Fuel costs

[roachcoach]

Been having a chat with a mate about this and I reckon its worth throwing it open to the greater public

Does anyone have any thoughts/opinion as to if there's a level which would represent what I term "breaking point" for the British public and what might happen as a result? I'm thinking maybe £2.00-£2.50/litre would do it if it happened over a short space of time (say 6-12 weeks or so).

You already can see people claiming to be stopping work because of costs - I'm fairly sure most of this will be hyperbolic, though perhaps not all. I do believe the squeals of small businesses however. Other knock on things I can think of are things like basic commodities rising (delivery isn't free), inflation rising pressuring BoE to kick base rates up, various other chicken little scenarios.


So what do you think? How do you think there's a limit beyond which it can't reasonably go? What recourse do the government have to limit it? Do you think blockades are back on the cards? Do you think the government has the capability to handle it?


Please remember this isn't just about drivers in their Evo's/imprezas/4x4's, this is the overall impact of fuel costs! Even the most ardent anti-car environmentalists still need to eat - this will affect everyone, so political agendas to be left at the door please

As background, I've no agenda here, until fuel starts breaching well over £3/litre we're fortunate enough to be relatively insulated from it/plus working from home is an option for me etc so there's no agenda, I just find the whole thing curious/morbidly fascinating that such a volatile yet critical commodity isnt "smoothed" by government somehow...but I'm not the best student of economics so I thought this might be an interesting thread.


It's traditional here to offer my prediction, but I've honestly no idea...uncharted territory here. You asked me a year ago what I thought would happen if fuel cost what it does today and I'd have predicted riots in the streets....so.../epic shrug from me.

[Blaineoliver]

Thankfully for me driving is a pleasure, not a requirement. So I am lucky that I drive when i want, so only spend what I want.

The issue isn't really this though, as you have said, the price of basic commodities will spike too. Surely the government should take a standard duty off fuel, not a percentage? (correct me if im wrong) But surely we should pay the same level of duty regardless of the cost of petrol.

I know people in america and australia were complaining recently at 40p a litre, which I remember reading it was in america. Surely Its far more serious for us at £1.35 a litre than for them. In difficult times, how can the government justify the duty on fuel?

[Blitzen]

I have cut down the car use considerbly.
I do not wish to line Tory pockets any more than i do already.

[badass]

The issue isn't really this though, as you have said, the price of basic commodities will spike too. Surely the government should take a standard duty off fuel, not a percentage? (correct me if im wrong) But surely we should pay the same level of duty regardless of the cost of petrol.

Duty is a fixed proce per litre. The VAT is the precentage.

I know people in america and australia were complaining recently at 40p a litre, which I remember reading it was in america. Surely Its far more serious for us at £1.35 a litre than for them. In difficult times, how can the government justify the duty on fuel?

The justification is simple. Pay less fuel duty, pay more elsewhere.

[oolon]

I know people in america and australia were complaining recently at 40p a litre, which I remember reading it was in america. Surely Its far more serious for us at £1.35 a litre than for them. In difficult times, how can the government justify the duty on fuel?

I did some calculations many years ago and found that the price for a "normal" journey was around the same. Both the counties you quote are significantly larger than ours, as a result the distance considered normal to drive is much larger. I remember being driven 50 miles to go to a bar in America, that seemed normal to them.

[roachcoach]

The justification is simple. Pay less fuel duty, pay more elsewhere.

Quite correct.

As I view it, the issue is that it (fuel) is so firmly tied to every aspect of our lives, having more than half the cost of it in tax - i.e. something the government can control - is a very blunt instrument to be wielding. I am not convinced the folks in whitehall realise the extent of the impact here. Take for example the public sector funding cuts, those have been particularly heavy and yet to maintain their fleet of vehicles essential for their use, they're being hit by fuel prices going north at a rate of knots - effectively a double hit. To be fair - they really should know this and maybe they do, but I'd feel a lot better if they were more open about it and discussed it further than 'we hear you'. Actually I've bet on that before this simmers down there are some Marie Antoinette style gaffes by parliamentarians

In more prosperous times, this would be less of an issue I think, but right now things are a little bit fragile with a lot of people seriously feeling the heat before this kicked off.

