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2 March 2011

The case against a “fair fuel stabiliser”

This costly measure would mean major tax rises or spending cuts elsewhere.

By George Eaton

The only time that William Hague led Tony Blair in the polls was during the fuel protests of 2000. Mindful of the damage that high petrol prices can inflict on a government and of Labour’s increasingly sharp attack on the “cost of living”, the coalition is assembling what has been described as a “rescue package” for motorists.

Today’s Times (£) reports that a “fair fuel stabiliser”, a measure first promised in 2008 but since quietly dropped, is being “actively looked at” ahead of the Budget on 23 March. With this in mind, it’s worth restating the practical case against the policy. Many supporters of a fuel stabiliser make the false assumption that the state receives a windfall in tax revenues when oil prices rise.

George Osborne, for instance, once claimed: “Currently, when oil prices rise, the government receives a windfall increase in tax revenues, mainly due to taxes on North Sea oil production. And when oil prices fall, the government suffers an unexpected shortfall in revenues for the same reason.”

In fact, as I’ve noted before, higher prices rarely increase revenue because of the overall effect on economic performance. A summer analysis by the Office for Budget Responsibility 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.

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

A

In other words, the government would need to raise taxes or cut spending elsewhere if it lowered duty on petrol. Even those who should be natural supporters of the measure, such as the chairman of the Retail Motor Industry Federation, Brian Madderson, aren’t convinced. In a recent letter to George Osborne, Madderson wrote: “Whilst the idea undoubtedly has popular appeal, the reality is that any such mechanism would require detailed investigation, involvement of industry and be both complex and costly to manage.”

The Chancellor should hold his nerve and face down the motorists’ lobby.