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Coffee House

Briefing: Another fuel duty freeze?

12 November 2012

6:59 PM

12 November 2012

6:59 PM

It looks like George Osborne will put the planned fuel duty rise on hold again, in order to avoid another Tory rebellion and potential government defeat in the Commons.

This battle has its origins in a Labour Budget: that of 2009, in which Alistair Darling introduced a fuel duty escalator whereby fuel duty would increase by inflation-plus-a-penny every April from 2010 to 2013. In his 2011 Budget, Osborne announced that he was abolishing the escalator and instead cutting fuel duty by 1p per litre. From January 2012 onwards, the escalator was to be replaced by a ‘fair fuel stabiliser’, under which the duty rises by inflation-plus-a-penny when oil prices are low for a sustained period, but only by inflation (as measured by the Retail Prices Index) when they are high.

Fuel duty was therefore set to rise by 3.02p per litre on 1 January 2012 — keeping it constant in real terms — and then again by inflation on 1 August 2012. But in last year’s Autumn Statement, Osborne delayed the 3.02p January rise to 1 August and cancelled the original 1 August rise (which was expected to be 1.92p per lite). And then, in June this year, he announced that the 3.02p rise would again be delayed until 1 January 2013 – and it’s this rise that is being debated in the Commons this evening.

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A number of Tory MPs have been arguing against a fuel duty rise, and threatening to vote with Labour to delay it at least until April 2013. It seems that Osborne, afraid of another Commons defeat at the hands of a Labour-Tory rebel alliance, has found a compromise with the potential rebels. Robert Halfon, the Tory backbencher who has long been at the front of the campaign against a fuel duty rise, said today that ‘I have had discussions with various people and it is my view that the government is in strong listening mode. If I didn’t believe that I would make a point and go in to the lobby with Labour.’ So it seems we can expect Osborne to announce another delay in his Autumn Statement next month, if not before.

It’s worth noting that a cash freeze in fuel duty is a real terms cut, and in fact fuel duty has already fallen by about 14 per cent in real terms since 2000:

And how much would another freeze cost? Well, the Treasury estimated that delaying the rise for five months from August 2012 to January 2013 cost around £550 million. Delaying it for a further three months — if that is indeed what Osborne does — should therefore cost somewhere around £330 million. That’s roughly consistent with the NIESR’s estimate — in a report for FairFuelUK campaign — that a 3p rise on 1 January 2013 would reduce the deficit in Q1 by £293 million. However, they also forecast that the rise (as opposed to no rise, rather than just a delay) would reduce 2013 GDP growth by 0.1 percentage points and cost around 35,000 jobs by the end of next year.

But if Osborne has indeed agreed to postpone the increase in order to avoid a backbench rebellion, his relief may well be short-lived. On the evidence of the past couple of years, we can surely expect him to come under pressure for yet another delay in a few months time.

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