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24 March 2011

Osborne must know he can’t tell the oil companies how to behave

This is economics at its most basic: the burden of tax can be shifted.

By David Blanchflower

Apparently, the Chancellor is going to be “watching like a hawk to make sure that motorists get the benefit of the Budget changes and make sure that there’s no funny business”. Sorry, but I don’t believe a word of it.

George Osborne is going to be watching like a dove: perhaps even a pigeon. What is he going to do? Give the oil companies a big ticking off if they raise prices? What information does he have about their costs? We learned many years ago that prices policies don’t work.

This is economics at its most basic. It’s what we teach in the very first class — that the burden of a tax can be shifted. Consumers will inevitably end up paying at least some proportion of the tax increase because they have no alternative to petrol. And Slasher Osborne is powerless to do anything about it.

It reminds me of the announcement that he made when he was shadow chancellor, that he would go after banker’s bonuses. It was just political rhetoric: he had no intention of following through in office, as it would have amounted to a private-sector incomes policy. We know that incomes policies don’t work in the private sector: there are too many ways to get around them. You can promote people into made up positions, for example.

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Meanwhile, the incomes policy in the public sector, as is currently being implemented with a wage freeze for higher-paid workers, will inevitably lower the quality of public-sector services. That may well be his intention: freezing wages in the public sector makes jobs in the private sector more attractive.

The tax on the oil and gas sector will have another likely effect — the industry will lower its investment. This will be bad for growth, given that the Office for Budget Responsibility (OBR) is forecasting that business investment is a major driver of growth going forward. Indeed, the OBR is forecasting that investment will grow by 6.7 per cent in 2011; 8.9 per cent in 2012 and over 10 per cent in 2013 and 2014, which seems overly optimistic. Can it be that Osborne doesn’t care that this tax will drive the oil and gas industry overseas to countries that are more pro-business? Surely not.

All this on the same day that Moody’s, the credit rating agency, suggested that the UK’s AAA credit rating was in doubt because Slasher’s policies are likely to lower growth. Here’s what it had to say:

Although the weaker economic growth prospects in 2011 and 2012 do not directly cast doubt on the UK’s sovereign rating level, we believe that slower growth combined with weaker-than-expected fiscal consolidation could cause the UK’s debt metrics to deteriorate to a point that would be inconsistent with a AAA rating.

Interesting.