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15 November 2011

Will Osborne cut fuel tax again?

Ministers consider scrapping 3p rise in fuel duty after 110,000 sign e-petition.

By George Eaton

“We have put fuel into the tank of the British economy,” declared George Osborne with a flourish in his last Budget speech as he abolished the fuel duty escalator – which adds an extra penny on top of inflation – and cut fuel duty by 1p. But that wasn’t enough to appease the motorists’ lobby. After all, Osborne’s “fuel tax cut” wasn’t really a cut at all. The VAT rise added 3p to the cost of a litre and fuel duty is still due to rise by a further 3p a litre in January, meaning an extra £1.50 to fill an average car or an extra £38 a year, and again in August. In view of this, an e-petition calling for further action to reduce petrol prices (submitted by the Conservative MP Robert Halfon) has been signed by 111,692 people and the resultant parliamentary motion will be debated for three hours in the Commons today.

The motion has been signed by over 100 MPs, including 83 Tories, and already there are signs that the government is prepared to give way. The Times (£) reports that David Cameron is considering scrapping the planned 3p rise and that even the green-minded Lib Dems are prepared to support him. The coalition is evidently concerned about rising pump prices and with good reason. Polling shows that the “cost of petrol” is among voters’ biggest concerns (just behind electricity and gas prices) and as PoliticalBetting’s Mike Smithson has noted before, there is a telling correlation between rising prices and falling support for the governing party. The only time that William Hague led Tony Blair in the polls was during the fuel protests of 2000. Labour’s increasingly sharp attack on the cost of living – it is calling for the government to reverse January’s VAT rise to reduce prices – means that Cameron and Osborne must be seen to offer relief.

The argument that any spare cash should be used to reduce tax on motorists rather than, say, limit cuts to Sure Start, is unpersuasive. Scrapping the 3p rise would cost the Treasury around £1.5bn. But with petrol more highly taxed in Britain than in almost any other country, the government has a case to answer. Of the current average pump price of 133.74p a litre, 58.95p is fuel duty and 22.29p is VAT – a de facto tax rate of 154.74 per cent.

Another cut in fuel duty would further undermine the government’s claim to be “the greenest ever” and discredit Osborne’s insistence that the “cupboard is bare”. But the Chancellor, ever the political schemer, will still be tempted to announce another populist tax cut when he delivers his growth review on 29 November.

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