Fuel duties are levied on purchases of petrol, diesel and a variety of other fuels. They represent a significant source of revenue for government. In our latest forecast, we expect fuel duty to raise £27.9 billion in 2016-17. That would represent 3.9 per cent of all receipts and is equivalent to £1,000 per household and 1.4 per cent of national income.

Fuel duty is levied per unit of fuel purchased and is included in the price paid for petrol, diesel and other fuels used in vehicles or for heating. The rate depends on the type of fuel:

  • the headline rate on standard petrol and diesel has been frozen since 2011-12 at 57.95 pence per litre. This also applies to biodiesel and bioethanol;
  • the rate on liquefied petroleum gas is 31.61 pence per kilogram;
  • the rate on natural gas used as fuel in vehicles (e.g. biogas) is 24.70 pence per kilogram; and
  • the rate on ‘fuel oil’ burned in a furnace or used for heating is 10.70 pence per litre.

VAT is applied after fuel duty, so, for example, the pump price of a litre of petrol currently reflects the pre-tax price plus 57.95p for fuel duty plus 20 per cent VAT on the pre-tax price and a further 11.59p for VAT at 20 per cent on fuel duty.

  • Recent trends

  • Latest forecast

    Our latest fiscal forecast was published in March 2017. Fuel duty receipts are set to fall by 0.1 per cent of GDP by 2021-22. That is more than explained by the tax base, where rising fuel efficiency reduces the amount of fuel consumed per mile travelled.

    From 2018-19 onwards, the Government has stated that the main rate of fuel duty will be uprated each year in line with growth in the retail prices index (RPI). The rise in the tax rate partly offsets the effect from subdued growth in the tax base.

    More detail on our latest forecast and how it was revised relative to our previous forecast in November was provided in paragraphs 4.74 to 4.75 of our March 2017 EFO.

    Expand to read the extract from our March 2017 EFO

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  • Latest monthly data

    Fuel duty receipts are spread relatively evenly over the year. Monthly volatility reflects a number of factors, including changes in pump prices (which drive demand for fuel) and seasonality in the number of miles driven (e.g. households and businesses drive fewer miles around Christmas).

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  • Forecast methodology

    Forecast process

    The OBR commissions forecasts of fuel duties from HM Revenue and Customs for each fiscal event. The forecasts start by generating an in-year estimate for receipts in the current year, then uses a model to forecast growth in receipts from that starting point. We provide HMRC with economic forecasts that are used to generate the tax forecasts. These are scrutinised in a challenge process that typically involved three rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee and OBR staff. This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks.

    Forecasting models

    Road fuel duty receipts are estimated by multiplying taxable fuel consumption – known as ‘fuel clearances’ – by the corresponding duty rate.

    Our fuel clearances forecast involves three steps:

    • we forecast total miles that will be travelled. This uses an econometric model driven that relates distances travelled to real GDP and the real price per kilometre travelled. That real price reflects our forecasts for pump prices, which in turn reflect assumptions about the dollar oil price, the sterling/dollar exchange rate and how changes in crude oil prices are fed through to pump prices;
    • we make assumptions about fuel efficiency to derive the total amount of fuel consumed to travel the number of miles we forecast. The average fuel efficiency of the vehicle stock is derived from Department for Transport projections; and
    • we subtract an estimate of the share of fuel consumed that will not pay tax due to evasion. This is done by estimating the ‘duty-paid share’ in recent outturn data, which is typically assumed to remain constant across the forecast period.

    The Government sets out policy assumptions for the uprating of fuel duty each year. Petrol and diesel duty rates are set to rise in line with RPI inflation from April 2018. The cash increase in receipts over the forecast period is more than explained by this rise in duty rates.

    Duties on other types of fuel such as heating oil raise small amounts. They are forecast based on simple assumptions derived from historical growth rates.

    Main forecast determinants

    The main determinants of our fuel duty forecast are those related to the tax base and those that are used by the Government in setting parameters of the tax system. See the ready reckoners section below for more information on the effects of these determinants on fuel duty receipts.

