Reeves looking at £3bn fuel duty increase
Rachel Reeves is weighing up a hike to fuel duty in the autumn Budget as she works out how to fill a multi-billion-pound black hole in the public finances.
The Treasury has refused to rule out increasing the levy, which has been frozen since 2011 and was cut at the height of the cost-of-living crisis.
In previous years, a decision on the rate of fuel duty for the next tax year has been announced in the spring – only weeks before taking effect.
But the Chancellor has decided the Budget to be held on October 30 will be the only fiscal event of the year, in a bid to prevent what she has called “surprise” decisions on tax and spending.
That means that Ms Reeves must announce the level of fuel duty for 2025/26 at the Budget rather than waiting until spring.
Reversing the 5p-per-litre cut introduced by Rishi Sunak in 2022 would raise around £3 billion, or more if the Chancellor allowed fuel duty to start rising with inflation again following the 13-year freeze maintained by the Conservatives.
But Jack Cousens of the AA urged Ms Reeves against the move, saying: “With household budgets under serious strain, the last thing they need is a rise in fuel duty. Unfortunately, the public are being hammered with perma-high pump prices that show little sign of budging.
“As well as pushing up the cost of refilling a car, any increase in duty would harm everyone as the vast majority of goods and services are distributed via petrol or diesel vehicles. Retailers will simply put the costs onto the consumer, creating even more pressure on their wallets.”
Some campaigners have previously warned that petrol retailers have not passed on the cut in duty to motorists – raising questions about whether or not they would increase their prices in the event of a hike.
Last week, the Chancellor claimed to have found a £22bn hole in the spending plans she inherited from the previous government. She announced savings of £5.5bn for this year and £8.1bn for next year, including by scrapping the winter fuel allowance for most pensioners.
Ms Reeves warned further spending cuts and tax increases would be needed at the Budget, although it is unclear exactly how the supposed black hole will affect the government’s longer-term borrowing rules.
She has promised not to raise income tax, national insurance, VAT or corporation tax, but has left open the possibility of increases to all other forms of taxation.
During the general election campaign, Ms Reeves insisted she did not want to hike fuel duty, saying: “Every time fuel duty has threatened to go up, we’ve opposed it … we’ve supported the freezes in fuel duty every time during the course of this parliament.”
In theory, the level of fuel duty is supposed to go up every year in line with inflation – a so-called “escalator”.
That is because unlike most taxes, it is expressed as a fixed price per litre of petrol rather than as a percentage – so if it is not increased, the cost of fuel duty in real terms steadily falls.
But the escalator has been suspended since April 2011, when former chancellor George Osborne announced he was cutting the level to 57.95p and freezing it thereafter.
That freeze was maintained by the Conservative Government every year, with the support of other parties, and in 2022 Mr Sunak announced a further – supposedly temporary – cut to 52.95p in order to help with the cost of living.
Economic experts have called on successive chancellors either to allow the fuel duty escalator to restart, so that the value of the tax is not eroded by inflation over time, or to confirm the freeze will remain permanently.
Under the status quo, the Office for Budget Responsibility (OBR) must make its fiscal forecasts on the basis that fuel duty rises each year even
With household budgets under serious strain, the last thing they need is a rise in fuel duty Jack Cousens
though that has not actually happened for a decade.
If the Chancellor chose not to increase the rate of fuel duty, she would need to find additional savings, because the OBR’S forecasts are based on the idea that Mr Sunak’s cut will only be temporary.
A Treasury spokesperson said: “Following the spending audit, the Chancellor has been clear that difficult decisions lie ahead on spending, welfare and tax to fix the foundations of our economy and address the £22bn hole in the public finances left by the last government. Decisions on how to do that will be taken at the Budget in the round.”
Ms Reeves last month announced the winter fuel payment south of the Border would move from being universal to being means-tested, sparking outrage north of the border about a potential £160 million funding gap.
Scottish Labour leader Anas Sarwar has urged the Scottish Government, which takes over control of the devolved payment this winter, to explore making its version “more targeted”.
Scottish ministers have said the universality of the payment, which could be worth as much as £300 for pensioners, cannot be guaranteed.
Mr Sarwar said: “This is a new devolved benefit that’s going to come to Scotland this year now that the winter fuel payment is going to be devolved.
“We have an opportunity to do that in a more progressive, fair way and I think the Scottish Government should take that opportunity.
“We’re willing to work with them and representative charities to make sure those that need the payment, those that are going to genuinely be supported by that payment, receive that payment.
“I don’t see the benefit in us giving a payment to those that frankly are millionaires and don’t need the money.”