From Ireland to Italy taxes on motor fuels are coming down and, in his Wednesday spring statement, Rishi Sunak is expected to jump onboard. The move comes in response to rising pump prices driven by bottlenecks in global supply chains and compounded by the war in Ukraine, with unleaded petrol rising by about 20p a litre since the start of the year. But, while the problem is a real one, cutting fuel duty will make inequality worse, not better.
While many among the UK’s poorest people drive, government data shows that about 40% of the poorest households do not own a car. At the other end of the spectrum, the richest households are on an SUV binge. The result is that the top fifth of households spend almost five times as much on motor fuel each year as the bottom fifth.
If the government were to follow in Italy’s footsteps, say, by applying a temporary 15p cut to fuel duty for six months, it would offer a relief of £2.5bn. But just 7% of this relief (£180m) would reach the poorest fifth of households, while 33% (or £820m) would flow to the richest, according to New Economics Foundation analysis.
The meagre £5 a month that the tax cut would save the average household in the lowest income group barely touches the sides of a cost of living emergency. It would however be a notable subsidy on the carbon-intensive lifestyles for many at the top.
This is not to deny that fuel prices are a genuine issue for low-income suburban residents with poor access to public transport and an unaffordable dependence on cars for their livelihoods. One recent paper estimated that one in 10 households fall within this group and as fuel prices rise, they will be forced to cut spending on other essentials. For such families, and millions more on low incomes, in-work benefits are the best way of cushioning the cost of living crisis. An uplift in these payments would be a far more efficient way of transferring cash to prevent poverty than cutting fuel duty.
The resistance to a benefit-led approach is ideological. Despite concrete evidence of their efficacy, the chancellor chose to ignore the existing welfare channels like universal credit and designed a cost of living support package that leaves every household poorer from next month. Current policymakers seem far more relaxed about spending indiscriminately benefiting the richest rather than those most in need.
The other part of the fuel duty debate is how much businesses are paying at the pump, and the effect this has across the supply chain. Rises in the cost of transporting goods will inevitably feed through into the price of food and other staple goods. The impact of these rises could, again, be mitigated by expanding the UK’s social safety net. A forward-thinking government might even, as we have argued at the New Economics Foundation, expand a basic payment to all UK citizens. Even a less ambitious government focused on tackling supply costs has scope through its system of taxes and rebates to more accurately target support at producers of staple foods and goods.
In tackling the cost of living crisis we should at all times hold in sight the world we want to live in, rather than just bailing out the sinking ship we have today. We need to address poverty and reduce emissions from the use of fossil fuels if we’re to tackle climate change: the two goals are complimentary, not incompatible. Decimation of bus networks and local authority budgets, and profit-motivated local planning have cemented expensive car and carbon-dependence over more sustainable and cheaper public transport options. No response to an increase in fuel prices is complete without addressing these issues.
New Zealand’s Labour government showed the world what is possible when they recently halved public transport fares and Greater Manchester mayor Andy Burnham’s move to cap bus fares at £2 is a move in the right direction. But these are rare glimmers of hope in a sea of crisis responses which better resemble “get richer quicker” schemes for those who are ultra well-off. In the aftermath of the 2008 financial crisis a slew of policies, framed as unavoidable, deepened health and wealth inequality. No such consensus should be enabled today.
• Alex Chapman is a senior researcher at the New Economics Foundation