    Main forecast judgements

    The most important judgements in our fuel duty forecast are related to the economy forecast that underpins it – the most important being real GDP growth and hence the underlying demand for fuel in the economy. Alongside those, we need to make a number of other forecast judgements. These include:

    • In-year estimate – Our estimate for fuel duty receipts in the current year is determined by performance of receipts year-to-date, developments in determinants of the tax base and any other indications from HMRC’s receipts monitoring. The in-year estimate determines the base year from which we use our model to forecast receipts growth;
    • The relationship between economic activity, the cost of driving and vehicle mileages – the extent to which vehicle mileages are affected by changes in household income and business activity (which are proxied by real GDP) and fuel prices is an important assumption in the forecast. We estimate these relationships based on historic data; and
    • Fuel efficiency – the average amount of fuel consumed to travel a mile determines the amount of fuel that will be bought for a given distance travelled. We assume that fuel efficiency improves over time, in line with projections from the Department for Transport.

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  • Previous forecasts

    Although fuel duties have been significantly lower than many of our earlier forecasts, this mainly reflects a series of policy decisions to freeze or cut rates. Budget 2011 announced both a cut in the duty rate and the cancellation of previously announced above inflation rises. The main rate of fuel duty has been frozen since then. The policy section below sets out how fuel duty policy has been changed at many of the Budgets and Autumn Statements since 2010.

    Abstracting from these policy changes, the underlying trend has been more positive, with receipts marginally up on recent forecasts. This reflects the recent pick-up in real GDP (and the associated effect on distances travelled), but also that we may have overestimated the pace of improvements in fuel efficiency and its effect on fuel clearances.

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  • Policy measures

    Since our first forecast in June 2010, governments have announced 11 policy measures affecting our forecast for fuel duty. Of these, 9 related to the cutting or freezing the main duty rate. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Annex A of the relevant Economic and fiscal outlook.

    The chart shows that fuel duty policy has been changed at most Budgets and Autumn Statements since 2010. Specifically:

    • in Budget 2011, the Government cancelled the pre-existing fuel duty escalator (where fuel duty rates were due to rise in line with RPI inflation plus a penny a litre in every year until 2014-15). The rate was also cut by one pence a litre in April 2011. The April 2011 RPI rise was delayed until January 2012 and the April 2012 rise was delayed until August 2012;
    • in Autumn Statement 2011, it delayed the planned January 2012 RPI rise until August 2012– thereby planning a rise before the next Autumn Statement;
    • in June 2012, it delayed the planned August 2012 RPI rise until January 2013;
    • in Autumn Statement 2012, it cancelled the planned January 2013 RPI rise and pushed back each subsequent year’s April RPI rises until the end of the Parliament to September;
    • in Budget 2013, it cancelled the planned September 2013 RPI rise;
    • in Autumn 2014, it cancelled the planned September 2014 RPI rise;
    • in Budget 2015, it cancelled the planned September 2015 RPI rise;
    • in Budget 2016, it cancelled the planned April 2016 RPI rise; and
    • in Autumn Statement 2016, the Government cancelled the planned April 2017 RPI rise.

    These successive policy changes are something to note when considering our fuel duty receipts forecast. Parliament has stipulated that our forecasts be based on the Government’s stated policies and that we must not consider alternatives. The Government states that fuel duty will be uprated by RPI inflation in the future, but has not done so in the recent past. Parliament also requires us to note risks to our forecast: the possibility that the actual path of fuel duty rates policy will differ from the Government’s current stated policy is a risk that we have noted in recent forecasts.

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  • Ready reckoners

    ‘Ready reckoners’ show how our fiscal forecasts could be affected by changes in selected economic determinants. They are stylised quantifications that reflect the typical impact of changes in economic variables on receipts and spending. These estimates are specific to our March 2016 forecast and we would expect them to become outdated over time, as the economy and public finances, and the policy setting, continue to evolve. They are subject to uncertainty because they are based on models that draw on historical relationships or simulations of policy settings. The table below shows that:

    • higher real GDP (which is used as a proxy for total demand for fuel) would increase fuel duty receipts due to increases in both business and household spending;
    • higher RPI inflation would increase fuel duty receipts (in line with the uprating assumptions set out by the Government, our default assumption is that duty rates are indexed in line with RPI);
    • higher oil prices would reduce the demand for fuel by raising its price. That would therefore reduce fuel duty receipts, which is charged on the number of litres consumed.

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