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14 March 2011

Labour goes back on the attack over petrol prices

The de facto tax rate on petrol is 161 per cent.

By George Eaton

With the Budget just nine days away, Labour has renewed its attack on the cost of living. At a press conference earlier this morning, Ed Miliband and Ed Balls reaffirmed their call for George Osborne to reverse the VAT rise on petrol using the £800m raised by the recent increase in the bank levy.

The argument that any spare cash should be used to reduce tax on motorists rather than, say, limit cuts to welfare, is unpersuasive. But this is still a smart line of attack by Labour, if a rather opportunistic one. Who was it that planned to increase fuel duty by a penny above inflation this April? George Osborne will almost certainly cancel that rise and, given that petrol is more highly taxed in Britain than in almost any other country, he has considerable room for manoeuvre.

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As the graph below shows, of the current average pump price of 131.1p a litre, 58.95 is fuel duty and 21.85p is VAT – a de facto tax rate of 161 per cent. In the US, by contrast, fuel tax is a maximum of just 7.42p per litre.

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The Tories have responded to Labour’s attack by arguing that EU rules prevent the government from reducing VAT on petrol. At the press conference, Ed Balls replied by pointing out that Kenneth Clarke cut VAT on fuel in 1994 and that the Treasury is seeking an exemption from the EU (over fuel duty) for the most remote rural areas.

It’s significant that the Tories’ poll rating fell to just 33 per cent in the latest YouGov poll, with Labour on 44 per cent. As Mike Smithson has noted before, high petrol prices tend to erode public support for the government.

With this in mind, Osborne is certain to use some of his £8bn revenue windfall to limit the price of fuel.