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The Budget, EU Debate and IDS: Why Raising Fuel Duty Rates Could Restore the Fiscal Balancing Act

It’s been a tough month for David Cameron and George Osborne. Among a whole host of other things, Iain Duncan Smith resigned as Secretary for Work and Pensions, citing the controversial changes to disability benefits. His departure caused a stir and many of the proposed changes were scrapped. Despite agreeing to arguably harsher cuts during his tenure, this move was conveniently timed: the EU debate is in full swing whilst quiet chatter about who the next Conservative Party leader will be can be heard in the background. It is plainly obvious that the supposed monetary ‘black hole’ left in the budget should be filled by taking advantage of low oil prices through taxation, without damaging the car manufacturing industry. 

Raising fuel duty presents a conundrum: such taxes are serendipitously “green”, but could damage manufacturing growth and exports. If fuel and road taxes are too high, manufacturers decrease investment and workers lose their jobs. Balance is integral, and this is a chance for George Osborne to have a show of strength.

Before the 2016 budget, a 2p fuel duty hike and potential rise of Vehicle Excise Duty (VED) was on the cards. After Osborne introduced a “premium” tax for vehicles worth over £40,000 last year, car manufacturers felt the heat. This is why he has kept the current fuel duty rate frozen for the sixth year – something which he might now be regretting.

The EU referendum has heightened public emotion, so this year’s budget is relatively mild. However, Osborne intends to save nearly £4billion this year, aiming towards obtaining a £10billion surplus by 2019 – with a smaller economy than expected. This is usually the perfect time for Chancellors to make sweeping yet unpopular changes, with the election four years away, but Osborne’s hands are tied. Duncan Smith’s resignation has constrained him, and now he looks short-sighted and unprepared as he abandons a key budgetary change.

With a fall in oil prices, raising fuel duty and vehicle taxation makes sense. Numerous sources suggest that the fuel duty rise would have raised £1billion. However, manufacturing organisation EFF said vehicle manufacturing growth will continue at a slower rate than 2015, which puts jobs at risk. Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, said last year’s budgetary changes risked undermining UK manufacturing and export growth. Indeed, decreased demand means this growth has fallen to a three-year low. Yet Osborne’s lowering of Capital Gains Tax presents a new opportunity for investment and could even cause growth for the economy in the long run.

If Osborne can lower Capital Gains, he can increase the fuel duty. Such tax changes would discourage the manufacture of gas-guzzling diesel cars, whilst raising the money to meet Osborne’s budgetary aims. Think-tank Policy Exchange said diesel cars are “overwhelmingly” responsible for higher pollution levels, and are pushing for a VED rise for diesel buyers, which could raise £500million annually.

Only frequent motorists would protest ostensibly “green” taxes, especially after the Volkswagen emissions scandal (and the possibility that other car manufacturers have also been pulling the wool over our eyes). With a relatively steady global economy, UK fuel prices would rise slowly with a growth in tax rates but use of high-emissions vehicles would decrease. In a word, there is one thing Osborne needs more of right now: balance. This would not affect manufacturing growth dramatically, but certainly would put Osborne back on track towards meeting his budgetary aims for 2019/2020. 

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