Thursday, 20 October 2011

We need to cut fuel duty

I'm aware that this may be seen as going against Lib Dem green credentials but I am firmly of the belief that the Lib Dems should be pushing hard for a cut in fuel duty to bring the price of fuel down by at least 10p, and preferably, 20p a litre.

Now, I don't think for a minute that we should be encouraging to produce more CO2, but at the moment the recovery is stalling due to high inflation and a switch to a greener economy will be even harder if we go back into recession. Right now people are spending more and more of their money on the essentials and therefore have less to spend on the kind of consumer goods consumption which underpin our current economic model.

When fuel prices go up, the prices of everything else goes up. Clothes, food, anything that's transported by road will go up in price. Companies which rely on the road for transportation will see their running costs go up and won't be able to afford to give their staff inflation matching pay increases. And as prices continue to go up  and wages continue to stall and fall in real terms people will have less and less money to spare. They'll spend most of their money just to get buy and, without any confidence in the economy, they'll save whatever they have left over, creating a self-reinforcing of economic decline.

A 20p cut in the price of fuel would go a long way to immediately reducing inflation and putting money back in people's pockets. Already people have so little money that they're struggling to afford to be able to make it to work or to be able to pay the energy bills.

A cut in fuel duty will probably cost the treasury money in the short term. But the treasury is already losing income as people can't afford to buy petrol at all. And it's no good pricing people off the road when the public transport infrastructure isn't cheap or extensive enough to be a viable alternative. If fuel duty is cut then people will see the cost of living decrease, inflation will decrease due to the knock on effect and people will have more disposable income, breathing more life into the economy and increasing tax receipts overall.

If we Lib Dems were to make this argument then we would do two things. Firstly we would receive a great deal of credit from a financially strained electorate and secondly we would be taking a decisive measure to reduce the spike in inflation and boost economic confidence by putting more money back in people's pockets.

4 comments:

  1. I am not an economist or a mathematician, but . . . .On average mileage this would be worth about £7 per week, but only for drivers - large numbers of generally the poorer members of society would not see this benefit.

    20p is a 14% reduction but what % does fuel represent of retail distribution costs??? even at 10% (which I doubt)this translates into only a bit over 1% of shop prices if all of it is allowed to drop through and intermediaries don't use it to boost profits - just look at the example the energy/oil companies themselves set, so not all of it will!!!
    If fuel is cheaper, presumably demand to some degree increases, which could push fuel prices higher.
    Finally if we are to "go green" we have to start somewhere and for the past generation there has always been a good excuse for yet another "short" delay. If we need a new order, the sooner we start getting used to it the better.
    So sorry George, I don't agree.

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  2. @TJ,

    Just with regards to the bit about demand increasing, well, yes it will. But only back to the levels it was before prices rose so high. In fact, the treasury is currently losing revenue because people can't afford to buy petrol. And, with falling revenue, that will mean more cuts elsewhere and less money to spend on things such as the feed in tariff.

    The other thing to bear in mind that there are now people who are already near being unable to afford to get to work. And people like hauliers and so on are on the verge of becoming unviable to increasing petrol costs. High petrol prices are killing the economy.

    Don't forget, £7 a week might not sound like much but it'll be a bigger saving than that for poor households. And for people at the bottom of the income distribution scale it could make a real difference.

    But, as far as I'm concerned, the psychological impact it would have is the most important thing. When people see prices going up they spend as little as possible and the economy slows down. If they have confidence that prices aren't going to rise then they'll be more willing to spend more, boosting overall economic confidence which will in turn boost overall economic growth.

    That's why I think it's necessary. That said, I know this is a controversial thing to suggest and I fully understand why you disagree with me :)

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  3. Reading this, and several other pages (the disgrace that is the disability system!), I think you'd get my vote if you were in my area.

    You are absolutely right that dropping the fuel rates would stimulate the economy, and to a far greater degree than, for example, a VAT cut (which would affect far more, and thus cost far more) - it would have a bigger impact, because the cost of fuel mostly effects those who go out and work, in this country, and thus turn the wheels of the economy. It would also mean that those on a tight budget who simply cannot use the bike or bus or train would be able to do a little more than before.

    To the commenter who suggested it might lead to a price rise due to increased demand, hardly! The UK uses a tiny fraction of the world supply of petrol and diesel for cars, and even a huge increase (say, 10%) would amount to nothing to the world commodity markets. (From 2010 figures, the road use of all petroleum products was 36 million tonnes, from a total UK production and importation of 102.6 million tonnes, and we still exported 39.2 million tonnes - http://www.decc.gov.uk/assets/decc/11/stats/publications/dukes/2305-dukes-2011-chapter-3-petroleum.pdf Pg66 [but 2nd page of that link])

    Currently, it is 57.95 pence in duty for both petrol and diesel then the VAT goes on the top of the selling price. Today, "ordinary" diesel was, iirc 137.9 a litre, best I saw. That's 114.9 ex VAT, so take off the duty and that's just under 57p a litre for the cheapest around. Knocking 20p off the duty means that at that same pump, the basic price would be 113.9 inc VAT! Bargain.

    A 20p cut basically means that you'd get the fuel for the current ex VAT price.

    I think it's a great way to work it, rather than going with 'making' more money for the banks to play with.

    And, though I'm a conservative in many regards, I think that those with low earnings and on disability should, perhaps, get fuel vouchers, which would be rather like luncheon vouchers.

    Perhaps 10p off the rate for all, and an extra 10p for the worst off in society, who are trying to better themselves (the low earners) and those who most need it (the sick). Those on JSA? Well, I'm not suddenly that liberal...

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  4. @Nigel

    Thanks very much for your comment - it's good to see that at least some people agree with me and that you've got some figures to back up my gut instinct :)

    I'm not so sure that vouchers are a good idea myself - purely because they aren't very flexible. In reality we could probably do with higher benefit payments (they've been falling in real terms for 20 years) but it should be done in tandem with reforming a welfare system that treats genuine claimants appallingly but is still easy for dedicated fraudsters to scam. Much like the disability system really - people with sever conditions who answer honestly are denied benefits but I could walk in there with no problems at all and easily get full support just by answering the questions in such a way as to match with the tickboxes that award the most points.

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