Why a “fair fuel stabiliser” would be bad policy

The government does not receive a “windfall” from higher petrol prices.

There's a notable interview with Robert Chote, the head of the Office for Budget Responsibility, in today's Financial Times in which he repudiates the notion of a "fair fuel stabiliser".

Philip Hammond, the Transport Secretary, has promised to "look at the practicality" of this measure in time for the next Budget and the government is under significant pressure from the tabloids to limit petrol prices. But Chote warns that the fuel stabiliser is premised on the false assumption that the state receives a windfall in tax revenues when oil prices rise. In fact, higher prices rarely increase revenue because of the overall effect on economic performance.

Chote refers to a summer analysis by the OBR which concluded that the "overall effect of a temporary oil-price rise would be 'close to zero' " and that "a permanent rise would create a loss to the public finances". This is because higher pump prices "reduce the demand for fuel, lowering fuel duty receipts" and push up the indexation of tax thresholds, benefits, public-service pensions and index-linked gilts.

As the data below confirms, higher oil prices would generally lead to a fall in tax revenues.

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This doesn't mean that a fuel stabiliser is unworkable, but it does mean that the government would need to raise taxes elsewhere if it lowered duty on petrol.

Chote's conclusion is that "a fair fuel stabiliser would be likely to make the public finances less stable rather than more stable". But will ministers put short-term political considerations first? We'll soon find out.

George Eaton is political editor of the New Statesman.

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Labour slumps to fourth place in North Hykeham and Sleaford by-election

Conservative candidate Caroline Johnson eased to victory as Labour tumbled from second to fourth place.

Caroline Johnson was elected as the Conservative MP for Sleaford and North Hykeham, while Labour slumped from second to fourth behind Ukip and the Liberal Democrats, who finished second and third respectively. The by-election was triggered by the resignation of Stephen Philips.

The seat, which has been safely Conservative since its creation, backed Brexit by a 20-point margin on 23 June. The Tory victory, with 53.5 per cent of the vote, is one of the party’s all-time best by-election performances while in government. 

Johnson won with 17,570 votes. In second was Ukip's Victoria Ayling, with 4,426 votes. Ross Pepper recieved 3,606 votes, while Labour's Jim Clarke got 3,363 votes.

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.