived the Treasury of nearly £1bn in fuel duty between January and June this year”.

Sure there is no denying that, in the first six months of 2011, retailers have sold 1.7bn less litres of petrol compared with 3 years ago. But what else has happened over that same period?

In 2008, the  AA reported that “Fuel price falls to 21- month low”. If we look at the middle of that six month period in 2008, the AA fuel price report March 2008, we’ll see that the UK average prices were 106.8 and 114.3 pence per litre respectively for petrol and diesel. Of this they claim tax of 62% (66.2p) for petrol and 58.94% (67.4p) for diesel.

Fast forward to March 2011 and we now have a UK average of 132.9p for Petrol and 139.0p for Diesel. With tax of 61% and 59.08% that equates to 81.1p per litre tax on petrol and 81.9p per litre tax on diesel. So, in the 3 year period being reported on, the tax on a litre of petrol has actually gone up 14.9 pence or 22.5%.

So they’re selling 15% less fuel, but the Government is actually taking home 7.5% more tax - helped in part by the increase in VAT. Not exactly that £1bn reduction in fuel duty you may have perceived, is it?

In reality, the last 5 years has seen the introduction of Euro 5 and other emissions legislation which has resulted in significantly more economical diesel cars. We now have family sized cars from the likes of Volvo that will do around 1000 miles on a single tank of diesel. With more than half of cars now being sold on PCP schemes, that result in a new car every 3-5 years, in this 3 year period a large proportion new cars buyers will have switched from an older Euro 4 car to a Euro 5 compliant diesel with economy improvements of up to 50%.

This would have resulted in significantly reduced diesel sales but the migration of petrol drivers to DERV has pretty much matched the economy improvements in this area, with a 0.5% drop in diesel sales since 2008. The overall loser is petrol. No surprise as supply and demand is clearly displayed in the pump price which has risen much less than diesel in recent times.

But don’t be fooled into thinking that the Government didn’t see this one coming and, with diesel taxes up 21% in the same period, they’re clearly raking it in.

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