DecarboN8 Director, Professor Greg Marsden, explains why the fuel duty freeze is counterproductive for both people and planet
Last week’s budget heralded a “record tenth year in a row” of a fuel duty freeze, which the Budget document suggests is part of “cutting the cost of living” and “helping hard-working people keep more of what they earn”. Tax doesn’t go up, people are better off, what’s your problem with that? Move on right?
As with any announcement, you need to peel back the spin to really think about who this is a benefit for and under what terms it might be heralded a benefit. There are five issues which sit underneath this which need unpicking if the debate on how we pay for travel is ever going to be socially progressive and contribute positively to climate change. These are:
- It is a tax break which benefits those who drive the most and, therefore, the wealthiest in our society (who also pollute the most)
- It widens the affordability gap between public transport and private car use at a time where we need more people to switch away from the car
- It pushes more people into car ownership who, despite the fuel subsidy, cannot really afford to own a car (bear with me on this!)
- It generates extra car traffic – taking us away from a discussion we absolutely have to have about how we pay for transport use in the future
- It has absolutely nothing to do with whether or not you work hard
I take each of these in turn.
It benefits the well off the most
The chart below shows the average number of miles driven by car by each of the five income quintile groups in the UK (data from the 2018 National Travel Survey). It doesn’t require a degree in maths to spot the inequality here. The wealthiest income group drives just over three times as far as the least well-off group, meaning this tax break will benefit the wealthiest the most. The Treasury estimates the “average motorist” has saved £1200 cumulatively as a result of the ten years of fuel duty freeze – but this framing hides the fact that when you factor in how many miles are driven, then the highest income group has benefited around £1760 and the lowest £570.
Just to put the figures in context, the cumulative £1200 benefit would fund three and half years of access to all public transport for the city of Vienna. It is a choice where we put our tax breaks and subsidy.
It widens the affordability gap to public transport
Household expenditure on fuel is around one-third of all motoring costs, the remainder being purchase, insurance, parking, servicing and repairs. In the decade 2008 to 2018, the Retail Price Index (a measure of how much things cost) has increased 31% in real terms. Overall motoring costs have increased by the same amount with fuel costs increasing by less (15%) but costs like insurance rising more quickly.
It is when you compare the price increases with public transport that the arguments for holding back fuel duty rises seem bizarre. Rail costs have increased by 49% and bus, coach and taxi by 66% over the decade to 2018, more than twice the rise in motoring costs. This is a result, in part, of deliberate government decisions to recover a greater percentage of the costs of running the railway from passengers by allowing large annual fare increases. The bottom line is that public transport is being made less affordable than driving.
It pushes more people into car ownership who cannot afford it
How can a policy which is holding down prices on fuel be bad for those who are hard up? The reason for this is that around five per cent of all households own a car despite not having enough money for items such as a washing machine, adequate heating or one week’s holiday away from home. This figure is 11% for households with four or more people (hard-working families perhaps?). This is referred to as forced car-ownership. More in-depth analysis of the reasons for this shows that people get access to a car to overcome the expense, limited service patterns and lack of early morning and evening provision of public transport. This is coupled with less secure employment and housing insecurity in the private rented sector to create conditions where a significant proportion of the population are forced to own a car to work around these wider failings in public service provision. It is certainly not a desirable choice to own a car at the expense of basics such as heating or phone access – such decisions are driven by necessity not luxury. This can be contrasted with Germany where only 5% of households with four or more people fall into the forced car ownership category. Again, the decision to provide tax breaks for fossil fuels rather than to fund public transport is a policy choice, and one which draws people into needing a car when they cannot afford one even with a fuel duty subsidy.
|Forced car ownership – if you own a car and cannot afford three of these|
|1. to face unexpected expenses (of an amount equivalent to the monthly poverty line in the respondent’s country);|
|2. one week annual holiday away from home;|
|3. to pay for arrears (for mortgage or rent, utility bills or hire purchase installments);|
|4. a meal with meat, chicken or fish (or vegetarian equivalent) every second day;|
|5. to keep home adequately warm;|
|6. to have a washing machine;|
|7. to have a colour TV;|
|8. to have a telephone (fixed landline or mobile);|
It generates extra traffic
There has never been a clear narrative about what fuel duty is for, even during the time of the fuel duty escalator in the 1990s. What policy arguments might have existed for using it as a tool to manage travel demand seemed to evaporate at the time of the Fuel Duty Protests and have yet to re-appear. What is irrefutable is that when prices rise, demand drops, and when prices fall, demand rises. Estimates vary but in the short run, for every 10% increase in fuel price distance travelled falls between 1% and 5% and vice versa. So, the policy of the past decade has been to stimulate a growth in road traffic which, in turn, fuels demand for more road infrastructure to tackle the even busier pinch points which result. All of this is contributing to the climate change problem and is one of the reasons why emissions from transport have flat-lined and are now the largest sector of the economy.
We have known since the oil price spikes of the 1970s that one way in which people respond to fuel price increases has been to buy more fuel-efficient cars. What has become clear over the past decade is that cheaper motoring costs, coupled with cheaper financing deals for new cars has flipped this on its head. Research has recently shown that sales of Sports Utility Vehicles have outstripped sales of Battery Electric Vehicles by 37 to 1 in 2018, almost quadrupling to 21% of all new car sales over the past decade.
Of course, fuel duty is a fairly limited policy tool. It is a one-size fits all tool which has to work in rural and urban areas. It is also increasingly subject to challenge given the ambition for all new cars to be electric by 2035. There will not be any fuel duty by 2035 and we currently just pay 20% VAT on domestic electricity. If no changes are made to how we pay for travel, the Department for Transport suggests that by 2050 traffic levels will have risen by 42% more than if we did not make switch to electric. Think of the additional demands for road construction and the pressure on our urban areas where expansion is not possible that this would bring! Is that a future we want? Given that we cannot muster the political will to deliver even a marginal increase in fuel duty, I am sceptical that we can find the will to address this urgently needed system wide transition.
Do hard-working families benefit from the fuel duty freeze?
Where to start on this one? Well, of course some do. But what about the households that don’t own a car? The ones facing annual price hikes for public transport? Around one in four UK households do not own a car. This is as high as 45% in London and as low as 15% in the South West. Perhaps the people in the South West all work harder than those in London? As I showed earlier, the highest income families will get three times as much benefit from the fuel duty freeze compared to the lowest earning families. Perhaps the rich work harder than the poor then? These comparisons are as ridiculous as the ‘hard-working families’ trope itself. If this is about lowering the cost of living for families who are struggling, then it is extremely poorly targeted.
As the terrible events surrounding the outbreak of the Coronavirus continue to unfold, it could seem trivial to debate one or two pence on the cost of a litre of fuel. However, when life begins to return to ‘normal’ the points raised above will not have gone away, and the climate emergency will still be here. It seems likely that oil prices will be depressed as the global economy faces a long recovery period so, what funds are available will best be targeted towards helping the public transport system recover and supporting the most vulnerable and hard-up to use it. Hopefully, this is the end of the road for fuel duty freezes.