The demand for fuel is relatively inelastic, meaning that higher prices do not lead to a big fall in consumption. The tax is also relatively cheap to collect, difficult to evade and can be justified rhetorically on environmental grounds.
But despite these political advantages, fuel duty has harmful hidden effects that politicians rarely discuss. One of these is the impact of higher travel costs on labour mobility.
Employment is not worthwhile when travel-to-work expenses are too high, particularly given the availability of welfare benefits to the unemployed. And subsidised public transport typically offers restricted access to workplaces – perhaps only to town centres and narrow route corridors. Opportunities may therefore be severely limited for job-seekers taxed and regulated out of car ownership or unable to afford inflated running costs.
The result is not just additional unemployment. Businesses may also face higher labour costs as the pool of potential employees is reduced. In addition, transport taxes tend to decrease the number of potential customers by shrinking the area within which exchange is profitable. In wider economic terms, competition is stifled, economies of scale are lost and the deepening of the division of labour is suppressed – with the knock-on effect of lower productivity growth.
The tax receipts from higher fuel duty rates are therefore likely, in the long run, to be undermined by the general losses to the Treasury associated with the higher costs imposed on the production of wealth. In the context of Britain’s worst-ever peacetime fiscal crisis, and an apparent unwillingness to make significant cuts to public spending, the latest tax rise may be yet another example of short-term political expediency overriding the imperatives of longer-term economic efficiency.