Fuel price blues–how the Tories are missing the plot

Daily Telegraph columnist and part-time Mayor of London Boris Johnson is the latest Tory to come out in favour of a fuel price stabiliser.  He joins a growing number of Tories backing the idea, and Liberal Democrats are now talking about fuel concessions for the country’s periphery.  Recent increases in fuel prices have given impetus to the scheme.

The inaccuracies in Johnson’s article have been spelt out elsewhere, and I don’t intend to repeat them here.  The proposal is however Government policy – it was announced by George Osborne in July 2010, with an instruction to the Office for Budgetary Responsibility to devise a scheme. So it’s worth considering whether it is a runner, and whether it really would achieve the objectives of being fairer and more business-friendly.

The principle behind the stabiliser is that the tax system should be used to stabilise fuel prices.  When fuel prices are high the tax would automatically fall, and when they fall the tax element would rise, in order to provide stability.

But the OBR has already reported and suggested that the numbers don’t add up.  The report points out that a short-term increase in fuel prices of £10 per barrel over the year boosts public finances by £2.4bn but the cost of offsetting it at the pump would be £3.7.  In other words, the stabiliser’s supporters would need to explain how a £1.4bn hole would need to be plugged.  Boris Johnson’s article sticks to the default coalition script that Britain’s economic problems were caused by Gordon Brown’s profligacy, a comment that sits uneasily with his advocacy of the stabiliser.

Moreover, we’re being told nothing about the fairness or otherwise of such a proposal.  Johnson’s scenario of middle England being forced to pay more to fill up the people-carrier gives the game away – the stabiliser would subsidise the middle classes most, especially since businesses will be able to claim back the VAT on increased fuel prices.

We’re not yet being told how it would work, and therein lies a key weakness.  One of the attractions of fuel duty is that it is extremely cheap and efficient to collect, with no more than marginal evasion.  Complications arise where there are special considerations, like the low-tax red diesel that is effectively used to subsidise agriculture – it’s sold for off-road use but fraud is widespread.  The introduction of a stabiliser would require more bureaucracy at a time when HMRC is being scythed back and, by being linked to pump rather than wholesale prices, would mean greater complexity for the fuel distribution industry, which is currently acting as a de facto cut-price tax collector.  Questions of how often the rates would change have not been addressed.

In other words, it’s a political sop to middle England.  Fuel prices have been a Tory issue – witness the (wholly mendacious) rhetoric about the “war on the motorist” which, eight months into office, Government ministers still parrot. Pure politics, and bad economics

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