UK fuel duty rise would rekindle inflation, warn motoring groups

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A rise in fuel duty would rekindle inflation and be “catastrophic” for British businesses, motoring groups have warned, as Rachel Reeves weighs lifting a 13-year freeze on the tax to help bridge a £40bn funding gap.

People briefed on the chancellor’s thinking said she is expected to announce the end of the “temporary” 5p cut in fuel duty from next year. The measure was introduced in 2022 after energy prices rose following Russia’s full-scale invasion of Ukraine, and has been continued by every chancellor since.

Reeves has also been urged by Treasury officials to end the 13-year freeze on fuel duty, although she will weigh the fiscal gain of the move against its impact on the “working people” she has vowed to protect.

Tax rises are set to form the centrepiece of her response to close a shortfall of funding needed to protect key government departments from real-terms spending cuts, as the chancellor prepares for the Budget on October 30.

Fuel duty, which at present is 52.95p per litre for petrol and diesel, is supposed to rise every year in line with inflation but has in effect been frozen since 2011 as successive chancellors curry favour with motorists.

The Campaign for Better Transport has estimated that ending the 5p cut and reinstating annual inflation-linked rises would add £4.2bn in revenue for the Treasury.

On Friday, the Road Haulage Association called on Reeves to maintain the current freeze, arguing that businesses would not be able to take on additional costs with profit margins already squeezed. 

“Firms are under pressure as it is and such a rise in fuel duty would be catastrophic for many, in particular Britain’s small and medium enterprises,” said Richard Smith, managing director of the RHA.

Edmund King, president of the AA motoring organisation, said an increase in fuel duty would be ill-timed, citing the continuing global uncertainty over energy prices due to the conflicts in the Middle East and Ukraine. 

“Hiking fuel duty could backfire on working people and fuel inflation,” said King. “Everything from the price of food in supermarkets to the delivery of social care within our communities is impacted by pump prices, and an unnecessary hike in fuel duty could make things worse.”

In March, then-chancellor Jeremy Hunt decided to maintain the 5p cut on fuel duty and freeze the charge for another year in an effort to ease cost of living pressures.

The measure was initially welcomed by motoring groups, with the government claiming it would save car drivers about £50 this year. 

But the automotive industry has criticised the extension of the discount as it makes it harder for carmakers to meet electric vehicle sales quotas that come into force this year. 

Petrol prices have come down since rising in the wake of Russia’s full-scale invasion of Ukraine, with the average price of a litre of petrol now about 135p compared with 146p in January 2022, according to the RAC.

The motoring group also said drivers were not actually benefiting from the cut, claiming retailers had failed to pass on the lower petrol and diesel prices in order to boost their margins.