Interesting times indeed. I liked the boring ones myself!



@Blaineoliver: There's a fixed "duty" on fuel, currently 0.5895/litre. then you add 20% VAT to both the fuel cost and the tax. Tax on tax, wicked


edit:

@oolon: It would be interesting to see how those other countries get the money in which we take from fuel.

[mcmiller]

I do not wish to line Tory pockets any more than i do already.

What an odd thing to say... do you really believe that David Cameron pocketing all the money as you implied or are you just being prejudiced

[Saracen]

.... In difficult times, how can the government justify the duty on fuel?

On the basis that they most heavily tax the things they know are least susceptible to changes in demand on the basis of changes in price. It's called price elasticity of demand.

This is not about moral justification, it's about the simple fact that what works, works. They have to get tax revenue from somewhere, in order to spend it, and if they put it on your pay packet, either in Income Tax on NI, you notice far more directly, and more relevantly, you blame government, not the supplier of the product you bought.

So, over the years, successive governments have loaded duty onto those things that they know don't tend to suffer massive demand drops as prices go up, namely fuel, tobacco products, and booze. And there are a fair few others too. It's quite an eye opener when you look at the variability of import duty rates on different products, and then consider that not only are you paying import duty on most products you buy, but then on most of them, beyond basic essentials, are paying VAT and not only are you paying VAT on the product, but on the import duty as well.

And the utter hypocrisy of some politicians is one of the few things that will get me, on occasion quite literally, screaming at the television, on of which was Ed Balls recent appearance criticising the current government's rise in VAT and saying it ought to be reversed on fuel. It's not that long ago that his government, with him as a major Brown economic advisor cut the VAT but loaded up fuel prices with extra duty to to recover the loss of revenue on fuel, and then reversed the VAT cut but didn't remove the 'compensator' in duty.

So it's all right from his government to rip us off on fuel prices for years, but within months of getting booted out, he's moaning about Tory fuel rises? Bleeping hypocrite.

As for how they "justify" it .... first, they try to pretend it's not happening. That worked for years. Then they try to blame it on international prices (some truth in that, but only some), then they try to blame it on someone else, be it the last government or just market speculation, then they try to brazen it out as being unavoidable.

But what it boils down to is that they do it because they can, and because it's one of the most effective ways of raising tax.

Lets face it, we all want public services. We all want the "best" education for our youth, we all want a superb and "free" (hah!) health service, we want our bins collect, criminals tracked down and locked up, we want a world class armed forces (because we think we're still a major world power), we want the welfare state to protect us when we're down, and we want it to pay for the cost of us raising our kids even when we earn damn good money ourselves. We want he government to save money, providing it doesn't cut something we, personally, want or use, and we want services to be "efficient" providing our job isn;t one of those lost to the Gods of Efficiency, because that isn't fair.

And, for years, we've been borrowing to pay for it.

Well, here's the thing. The country owes several shed-loads of money, because we've been buying things we couldn't afford for years. And, like any other borrowing, you have to pay interest on it and eventually, that alone costs you shed loads on money.

The trouble is, we spent long-term and borrowed short-term. That "borrowed" money is a kind-of revolving arrangement, and we regularly have to go out to the markets to borrow the cash to pay back the loans we already have that have become due. And that puts us at the mercy of the markets, because if they won't lend, or won't lend at the current rate, we can't borrow which means we can't pay back what we've already borrowed.

And that would put the whole country in a position analogous to an individual that has mortgaged himself to the hilt, maxed out bank loans and credit cards and now has to go to shady loan sharks to try to keep the whole house of cards standing. Or we end up like Greece, with outside fiorces (ike the IMF or Euro stabilisation fund) writing our budgets for us.

And on top of the vast amounts of money we actually owe, we've got some very nasty shocks coming our way in terms of in-built spending commitments.

