Why Darling Should Cut Fuel Duty

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Here in the UK (and I guess elsewhere if my friends in the US are anything to go by) the price of petrol ("gas" for you colonists) has shot up in the last few weeks. Only yesterday the price per litre for diesel was 120p at my local Tesco Garage. A search on petrolprices.com shows that I’d be lucky to find a price of 110p a litre for unleaded.

That’s an awful lot for a litreof petrol, so how is that price calculated? Well, here’s a rough guide to the cost of a 110p litre of unleaded.

• The raw petrol (as it were) costs about 34.75p
• On top of that the retailer has to make a living, so he takes a cut of aroud 8.5p, giving a total so far of 43.25p
• Fuel Duty is a huge whopping 50.35p, taking the price to 93.6p
• The Chancellor then takes a further bite through VAT (16.38p), taking the final price to 109.98p.

Now, you read that right - the Chancellor first puts a fuel duty on your petrol and then charges VAT on top. So if the fuel duty goes up by 2p, in fact the tax paid goes up by 2.35p. Bet you didn’t know that eh?

Just to be clear, and to help us in our calculations, the Chancellor takes 66.73p of your 110p litre of petrol. That’s a lot of money.

Now, the fuel duty went up in October, and at the time the cost of a litre of unleaded was around 95p. Let’s break that down shall we?

• The raw price per litre was about 22p
• Retailers took around 8.5p
• Duty was 50.35p, taking the price to 80.85p
• VAT added a further 14.15p, taking the total price to 95p a litre.

The key point ot note here is that the total taken by Alistair Darling was 64.5p.

Now, a little mathematics. 66.73p (what the Chancellor is now taking) minus 64.5p (what he took in September) is 2.23p. That means, that because of the increase in fuel prices in the past few months, Alistair Darling already has all the extra money he was hoping to gain by increasing the fuel duty again in the autumn. So is there any other argument for raising fuel duty?

• Perhaps Mr Darling wants to raise fuel duty to promote a switch to public transport. The problem with this line of reasoning is that the price goes up to make it more expensive to travel by private car, but we’ve recently had a 15p rise, not just a 2p rise. Adding another 2p onto the price of a litre of petrol is going to have a miniscule effect in addition to the petrol inflation of the past eight months. The environmental argument for a price rise is good, but it has already been more than achieved through the increase in raw crude.
• Could it be that the Chancellor just wants more money from us simply to help balance the Labour books? This can be the only reason, because if he was interested simply in bringing in a fixed amount of money through fuel duty he could actually cut fuel duty by 0.5p right now, today, and still be bringing in what he was forecasting to take from us when he proposed this autumn’s further rise.

In fact, look at it this way - Since the amount of tax per litre has gone up almost 2.5p since September, by cutting fuel duties by 1.5p right now Mr Darling would still be taking in 1p more in tax per litre than just a few months ago. Why doesn’t he do that? Because he needs to cover Gordon Brown’s back, the former Chancellor and now lame-duck Prime Minister who in a time of economic boom racked up a massive PSBR that now needs paying off.

One final thought - Those who are really affected by this high level of fuel duty are the same folks who have been squeezed by the abolition of the 10p tax rate. I can afford to put another £10 into my car every week on the income that I’m on (and the expenses I can charge for my parish mileage). For someone earning £15,000 a year, needing their car to get to work and to buy the groceries, an extra £10 a week is crippling. A cut in fuel duty would help out some of the least able in society, those who want to work for a living but find everyday costs escalating out of control. I wonder though, whether Mr Darling and Mr Brown don’t really care how they affect the low income earners in this country, and are about to sacrifice another tranche of their support on the altar of environmentalism?

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