Motorists are not seeing the full benefit of a continued freeze to fuel duty because retailers are not fully passing on the 5p cut, campaigners have said.
It comes ahead of Wednesday’s Budget speech in which an announcement is expected that the tax will be frozen once again.
The levy on fuel has been frozen at 57.95p since March 2011 and was temporarily slashed by an extra 5p in 2022 by Rishi Sunak, the Chancellor at the time. It was set to run out last year before being extended but reports now suggest current Chancellor Jeremy Hunt will extend it again.
Government policy is that fuel duty should rise in line with inflation, though this has not actually happened in more than 12 years – with a freeze being extended regularly in a situation economists have described as “something of a joke.”
The RAC has warned that drivers “haven’t seen the full benefit of the 5p fuel duty cut” anyway as retailers are taking higher margins on the fuel they sell.
Analysis by the RAC suggests that the average profit margin for petrol retailers rose to 17p per litre last year.
Although it is now around 10p per litre, this is far higher than the long-term average of 7p per litre.
Simon Williams, RAC’s head of policy, said: “We don’t expect any changes to fuel duty in the Budget, especially with an election on the horizon and given that pump prices are once again on the rising across the country.
“It shouldn’t be forgotten that as a result of retailers taking a bigger margin on the fuel they sell – to reflect higher costs, they argue – we feel drivers still haven’t seen the full benefit of the 5p fuel duty cut that was introduced two years ago after Russia invaded Ukraine.
“What drivers really need is for the fuel price monitoring body promised by the Government to be up and running. While good progress is being made, this is still some way off.”
The warning comes as economists chastised the Government’s policy on fuel duty.
Helen Miller, deputy director at the Institute for Fiscal Studies (IFS), said that extending the 5p cut for another year would cost around £2.4bn and freezing fuel duty – rather than increasing it in line with the retail prices index (RPI) measure of inflation – would cost around £1.5bn.
She said the Government continually saying it would increase fuel duty in line with inflation had “become something of a joke.”
“Each year, the public finance numbers are based on the assumption that future rates will rise in line with inflation, but each year since 2011 a ‘temporary’ freeze has been announced. This is not a sensible way to set policy,” she told i.
Charles Goodhart, a former Bank of England economist, also criticised the plan to freeze the tax.
“It is exactly opposite to what is needed in the longer term, where governments need to provide incentives to lower the use of fossil fuels, and to raise revenue in order to prevent public sector debt and deficits from rising further. It is an example of giving priority to short-term political concerns, rather than longer-term reform and stability,” he said.
It comes as data released this week by RAC Fuel Watch showed the average price of petrol rose by 4p a litre in February while diesel shot up by nearly 5p, making for the biggest monthly rise in five months.
Gordon Balmer, Executive Director of the Petrol Retailers Association, said: “We are pleased to hear the rumours that the Chancellor is considering continuing the fuel duty freeze to support struggling households amidst the cost of living crisis.
“Regarding the fuel duty cut, which was fully passed as acknowledged by the Competition and Markets Authority’s report, wholesale prices have remained volatile, offsetting its impact. Our members, faced with rising costs and falling sales, have had to navigate covering their expenses while maintaining competitiveness.
“As always, we recommend consumers shop around for the best deals.”