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2p could be a tax too far for UK's motorists

2 Jun 08

The deferred fuel tax hike, set to take effect in October, is set to add to the Governmnet's unpopularity

The UK Government last week gave the go-ahead for oil production in two new North Sea fields, which are expected to produce up to 50,000 barrels a day once production reaches its peak. That won’t have much impact, however, on fuel prices at the pumps in the short term.

Also last week we saw hundreds of lorry drivers protesting in London and bringing the M4 to a crawl, over the rising cost of diesel. Road users also have worse to look forward to: changes in vehicle excise duty, set to come into effect next year, will mean hikes of up to £200 in tax for owners of older, less efficient vehicles, and an extra 2p per litre on petrol, deferred from April, is set to be levied from this October.

Critics of the Government point to the fact that higher fuel prices mean a VAT “windfall” which could be used to further defer the increase in fuel duty, or to help out hauliers, pensioners or anyone else particularly badly hit by spiralling energy costs.

Chancellor Alistair Darling is right to say that an increase in one area of tax revenue does not necessarily translate into a net bonus for HM Treasury. Higher fuel prices will hit company profits and the Treasury will lose on corporation tax even if it wins on VAT.

None the less, the justification for the fuel duty “escalator” is looking fairly shaky. If the idea was to suppress demand for fuel by raising its price, the market itself has achieved that. Fuel costs contribute disproportionately to the “feel bad” factor when prices are rising. They are highly visible – how many other commodities have the prices prominently displayed at the roadside? And rightly or wrongly, they contribute to this Government’s unpopularity.

According to Louis XIV’s finance minister, Jean Baptiste Colbert: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.

If Alistair Darling cannot find the money from somewhere to further defer the 2p hike in fuel duty, the goose won’t just be hissing. It will be biting back.

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