Last week, the Chancellor published his Spring Statement, announcing £22 billion worth of support for the year ahead. Two key changes were made last week that aim to help with the squeeze on household budgets.
Fuel duty cut
The most immediate intervention by the Chancellor, which is already being implemented, is a 5 pence reduction in fuel duty. This is a charge applied to petrol and diesel sales and will amount to a £2.4 billion tax cut over the next 12 months. For drivers right now, this provides a short term solution to soften the blow of sky-high fuel costs, but it doesn’t offer long-lasting relief from rising pump prices.
Oil and gas are internationally traded, meaning motorists are unavoidably vulnerable to spikes that the government cannot protect them from as long as we’re driving petrol and diesel cars. The electric vehicle transition offers an alternative. We can run our cars with cheap, home-grown electricity at a less volatile price from a grid powered by cheap, home-grown clean energy.
The fuel duty change highlights a problem with the current motoring tax system. As fuel prices increase and electric vehicles become more popular, tax revenue towards funding for essential public services, like schools and the police, is shrinking. According to the Transport Select Committee, this will leave an estimated £35 billion black hole in government finances. This will be made worse by the 5p fuel duty cut, which will be politically difficult to reverse. Ultimately, we will need a new system, and road pricing seems the best substitute, which is why the committee recommended the government conduct a review as soon as possible. With the Treasury apparently in favour of road pricing, it should not be afraid to push for this review.
Coming into play in April this year, energy-saving materials like insulation and solar panels will be zero-rated for VAT, slashed from 20%. Although it’s not a fix-all solution, installing insulation is one of the most cost-effective ways of improving energy efficiency - loft insulation costs £640 on average. It could save people £493 a year as well-insulated homes require less energy to stay warm.
Most importantly, this VAT cut will be in place for the next five years, providing the industry with the certainty to invest in training up installers in energy efficiency, the major barrier to national rollout. To help boost training further, CEN MP Siobhan Baillie has been campaigning for the government to publish a green skills strategy.
Financial institutions should also see this as a boost of confidence to develop more retail products like green mortgages, which the Treasury is now seeking to promote. Offering favourable rates for commitments on decarbonisation efforts, like energy efficiency improvements, will increase access to finance for many more households and businesses. The Chancellor’s recent directive for the UK Infrastructure Bank to offer low costs loans for energy efficiency improvements will further support private investment.
What this means
The UK is entering a period of high inflation and the cost of oil and gas has increased for several reasons. Living costs are therefore increasing. While there are few policy levers we can pull to limit inflation rises, we can protect ourselves from future price shocks by spurring growth and reducing our demand for fossil fuels in our homes and transport.
Despite criticism that it didn’t go far enough, this mini-budget included several commitments seeking to ease the cost of living. While the fuel duty cut is a sticking plaster, tax cuts on home improvements, financial retail products, and private investment will provide a long-term direction for an industry that will kickstart a retrofit revolution.
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