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Thursday, 14 September, 2000, 18:52 GMT 19:52 UK
Could the government cut fuel duty?
Oil rig
The oil price rise has increased the Treasury take from oil companies

by BBC economics reporter Jenny Scott

Can the government afford to reduce fuel duty?

Finding the money to shave at least 4p off petrol duty wouldn't be a problem for Prime Minister Tony Blair. But it could well be a mistake, according to economic experts.

Government coffers are brimming with cash thanks to stronger than expected tax revenues, better economic growth and higher oil prices.

Many economists predict that government revenues will exceed spending by at least 10bn this year - around 4bn more than official projections.

Tempting option

Given that it costs 420m to take 1p off the price of a litre of fuel, according to the independent think tank, the Institute for Fiscal Studies, the government could theoretically lop almost 10p off pump prices.


The government shouldn't be jiggling with taxes in response to short term variations in the economy

Robert Barrie, economist, CSFB

After around a week of refinery blockades that left petrol stations dry, strained health services and left some shops empty of bread and milk, this may look like a tempting option.

But it would be a big mistake, say economists. "The government shouldn't be jiggling with taxes in response to short term variations in the economy," said Robert Barrie, economist at investment bank CSFB. "It would be mad to do that."

For one thing, this year's improvement in the government's finances could be fleeting, so spending it may store up problems for later years.

Accounts in the red

If future economic growth was worse than expected and unemployment jumped, tax revenues would fall and government spending in areas such as benefits would increase, leaving the Treasury to fund the shortfall.

Gordon Brown, Chancellor of the Exchequer
Gordon Brown: Treasury windfall from rise in oil price

As it is, public finances are expected to be 11bn in deficit by 2003/04, thanks to money earmarked for hospitals and schools over the next three years. Empty pockets would mean borrowing more money, something the government is keen to avoid.

A sharp fall in oil prices could also stretch finances. The IFS estimates that the recent rise in oil prices has yielded almost 1bn pounds more in North Sea revenue - a tax on oil companies - than the government expected when it made its calculations for the March Budget.

If oil prices stay high that figure will rise. However, if prices slip below the rate of $22 a barrel assumed in the Budget, that figure will also fall.

Enviromental concerns

There are also a raft of strategic and environmental reasons not to cut fuel duty. High petrol prices help to discourage motorists from buying inefficient, gas guzzling cars.

"Cutting fuel tax would be like cutting cigarette duty," said Garry Young at the National Institute of Economic and Social Research.

Tax payers also like stability. Raising and lowering taxes in response to short term fluctuations prevents people and companies from planning ahead, resulting in an inefficient revenue system.

The government raises around 22bn a year in fuel duty - far more than the 13bn it raises from council tax or the combined revenue from taxes on cigarettes, alcohol and gambling.

Any attempt to cut that duty is now firmly a political decision, not an economic one.


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14 Sep 00 | Business
13 Sep 00 | UK Politics
12 Sep 00 | Business
12 Sep 00 | UK Politics
12 Sep 00 | UK Politics
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