David Bell: Tax increases are becoming a self-defeating exercise

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PETROL taxes are now so high there is a danger they are not meeting one of their main objectives - making as much money as possible for the government.

Data from the Department of Energy and Climate Change show that retail sales of petrol fell by 2.7 per cent in the first quarter of 2011.

Diesel sales fell less rapidly, but were still nearly 1 per cent below their level at the end of 2010.

In May 2008, shortly after the financial crash hit the UK, fuel duty per litre was 54p.

In 2010-11, it rose to 59p, and in January 2011, Value Added Tax increased from 17.5 to 20 per cent.

There was a 1p reduction in duty in March, paid for by a substantial hike to North Sea taxation.

But this made little difference to petrol prices on the forecourt. Taxes account for around 60 per cent of the current price at the pumps.

With increasing taxes and increases in the world price of oil, pump prices have increased more rapidly than general inflation.

In the first quarter of 2011, retail prices overall were 5.3 per cent higher than a year previously.

Petrol prices were 12.3 per cent higher than a year ago.

Individuals are responding by reducing their driving. They are also switching to more fuel-efficient vehicles.

In the first three months of 2011, fuel stations sold more than a billion fewer litres of petrol and diesel than they had done in the first three months of 2008.

This may please the green lobby. But for the government, the news is not so good.

In May 2008, receipts from fuel duty were 2.081 billion. In May 2011, after all the tax and price increases, fuel duty receipts were 2.157bn - an increase of only 3.7 per cent.

• David Bell is professor of economics at Stirling University

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