It's as if that individual I mentioned, having been fully mortgaged and maxed out bank loans and credit cards, then signs a credit agreement to buy a new car .... the payments for that agreement have to come from somewhere, so what you're actually doing is not so much incurring a debt but a spending commitment that takes a portion of your salary for the next few years right off the top of your pay packet, before you ever get to being having disposable income to be able to pay back the credit cards .... or the loan shark.

And that is the nature of the hidden commitments, like Railtrack, and PFI, and of course, the looming time-bomb of pension commitments.

So what's the justification for keeping tax on fuel as high as they can get away with? Simples .... they need the money!

I'm sure that any sitting government, Tory, Labour, LD, Coalition, whatever, would love to be able to announce that they're going to cut, or abolish fuel duty, halve Income Tax everyone, make the personal allowances £30,000 and set VAT at 3%.

But they can't. Or they can, but it means abolishing the NHS, closing down the military, sacking the police force and giving up on schools. Etc.

What I do expect is something from Osborne on fuel prices in the budget. Both he and Cameron, among others, have already hinted pretty strongly at it. They "feel our pain" (like hell they do), and they "can't pre-comment on budget measures". So expect something. It might be a stabiliser, or it might be the abandonment of the planned (by Labour) increases that have yet to materialise, or something else. But personally, I'd expect it to be more token that anything with a significant real impact on prices. It might stop them going up as they otherwise would (either via stabiliser or via dumping planned increases in duty), and we might, if we're lucky, get a gesture reduction, but we won't get anything that will make a huge impact because the long and short of it is that they simply don't have the spare funds to do it.

So the justification for high fuel tax is that it's pragmatic, very effective, raises a naffing fortune in tax and is politically less painful than doing it in more directly obvious ways like clobbering your pay packet.

And, at a very basic level, it's progressive too, in some ways. It hits the really poor less than everyone else, and does so only indirectly, because they can't afford to run cars so aren't hit directly by fuel prices, with the impact only being indirect, via shop prices rising due to the costs on business of transportation. Also, if they clobber your pay packet, you have no way to reduce or minimise the effect. If they do it via fuel prices, it encourages people that do run cars to think about journeys they make, and only do what's necessary, not what they'd like to do.

And that, of course, has been the course of action suggested by many Green activists for years - price people out of their cars. Well, now we're seeing what that feels like.

Oh, and it's progressive in another way too. The better off you are, the less you'll have to reduce your mileage because you can't afford it. This, of course, is a luxury the relatively poor can no longer afford. And, it'll focus people's minds on cars with high fuel efficiency too, thereby again achieving the green agenda (which is no bad thing). So .... if you're wealthy, you don't have to worry about an extra few pounds, or tens of pounds, on your fuel bill, which means the marginal rate of tax you pay goes up a bit compared to the less well off because you're buying fuel without thinking about it.

Of course, those caught in the middle, that being those that have no choice but to use the car, perhaps to get to their job, but still on low incomes are getting squeezed and aren't much liking it, but I'm sure the government would say that that's why they have tried to ease the pain elsewhere, such as the reductions in income tax for the lower paid about to take effect because of the LD-inspired rise in personal allowances.

There is, therefore, some attempts to balance the pain more towards the wealthier. If you increase basic PAs, everyone gets it. If you then lower the starting point of the Higher tax band, you can recoup the cost of those PAs by taking a bit more from Higher rate taxpayers. And, if you clobber a bit more at £100,000 and/or £150,000, you hit the even better paid a bit harder.

In other words, we cannot look at fuel duty costs in isolation.

It's part of a VERY complex system of both direct and indirect taxes. And what governments do is tweak a bit here, tweak a bit there. If you want a redistribution effect, then you start from the premise of a zero-sum game - if one group benefits, another pays for it.

And that's the game with all the tax rises and even the cuts.

You have to look at expenditure. What do we spend money on, in the public sector. Do we want it, and if we do, do we need it? And if we do need it, are we spending in the most efficient way, and getting value for money?

