Government claims cheaper petrol prices in real terms lead to increased spending as well as more jobs and investment
The Government will recover almost half of the revenue lost from its decision to freeze fuel duty because individuals and businesses will plough some of the money saved back into the economy, according to Treasury analysis.
It claimed the economy would benefit from a double wave of higher consumption and production, as cheaper petrol prices in real terms translated into increased spending as well as more jobs and investment.
The Treasury estimated that the Chancellor’s decision to cut fuel duty by 1p in 2011, then freeze it for the rest of this parliament, would increase the size of Britain’s economy over the next 20 years by between 0.3pc and 0.5pc of gross domestic product (GDP) – or between £4.5bn and £7bn in today’s prices.
It described fuel duty, which brought in £26.6bn to the Treasury’s coffers last year, as one of the “most distortive taxes”. It said successive real terms cuts would provide a big boost to other areas of the economy.
The Treasury believes the move will increase business investment by 2pc. Consumer spending, which drives two-thirds of the UK economy, is projected to increase by 0.3pc, as people and businesses use savings to invest and spend more. It claimed this would help the Government to recover 49pc of the revenues it will lose by introducing this measure.