Spring Budget 2022 – will Government throw a lifeline to motorists?

On 23 March the Chancellor of the Exchequer, Rishi Sunak will give what is arguably the most difficult budget statement for many years that the Government has had to make. The dilemma for the Chancellor – how can Government pay for the £300bn+ it has borrowed so far to tackle Covid-19 given the current cost of living crisis?

If you rely on road transport then you are no doubt feeling the pinch. The price of petrol and diesel has risen from an average of £1.27 in March 2021 to £1.55 as of 1 March 2022. The reality is that as of today (22 March) fuel at the pump has increased to over £1.70 in most UK regions. An annual increase of over 35% at the very least. Additionally the price of heating our homes has more than doubled. With increases in energy and fuel prices comes increases in the prices of many other goods and services. The Bank of England predicts average inflation to be 8% over the spring period, with some forecasting double digit rises.

So how will the Government respond? Well the Chancellor has hinted in recent weeks that some temporary support will be provided, but how will this be achieved and what impact will this have? We assess some of the policy options below.

  • Cutting fuel duty – the tax on petrol and diesel fuel has been frozen since 2011 although it still provides Government with £29bn of revenue each year. Commentators believe that the Government will go with a 5p a litre temporary reduction, providing relief of 6p a litre at the pump (1p VAT saving on top). This would cost the Treasury £3bn or so. Would a 6p litre saving be of any help though? As above fuel has increased by 20p a litre over the last month for most of us. A much larger cut would be needed to provide any real help to consumers and businesses if we are set to have higher fuel prices over the medium to long term. There is a possibility the Government may look to exceed expectations and commit to a bigger cut until the autumn budget, but a 5p a litre reduction is more likely.
  • Remove or cut VAT on fuel – this would potentially lead to up to a 20% reduction in the price of fuel. VAT has also already been cut on hospitality goods and services during the pandemic with it due to increase in April back to the standard rate. The problem with a more generous offering like this is that Government will likely have to commit to lower VAT receipts for the foreseeable future or face public outcry once the rate returns to 20%. This option is unlikely to be taken forward.
  • Funding to support spending on electric vehicles (EVs) – the electric car grant was reduced again to £1,500 in December and the home charger grant is set to be removed for most homeowners at the end of April. Providing more public support to incentivise the switch from fossil fuelled vehicles to electric could help to reduce monthly fuel costs, even with the hike in energy costs. There have also been some very good evidenced arguments made by trade bodies and institutes around why more help is needed. But the direction of travel until now has been to remove direct support for motorists, with the Transport Secretary and Prime Minister pointing out that more and more affordable EV models are entering the market. Expect more assistance announced towards supply based initiatives – such as improving the electric charge point infrastructure – rather than funding for individual motorists.
  • Mileage rate increase – the Government sets the mileage rates that are paid to public servants for their travel and also specifies a recommended rate that private businesses should use. Given these rates have not been changed for several years it is only right they are increased to reflect current fuel costs. If not then those providing essential services will be losing out, particularly those in field based roles – many of whom have been keeping the country running and treating those hit by Covid. We would expect the Government to take action on this front.
  • National insurance allowance increase – the Government has held its line on raising NI as planned in April. This will hit all employers and employees, with the extra funding raised being funnelled into the NHS and care sector. But there have been rumours that the Government is considering increasing the NI allowance threshold (over which NI kicks in) to more than £11,000 per annum from £9,568 currently. This will provide more benefit (proportionally) to those on lower incomes and is a measure that has been backed by some notable economists and academics.

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