A hike on fuel duty in tomorrow’s Budget would hit the poorest families hardest, an analysis has found.
George Osborne is thought to be considering putting up the petrol tax amid tumbling oil prices - but the Resolution Foundation think-tank argues it would be “hard to justify” a “regressive” move while handing a tax cut to the richest.
The Chancellor has frozen the fuel duty rate at 57.95 pence per litre (ppl) since 2o11, a giveaway that is on course to cost the Exchequer around £30 billion - the Huffington Post UK has revealed - by cancelling a rise in the levy that goes up automatically in line with inflation.
Some have questioned whether it has made much practical difference to household budgets: Osborne’s measures have stopped prices on the forecourt going up by 17 ppl, but the falling oil price has led to a 24 ppl actual reduction in the average cost of petrol.
While the Chancellor might be tempted to ask motorists to give a little back to help find £4bn of “further savings” he is seeking, the move would be politically toxic.
Reports have suggested he is weighing up a tax cut “for the middle classes” by lifting the 40p tax band to £50,000 from the current £42,835 level.
The Resolution Foundation’s analysis suggests a 2p increase in fuel duty in April would swell the Treasury coffers by around £900 million a year.
But that would result in a £35 a year hit to all UK households.
Measured against share of incomes, the biggest proportional impact would be on the poorest - with the average spending power reduction being around one-third greater than among the wealthiest households.
Matt Whittaker, chief economist at the Resolution Foundation said: “Fuel duty is an unpopular tax, which is why the Chancellor has made postponing or cancelling automatic rises a feature of almost every Budget he’s delivered.
“But the outlook for public finances looks to have deteriorated somewhat over recent months, making it more likely that Wednesday’s Budget will contain some form of tax rise. With the Chancellor having ruled out most of the usual revenue-raising suspects he may choose to revisit fuel duty.
“But it is lower income households who are hit hardest by fuel duty rises. And it would be hard to justify such an increase while simultaneously introducing new income tax cuts for richer households. Most drivers paying more at the pump will gain nothing from moving the 40p tax band closer to £50,000.
“The Chancellor should save himself some money by ruling out such regressive income tax cuts and instead focus more support on those on low-to-middle incomes.”