THE FREEZE in fuel duty will boost the economy by up to £7.5bn, a new government report calculated yesterday, arguing that cheaper petrol prices will lead to higher spending and increased investment.
The Treasury’s analysis – which has been peer reviewed by academics – was met with encouragement from the Institute of Directors (IoD), which said it hoped the changes would herald “the beginning of a new approach to tax”.
The report said that the decision to cut fuel duty by 1p in 2011, then freeze it for the rest of this parliament, will increase the UK’s GDP by 0.3 per cent to 0.5 per cent over the next 20 years, equating to £4.5bn to £7.5bn.
“The model shows fuel duty to be one of the most distortive taxes, with a reduction in rates generating significant dynamic effects,” the report said.
Fuel duty raises around £27bn each year and is the fifth largest source of government revenue. The report says the freeze should boost business investment by two per cent and increase consumption by 0.3 per cent, meaning that between 37 and 56 per cent of the money lost in tax revenues would be recovered. But it admits that certain factors are not included by the forecasting model, which uses up to 40,000 equations to try to model the long-term economic effects of policies.
These include congestion and air pollution, which the report argued would have a negligible effect on the main conclusions.
“We thoroughly support the Treasury decision to study the overall effect of cutting fuel duty,” said James Sproule, chief economist at the IoD.
“We hope this is the beginning of a new approach to tax, which looks to see where reform, or outright tax elimination, could have significant positive effects on the UK’s long-term prospects.”