Cost of fuel could be damaging to economic growth

The Momentum UK Team 16 November 2012

Fuel prices are placing a disproportionate amount of pressure on British workers and the economy a study from the Institute of Economic Affairs reveals.

The study suggests that the heightened level of fuel taxation is having an adverse effect on economic growth. As the cost of getting to work, and haulage expenses increase, the fear is that heavy fuel taxation is slowing recovery.

The news draws the light upon the intended 3 pence rise in fuel duty.

Taxes amount to 60% of the overall cost of a liter of fuel, with fuel duty generating around £33 billion a year to the treasury. But the study reveals that there comes a point at which the level of money generated is counterproductive to economic growth, especially when applied to getting individuals off state benefits.

One element if the study found that a single person aged 25, on minimum wage and living in low cost housing would be £70 better off working than receiving state benefits, but once you account for the cost of fuel and travel times, the economic gain by returning to work is decreased by almost 40%.

Such heavy taxation is also restricting the haulage and public transportation industry. Diesel taxes on commercial vehicles are particularly high. The UK has higher fuel duty than any other major economy, paying 50% more than in France and Germany.

The difference is even higher when you leave the EU, with Britain paying over 500% more on commercial fuel tax than the US. This reveals that UK industries who are heavily reliant on road transport are greatly disadvantaged.

Dr Richard Wellings, author of the report and Head of Transport at the Institute of Economic Affairs said;

"Fuel duty in the UK has risen to exorbitant levels. Motorists are being unfairly treated by the Treasury. It's time politicians realised that when they tax so heavily they damage the economy.”

The report suggested a number of measures that could be put in place to aid growth. This would offer individuals and the economy the chance to take advantage of cheaper transport.

These measures included an immediate withdrawal from the intended 3 pence fuel duty rise. As well as reducing fuel tax to be inline with the EU Energy Taxation Directive. The study also suggests the eventual elimination of fuel duty.

To counter the loss in income for the treasury, the study suggests the privatisation of certain road networks and the removal of loss making public transportation schemes.

Dr Richard Welling said;

"Cancelling the planned rise in fuel duty should be a priority in the autumn statement. But this is not enough. Delivering on economic growth means reducing transport taxes over the longer term and bringing in more private sector investment."