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Spring statement: How will fuel duty cut impact UK petrol and diesel prices?

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Spring statement Fuel prices for petrol and diesel at the SOLO filling station on Clifton Street in Belfast, as oil prices continue to soar due to Russia's invasion of Ukraine. (Photo by Liam McBurney/PA Images via Getty Images)
Spring statement: The average cost of a litre of petrol at UK forecourts rose 3.5p in the last week, while diesel prices surged 5.5p, according to figures from RAC. Photo: Liam McBurney/PA Images via Getty

UK chancellor Rishi Sunak is set to announce measures in his spring statement on Wednesday to ease the cost of living crisis as he faces pressure from backbenchers to cut fuel duty.

Reports say the Treasury is mulling a 5p per litre reduction in fuel duty after prices at the pump soared to fresh highs last week.

Expectations of a cut in the upcoming mini-budget were raised after he pledged to "stand by" struggling households facing "prohibitively expensive" fuel and energy costs.

While a drop in oil prices last week led to a cut in wholesale costs for fuel retailers, drivers are still feeling the impact at the pumps as crude nudged higher again.

With Sunak's spring statement around the corner what could a potential cut in fuel tax mean for UK consumers?

Spring Statement
UK chancellor Rishi Sunak is due to set out measures in the spring statement this week. Photo: Wiktor Szymanowicz/Future Publishing via Getty

Why prices are rising

Britain's fuel prices have risen sharply since Russia’s invasion of Ukraine, with global crude price spiking and then declining amid peace talks between the nations and rising COVID cases in China.

Fuel price movements in the UK are mainly determined by oil prices, and the exchange rate between sterling and the US dollar as crude is traded in dollars.

Read more: Sunak to have £6bn to help ease UK's cost of living crisis

Benchmarks posted their biggest weekly drop since November earlier this month, after Brent (BZ=F), the basis for international prices, hit its highest level since 2008.

But both the oil price and, therefore, wholesale costs have gone up once again this week as tensions between Ukraine and Russia deepen.

This saw the average cost of a litre of petrol at UK forecourts rise 3.5p in the last week, while diesel prices surged 5.5p, according to figures from RAC.

RAC fuel spokesman Simon Williams said: "The window for pump prices to come down appears to be have been well and truly closed, with both oil prices and therefore wholesale fuel costs once again rising after last week’s big drop, putting yet more pressure on households and businesses."

Filling up a 55-litre family car now costs £91.86 ($121.09) for petrol and £98.43 for diesel.

Brent crude is currently trading 6.3% higher to $114.63 a barrel. US light crude (CL=F) was 6% higher to $110.98 in electronic trading on the New York Mercantile Exchange at the time of writing.

Brent crude rose 6.3% to $114.63 a barrel in afternoon trade on Monday in London. Chart: Yahoo Finance
Brent crude rose 6.3% to $114.63 a barrel in afternoon trade on Monday in London. Chart: Yahoo Finance UK

How would changes in fuel duty affect current pump prices?

Slashing fuel duty could reduce the prices at UK forecourts and alleviate pressure off UK households as millions face entering fuel poverty.

Analysis from RAC compiled for Yahoo Finance UK, showed that a 5p cut would bring the average price of petrol down to 161.03p from the current 167.03p. For diesel this would drop to 172.97p down from 178.97p, with people saving around £6 on average at the pumps.

In a scenario of a 10p fuel tax cut, the petrol price would fall to 155.03p, diesel to 166.97p and a full 55 litre tank would cost £85.27 and £91.93 respectively.

However, experts have said that a reduction in fuel tax would be a "drop in the ocean" and that a 5p per litre cut won't be enough to stop Brits from having to make fuel conscious decisions.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: "There were reports of a 5p cut in fuel duty, which while a welcome change, would still leave the government making 80p a litre at the pumps.

"With the cost of unleaded at eye-watering highs, this isn’t going to be enough to stop people from having to make very difficult decisions about how and where they travel in future."

Currently fuel duty costs around 58p a litre, and VAT nearly 28p per litre. On a 55 litre tank car, £47.30 goes towards tax, according to Coles.

Read more: Sunak told raising benefits could do more to support households than scrapping NI rise

Williams added that despite talks of a 5p cut in fuel duty, this may not be "deep enough to make a real difference to drivers who are facing the highest ever costs to fill their tanks".

It will cost Sunak £1.4bn if fuel duty is cut by 5p, according to estimates from Capital Economics.

When this is added to the cost of all the measures that have been reported over the last few weeks, it comes to a total of £51bn. This includes a doubling in October’s energy bill rebate from £200 to £400 (which would cost £5.5bn) as well as a temporary VAT reduction on domestic fuel (£2.4bn).

A reduction in fuel duty could lower the prices at UK forecourts and take pressure of drivers. Photo: Joe Giddens/PA Images via Getty Images
A reduction in fuel duty could lower the prices at UK forecourts and take pressure of drivers. Photo: Joe Giddens/PA Images via Getty

How a reduction in VAT could impact fuel prices

RAC estimates that cutting the current 20% VAT by 5% to 15% would bring the average price of petrol to 160.07p a litre and to 171.51p for diesel, saving UK consumer a total of £6.96 and £7.46 in petrol and diesel costs respectively.

Williams said ensuring all drivers benefit from the fuel duty cut "depends entirely on retailers reducing their prices and not using it as an opportunity to take a greater profit on every litre they sell".

This would be guaranteed by a cut in VAT — a tax on a tax.

Slashing VAT by 7.5% would see the petrol price fall to 156.99p and diesel to 167.78p. A full 55 litre petrol tank would cost £86.12, and £92.28 for diesel.

In a 10% VAT cut scenario, prices would further drop to £153.11, £164.06, saving drivers £7.66 and £8.20 on petrol and diesel costs respectively.

Watch: Why are gas prices rising?

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