Is the French government really benefitting from increased fuel prices?

New estimates reveal that the crisis in the Middle East may have seen government revenue decline despite claims that the French state has been profiteering from the current price hikes. 

Industry leaders, rival politicians, and motoring lobbies have accused the government of using the global oil crisis resulting from the war between the US, Israel and Iran to replenish state coffers.

The government has denied these claims and remains adamant that it will not reduce fuel taxes – a position reinforced by Prime Minister Sébastien Lecornu on Wednesday – a measure it claims is economically unsound.

Despite its refusal to lower taxes, the government has made one concession to motorists by temporarily allowing the sale of diesel that is less resistant to cold.

The authorisation of this type of diesel, which is normally not allowed for sale, will be permitted until the end of March, Maud Bregeon, delegate minister and government spokesperson for energy within the Ministry of Economy, Finance, and Industry, confirmed in a ruling published Thursday (March 26).

In the ruling Bregeon cites “exceptional supply difficulties encountered in the context of the war in Iran and the blockage of the Strait of Hormuz,” as well as “difficulties in sourcing diesel that meets seasonal specifications” for its decision.

Taxes make up half of fuel cost

Fuel prices have remained high this week, with diesel (gazole) reaching and remaining well above €2 per litre for several days, and petrol prices close behind. 

Uncertainty over further price increases remain, with conflicting information on the status of the conflict in the Middle East, but industry leaders across all sectors have warned a prolonged war will lead to further increases.

The month-long climb in fuel costs for drivers, marked by the onset and continuation of conflict in the Middle East and closure of the Strait of Hormuz, has seen the French government face consistent criticism. 

Even prior to the conflict, fuel costs in France were higher than neighbouring countries such as Spain and Italy, largely due to taxes on fuel. 

Around 52% of the total cost of a litre of fuel in France is due to tax comprising VAT and the TICPE energy tax (which itself also attracts VAT). 

With fuel costs rising by around 20c - 40c per litre, many believe the government to be receiving extra tax on the higher prices, leading to a windfall if prices remain high. 

Marine Le Pen of the far-right Rassemblement National (RN) accused the government of “behaving like a crisis profiteer [and receiving] undue revenue,” earlier this week. 

A long-standing policy of the RN has been to reduce VAT on all energy (vehicle fuel, electricity, etc) from the current 20% to 5.5%. 

Similar calls to reduce taxes on fuel have also been made by supermarket bosses, who were encouraged by the government to reduce their own profit margins on fuel sales to lower prices at the pump. 

The graphic below shows the breakdown of fuel costs per litre in France.

Is the government really benefitting? 

The reality however is slightly different. 

The first thing to note is the TICPE tax is fixed at some €0.608 per litre for diesel and €0.670 per litre for petrol. 

This is the same regardless of any fluctuation in the price of fuel, and has not changed due to the conflict. VAT on the TICPE tax is also constant. 

This means the only flexible fuel tax is the 20% VAT on other components (base price of petrol, distribution etc).

Taxes on fuel has been reduced in countries such as Italy and Serbia in a bid to reduce the costs to drivers. 

The French government says any cut to fuel VAT could cost billions and push the government’s debt above 5% of GDP. 

However, it may not even be benefitting from a windfall during the current conditions.

Calculations by public broadcaster France Télévisions estimate that the French government received an average of €743 million per week from all taxes on fuel prior to the current conflict.

This increased to around €1 billion at the start of March (the first full week following the outbreak of hostilities) meaning an extra €250 million or so in revenue. 

If this increase remained stable across the year, the government could expect to see around €13 billion extra in revenue from fuel taxes. 

However, the price increases subsequently led to a 24% reduction in fuel purchases, dropping weekly revenue to €843 million in the following weeks, or around €100 million more than usual. 

As prices continue to rise, drivers are filling up even less, further reducing the tax received from the sale of fuel.

“We are seeing that people are driving less. This increase in fuel prices can not be considered a very advantageous operation for the State,” said head of Mobilians service station group Francis Pousse to FranceInfo. 

Even if revenue from fuel taxes remains marginally above average, the knock-on effect of increased prices is likely to lead to reduced revenue elsewhere. 

Weaker household purchasing power due to increased costs makes households less likely to spend on luxuries and even base goods, reducing taxable revenue elsewhere. 

This will also be felt by businesses, leading to further tax reduction. 

“Companies will potentially hire less, invest less, and therefore there will be less economic activity,” said deputy director of the OFCE research body, Mathieu Plane. 

“They will also have lower profit margins because their production costs will increase, resulting in lower profits. Overall, this represents a loss of activity for the French economy, which will translate into lower tax revenues.”