Because underlying every single pound, every single penny government spends on those services that we all want, and that so many people are screeching about when there's any talk of cutting just about anything, is that they have to be either paid for out of tax, or paid for out of borrowing, and we can't keep increasing the borrowing. We are already spending more than many large government departments entire budgets simply paying debt interest on what we've borrowed already, that being some £44 billion a year on interest payments.

So ... we can't borrow more. But are. When we have a deficit, we are borrowing more and more, day by day, year by year, and that debt and the interest costs are going up. Even with the Coalition plans, that deficit is set to increase the debt, every day, for the next several years.

The whole idea now is to get the deficit down as fast as we can, consistent with not wrecking the economy (and that is where the Coalition and Labour disagree, not about getting it down and eliminated but how fast to do it).

So if we can't justify borrowing more to provide services, do we cut services or increase tax?

If the government cuts fuel duty, it either has to raise tax somewhere else, to cut something extra to pay for it.

In which case, we need to either identify the additional service cuts we want to make, or we have to find a tax rise that is :-

a) desirable, socially
b) will work
c) will not damage the economy even more than fuel duty.

Good luck with that.


PS. I'm sure there will be people thinking "tax the banks", or "tax the rich", or "clobber tax avoiders". Good idea, providing it doesn't fall foul of b) or c). And, of course, proving it raises enough money to fund fuel duty cuts.

Sorry it's a long answer, Blaineoliver, but you did ask.

[roachcoach]

Excellent post Saracen, indeed the whole affair is akin to a net - one cant very well pull one string without affecting those around it - In retort I think the concept of a stabiliser is going to tick most boxes.

The budget allowed/expected £xxx to come in from fuel/VAT. This is expected, what it didn't expect is the MacDaddy of all Hellstorms™ to kick off in the middle east sending oil prices north - which in turn increases their VAT haul (percentile based tax).

A level of stability to what is for many, a "living" cost, would reassure the people I think; no (well, less) horrible shocks incoming if something flares up somewhere. A relative degree of stability. Naturally, such a system would be quite complex, however I'm pretty sure there's enough smart folks down there to make it work. They wouldn't even need to try and explain it to the "public", just a cheerful "fuel stabiliser is in: win" remark would placate many of the masses.

Indeed, something as simple as dropping VAT off fuel and raising duty to a level where it would compensate for the previously budgeted VAT return on fuel. Voilla, the percentile system is dead and fuel costs drop to "budgetary expected" levels. Oversimplified but I'm sure folks will get the idea.



Questions around this are:

a) Are they actually making more money or are drivers offsetting it by either not driving, or driving more economically. I suspect they are making more, the question is if it is enough and would such a change have no net loss.

b) If they are, is the money better spent elsewhere or used to keep fuel at a consistent, predictable level in keeping with their budget, which also keeps people moving and spending elsewhere?


Thing is, scenario b) leads to a problem in that there is probably a fairly large group of people who will cut other things over petrol. i.e. your true "essential" drivers and those who are willing/able to make sacrifices to keep driving - that group will hurt the economy, not that its their fault, its just a fact.

[kalniel]

To answer the OP, the breaking point for me would simply be the one at which car travel was so much more expensive than convenient public transport that it made substantial economic sense to abandon the car where possible. I don't see that happening any time soon, as for my own journeys the cost of public transport is going up faster than the costs of my travelling by car. Public transport also takes me much longer (just over 2 hour door-to-door time vs 35mins) as well as being significantly less pleasant (a seat? You must be joking)

If fuel costs are having an effect on how people choose to drive then great - I think we should be driving more economically and car sharing more. Economical cars are now very cheap to buy so if costs are becoming a concern there is something almost everyone can do about it.

Should tax be cut on fuel? Not in the slightest. I agree with a cut in tax for RFL, but fuel duty should be raised as it's one of the more progressive taxes in existence IMHO. Cutting it or any other fuel related tax would mean we have to find the money elsewhere, which would almost certainly be less progressive IMHO, as Saracen so verbosely describes above.

