The UK government is now re-evaluating its planned fuel duty increase, initially set for September, as escalating tensions in Iran contribute to rapidly rising pump prices. Prime Minister Keir Starmer confirmed the review during parliamentary questioning, acknowledging the growing pressure to abandon the policy change.
Context of the Policy Shift
The freeze on fuel duty, currently at 52.95p per litre, was first implemented in 2022 under then-Chancellor Rishi Sunak as a response to soaring prices linked to the war in Ukraine. The measure was designed to provide temporary relief to consumers and businesses. The ongoing conflict in Iran, restricting crude oil exports, is now creating a similar inflationary pressure.
Oil prices have climbed from $55 at the start of the year to around $90 per barrel, pushing average petrol and diesel prices up by 6p and 12p, respectively, in just the past week. Diesel prices are now at their highest in nearly two years, according to the RAC.
Government Stance and Revenue Projections
While Starmer indicated a review is underway, he stopped short of committing to a full reversal, suggesting that diplomatic efforts to de-escalate the Iran conflict are the most effective long-term solution. The planned increase would be phased in over three years, aligning with the Retail Price Index (RPI), ultimately bringing duty to at least 57.95p per litre.
The Office for Budget Responsibility (OBR) projects this change will generate substantial revenue for the government: an additional £0.2 billion in 2026-27, peaking at £26 billion by 2028-29. However, the OBR also anticipates these revenues will decline by £0.9 billion by 2030-31 as the adoption of electric vehicles (EVs) accelerates.
Long-Term Fiscal Considerations
The OBR warns that maintaining the freeze poses a fiscal risk as fuel duty revenues naturally decline with the shift to EVs. Currently, fuel duty accounts for 0.7% of GDP, but this is projected to fall to just 0.1% by 2050-51, when EVs are expected to dominate the market.
The government is walking a tightrope between immediate cost-of-living concerns and long-term revenue stability. The situation highlights the increasing volatility of global energy markets and the need for sustainable fiscal planning in a rapidly changing automotive landscape.
The policy review reflects a difficult trade-off between short-term economic pressures and the broader transition to cleaner transportation. The outcome will likely depend on how quickly the crisis in Iran stabilizes and how aggressively the UK continues to push for EV adoption.
