U.K. Chancellor Considers First Fuel Tax Increase in Eight Years

(Bloomberg) -- The U.K. is considering the first boost in vehicle fuel duties in eight years to help fund higher spending on health, people familiar with the Treasury's thinking said.

For years, chancellors have put off the fuel tax increases to soften blows on motorists coming from weaker economic growth, higher oil prices and rising living costs. Now, the government seeking ways to pay for Prime Minister Theresa May's pledge to boost funding for the National Health Service and also push consumers toward less-polluting vehicles.

May insists that a “Brexit dividend” -- the 350 million pounds ($461 milllion) a week that Britain will no longer have to pay into the EU budget as a result of leaving the European Union -- will fund her pledge to inject much-needed cash into the ailing National Health Service.

But what's increasingly apparent is that the money will come from tax increases, fuel being one way to raise cash. Alcohol duties are another. Politics rather than economics are guiding the next Budget.

Money is tight, economic growth is weak and yet May needs to buy some good will by trying to show years of austerity are coming to an end.

The tax move would anger motoring groups and drivers, who complain they pay some of the highest taxes on gasoline and diesel in the world. Environmental and health groups would praise higher fuel taxes, which would prompt more people to buy electric cars as well as alleviate some of the harm caused by pollution.

“We have been living with the highest fuel duty in the world despite a freeze,” said Howard Cox, founder of the pressure group FairFuel. “Any emotive fuel tax hike to fund the NHS will be suicidal for the government when they know and have stated in 2014 that cutting it, will generate much more growth taxes to the exchequer.”

Hammond's Choice

Chancellor Philip Hammond is considering whether to lift a freeze on fuel duties in place since 2010, according to the people, who asked not to be named because the discussions are confidential. Fuel duties currently bring in about 28.2 billion pounds ($37 billion), or 3 percent of the Treasury's annual receipts.

The Treasury has forgone 46 billion pounds in taxes since 2010 as it froze the duty at 57.95 pence per liter for diesel and gasoline, Hammond said in November. It's the longest the tax has been kept steady in 40 years.

Boosting the duty now would come at an uncomfortable time for drivers. The cost of fuel has been rising with an increase in oil prices and decrease in the value of the pound. And truck drivers are bracing for the impact of Britain leaving the European Union, which threatens to increase friction in shipping goods across borders.

“Piling more costs on to hauliers at a time of Brexit uncertainty will be an economic disaster,” said Richard Burnett, chief executive officer of the Road Haulage Association. “It is completely unacceptable to now suggest that we should be forced to prop up other sectors.”

Sidesteps Past

Previous budgets have indicated that the duty will increase in line with the retail price index starting in the 2019-20 fiscal year, though Hammond and his predecessors have pushed back plans for an increase before, according to the Office for Budget Responsibility.

The Treasury is also starting to take more seriously the impact of pollution on health. By 2035, the impact of air pollution could cost 5.3 billion pounds a year in health and social care costs in England alone, according to Public Health England.

The government is also working on releasing a “Road to Zero” strategy for reducing emissions from transport later this month. It will showing how the U.K. will phase out fossil fuels in cars by 2040, and Transport Secretary Chris Grayling has said the government wants every new car and van to be “effectively” emission-free by then.

The plan is likely to include a series of measures to bolster the take up of electric cars, including asking more local authorities to install roadside charging points, according to a person familiar with the document. The lack of public recharging infrastructure is widely seen as the biggest barriers to electric car sales.

Electric Cars

Ministers are also considering capping the Plug-in Car grant, when it is due to review the subsidy in October, the person said. The 5,000 pound grant is currently available to luxury cars like Tesla Inc.'s Model S, and the government is keen to ensure its money in the most effective way, the person said.

The document may also look at changes to benefit-in-kind for electric vehicles as a way to spur more company fleets to buy cleaner cars and vans and changing planning regulations to make it easier for companies to install charging infrastructure, the person said.

Still, a fuel duty increase would be controversial both among motorists and in Parliament.

“It would be absolute madness to raise fuel duty and hit working people up and down the country,” Robert Halfon, a Conservative member of Parliament, said in the House of Commons on Tuesday.

--With assistance from Kaye Wiggins.

To contact the reporter on this story: Jessica Shankleman in London at jshankleman@bloomberg.net

To contact the editors responsible for this story: Flavia Krause-Jackson at fjackson@bloomberg.net, Reed Landberg

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