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Why the Autumn Statement needs 6p Fuel Drop

When George Osborne presents the Autumn Statement on 5th December his priority should be to get the economy moving as soundly as possible without jeopardising the UK’s credit rating. The UK has the flexibility of having its own currency; therefore whilst we are impacted by the Eurozone and global downturn we have manoeuvrability that other countries may not have.

MyMoneyPA is a consumer champion; putting consumers in control and providing services that allows them to save time and money. With the belief that the Autumn Statement is an opportunity to give some much needed growth to the economy and restore some consumer confidence, MyMoneyPA recommends that there is less tinkering with small initiatives and more strategic actions taken. The company recommends that the Chancellor puts at the heart of the Statement a commitment to reduce the fuel duty permanently by 6p per litre with immediate effect.

The Government have a £35bn quantitative easing windfall that could be used to cover the fuel duty reduction which will cost net less than £4bn and there is still a substantial amount that can be used to meet Mr Osborne’s “fiscal mandate”.

The biggest single impact in the Statement could be to reverse the planned 3p increase in fuel duty and implement a reduction instead. MyMoneyPA believes a significant reduction of 6p would be best to stimulate the economy. The National Institute of Economic and Social Research (NIESR) estimates that a 3p increase will cost around 35,000 jobs and will increase headline inflation by about 0.3% introducing the possibility of the Bank of England needing to increase interest rates to offset inflation well above its target of 2%.

NEISR state the alternative scenario of reducing the tax on fuel has a positive impact on GDP growth and jobs. A permanent 3p decrease (when compared to the planned increase) will create around 70,000 jobs and increase GDP growth by about 0.2%. It will cost the treasury £1.8bn net. They also believe that a temporary 10p cut (effective for a year) will increase consumer spending by 0.5%, will create 100,000 jobs (some temporary due to the temporary cut) and cost around £4.5bn whilst also having a positive impact on inflation.

Why is this tax cut being proposed? There are numerous things to consider; any increase/decrease of fuel duty will have the biggest impact on those on lowest income as fuel expenditure represents around 7.5% of their total expenditure. UK duty on diesel, which represents the majority of the UK road fuel demand by volume, is the highest in the Europe. The 6p cut will amount to a change in pump price of 7.2p due to the reduction in VAT charged. After the cut it will still be the third highest in Europe. The French are currently considering a fuel duty cut and the US is considering increasing output to lower production costs.

Additionally the International Energy Agency expects the average import price of oil to fall from $107 a barrel this year to $89 in 2017 so we should generally see prices at the pumps coming down but as the tax is a set amount the government will not lose tax receipts other than the suggested cut. Inflation will be reduced and consumer spend should increase. Generally prices will be reduced, especially food, due to the reduced transport costs creating a positive impact on inflation.

The fiscal impact - fuel duty is the fifth largest contributor to Government tax revenues after income tax, National Insurance, VAT and corporation tax – is not significant in the big picture. The reduction of the fuel duty tax will be offset by increases in all the others as a result of more jobs and greater consumer spending. So this is a great way to assist the UK in getting out of the downturn.

There will be those that want to force the consumer off the road by pricing fuel in a way that forces people onto public transport and other modes of travel but this is impracticable and damaging to the UK economy. There are so many initiatives now that are working to replace/enhance the combustion engine that the ecological impacts can and will be moderated in the future. Yes, we may increase pollution in the short term but improve the economy and by doing so generate longer term ecological benefits.

So the Autumn Statement is a chance for the Government to make some bold decisions, whilst keeping a tight rein on expenditure, we need to restore consumer confidence and begin to see the shoots of real growth for the UK economy. The response from business and the consumer will be positive as they are consistently asking for more to be done. This is a simple change to make and the UK really has to do something to get the economy moving; we need the twin goals of keeping a tight rein on expenditure to protect the credit rating and increased growth receipts.

This was posted in Bdaily's Members' News section by MyMoneyPA .