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Tories would cut 5p a litre off cost of fuel by using tax surplus from oil price rises

Times Online
The Times
July 7, 2008

Tories would cut 5p a litre off cost of fuel by using tax surplus from oil price rises

Osborne claims proposal would ‘share the pain’

Petrol pump

The Conservatives announced plans yesterday to curb rising petrol prices by cutting fuel tax when oil prices rise, saying the move would reduce prices at the pumps by 5p a litre.

A Tory government would introduce a “Fair Fuel Stabiliser” to use the additional tax revenue generated by the oil price rise to absorb increases at the pump by 50 per cent.

The Tories claim that the Treasury benefits from an additional £100 million a year for every $1 a barrel rise in the oil price and want to use this to “share the pain”. They deny this will create a financial black hole because oil windfalls are not used when calculating spending plans. Motorists would also face tax rises on fuel if the price of oil dropped, with a target level set in the first Tory Budget. This is designed to ensure that the government met its revenue forecasts.

The Tories claim that, had the Fair Fuel Stabiliser been introduced in the 2008 Budget, when unleaded petrol cost £1.08 a litre, then half of the 10p rise since then would have been absorbed by government. Ford Mondeo owners filling up at £1.18 a litre today would therefore save up to £3.50 on each tank of fuel under the Tories, and Vauxhall Astra drivers £2.60. Last week Gordon Brown said that the notion of a windfall was an illusion because rising fuel costs hit the economy and drive down the tax take in other areas. The Tories believe, however, that their plan would keep prices lower and would reduce inflation from 3.3 per cent to 3 per cent.

About 60 per cent of the retail price of fuel is accounted for by tax, with the Tory figures showing a 115p-a-litre price for petrol is typically made up of 50.35p in fuel duty, 17.13p in VAT, 37.35p for the cost of the product and 10.17p for delivery and retail.

The party issued a consultation document yesterday asking how frequently the fuel duty levels should be changed and how this change should be calculated. George Osborne, the Shadow Chancellor, said: “We need a totally different approach to fuel duty, where government helps families instead of harming them. A Conservative government would share the pain when oil prices rise, and share the gain if they fall. So when the price of oil goes up, fuel duty would actually be cut. And with duty rising when oil prices fall, we would be putting something aside in the good years to help in difficult times.”

Vince Cable, the Liberal Democrat Treasury spokesman and a former chief economist at Shell, said Mr Osborne was “presuming a knowledge of future trends in oil prices which is not shared by most people who look at these professionally”.

He said: “If George Osborne wants to be taken seriously, he needs to explain what assumptions he’s making about the trend in oil prices.”

Kitty Ussher, Economic Secretary to the Treasury, said the Tories were wrong to assume a straight trade-off between oil prices and increased revenues. “When oil prices go up, some revenues fall while others rise, because of the impact on business profits and household budgets. So if George Osborne were to do what he proposes, he would need to raise nearly another £3 billion in taxes elsewhere in this year alone to plug his tax gap – that’s getting close to an increase of 1p in basic income tax.” The AA, the motoring organisation, strongly backed the plans, with Edmund King, its president, saying that the organisation suggested a similar system to the Chancellor in January. “Record pump prices and high levels of excise duty are affecting the mobility of millions,” he said.

Mr Brown and Alistair Darling have hinted strongly that the 2p rise in duty due for the autumn will be suspended.

£3.50 – What a Ford Mondeo owner would save when filling up under the plan 
Source: Conservative Party

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