Wednesday, 28 May 2008

Cut fuel tax?

Alice Miles argues in the Times that the scheduled 2p increase in fuel tax should be deferred this Autumn. I'm not so sure this would have much impact. If petrol companies can profit from selling it at this price, may they just pocket any tax deferral or reduction? There would have to be a solid way of ensuring that any tax change finds its way to the end consumer and I'm not sure that can be guaranteed. It is bad enough having belt bursting price rises without just contributing more to petrol profits. So it's not the right way to go.

Besides, if we are now seeing the start of a response to global conditions of expanding demand as countries such as China rapidly develop meeting limited supply then we are just slightly mitigating the inevitable. Let's leave OPEC out of the argument for now as I'm sure that its impact is to accelerate or slow price changes but they can't fundamentally alter market conditions which suggest a step increase in the price of oil over time. Diplomatic pressure will either work or it won't but best not to factor it into the equation. If it does work, then it's a short term bonus, that's all.

A note of caution. We can't throw the environmental argument completely out of the window though it does carry less weight in circumstances such as these. Alongside whatever policy is pursued on petrol prices, there needs to be a greater consideration about how the state can better support market-driven environmental technologies so that their introduction and dissemination is accelerated.

Of course, petrol price rises are a (severe) short term hit and the volatility of the price, i.e. rapid price rises currently, hit the consumer hard. So is a better approach not to give the cash directly to people in the form of enhanced tax credits for the least well-off or a one off tax rebate? Mexico is currently doing a similar thing to offset food price rises.

Such a policy could make counter-cyclical economic sense as economic conditions harden. The impact on interest rates will need to be carefully considered- there's no point giving more cash with one hand if the response is going to be interest rate rises or rates falling more slowly (though as we've discovered the relationship between interest rates and mortgage rates are uncertain at the moment for many if not most mortgages.) Then there's the fiscal rules....we are dangerously close to the 40% national debt ceiling. This limitation, it should be said, applies to both fuel tax cuts or increased tax credits. Who'd be Chancellor?

The calls to reduce fuel tax and/ or excise duty will rise to a cacophony over coming months. There are better ways of reducing the pain of price rises. If we go for the tax credits/ tax rebate route for goodness sake say why it is being done that way. Then explain and communicate why time and time again. There is no point having the right policies if they are matched with duff communication.

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