Will it eventually lead to blockades? Yes, probably, though doing so in these economic conditions isn't the smartest move, but then some people only look to the short term.

[G4Z]

I disagree that fuel duty is a progressive tax.

I am not making a comment on weather its at the right level or not, just that it isn't progressive. Even if you don't drive a car just about every product or service is dependant on fuel. If you are on a fixed income and the cost of fuel increases the cost of living, what are you going to do? Once you have cut down to essential spending only and it rises again, then what do you do?

I appreciate that in reality there are few people who are really genuinely poor in this country but if fuel goes up to levels of £3 or £4 a litre would that still be the case?

[roachcoach]

Drivers, or lets be more precise commuters, are only a (small) part of the picture.

Even people with no cars will be hit when retailers decide to stop sucking up rising fuel costs, something I think a lot of people forget.

Perhaps we'll see some sort of balancing factor for hauliers - perhaps exempting them from road tax for example to keep wholesale costs in check.

[kalniel]

I disagree that fuel duty is a progressive tax.

I am not making a comment on weather its at the right level or not, just that it isn't progressive. Even if you don't drive a car just about every product or service is dependant on fuel. If you are on a fixed income and the cost of fuel increases the cost of living, what are you going to do? Once you have cut down to essential spending only and it rises again, then what do you do?

I appreciate that in reality there are few people who are really genuinely poor in this country but if fuel goes up to levels of £3 or £4 a litre would that still be the case?

We still have a choice. We can chose to buy goods with lower transport costs than others for example. If we choose to drive a powerful thirsty car in a manner that guzzles fuel then we can do, and we can pay for it. On the other hand we have the choice to drive a more economical car and drive in a leaner manner. I'm probably using the term progressive incorrectly, but I'm meaning that we genuinely have a choice, not to avoid it completely, but in how much we pay, dependant on driving preferences.

[BigYoSpeck]

We're basically about to entire an age of spiralling inflation. Fuel costs go up, business running expenses go up, cost of living goes up, people demand pay increases, business costs go up, fuel costs go up more, cost of living increases, people demand pay increases to cope and so on and so on.

And all because Sarah Beeny convinced us all there was money to be made from property.

[kalniel]

We're basically about to entire an age of spiralling inflation. Fuel costs go up, business running expenses go up, cost of living goes up, people demand pay increases, business costs go up, fuel costs go up more, cost of living increases, people demand pay increases to cope and so on and so on.

And all because Sarah Beeny convinced us all there was money to be made from property.

Depends what you mean by an age. We've been there before. *shrugs* all part of economic cycles I guess.

[roachcoach]

We still have a choice. We can chose to buy goods with lower transport costs than others for example.

You'll struggle with that, supermarkets crushed local stores years ago, save in the odd exception what you might save in delivery, you'll lose overall. Even then, I think the point G4Z was making was that some folks are already borderline, shopping at the cheapest places available - if it keeps rising at this rate, they're sunk and likely so are a great many others. 2p on this, 2p on that, pretty soon that adds up to real money for a lot of people.

I suppose the question is what percentage of the population can actually make these choices - you are quite correct there are people who can, I suspect there are a decent number who cannot.


(One can't divorce fuel 'cost' and duty when duty/tax is over half the cost of fuel and at least partially percentile based).


As Saracen mentioned - the whole thing is interlinked - not just tax to budgets, but everything. And that includes cost of living which affects everyone, everywhere. Are emergency services allowed cheap fuel? If not, I seriously doubt they're being given extra funding to fuel their vehicles which can only lead to cuts (on top of existing cuts) elsewhere. EMS are merely an example, even if they do get cheap fuel there are lots of other things, lots.

We're not married to fuel in this country - its in our bloody DNA. Which is a bit of a problem in that decent clean, affordable alternates aren't mainstream yet.


Edit:
On the other extreme, if everyone did up and stop driving who could, the government would be utterly screwed in the lack of duty income. Perhaps it is currently in everyone's interest to keep it middle of the road, until such time as we can manage ourselves away from it.