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Rapid increases in pump prices have sparked renewed debate on the level of fuel duties, with calls for the Chancellor to cancel April's planned real-terms increase in the forthcoming Budget. There is also continued speculation about the prospect of a "fair fuel stabiliser" (FFS) - a formal mechanism to cut duties at times of high oil prices (and to raise duties when oil prices fall). During Prime Minister's Questions on March 2, David Cameron made it clear the FFS was still under consideration, saying: "...we will look at the fact that extra revenue comes to the Treasury when there is a higher oil price, and see if we can share some of the benefit of that with the motorist. That is something that Labour never did in all its time in government." What are the facts and how should we assess these proposals?
Day-to-day changes in fuel prices are highly visible and fuel is an important share of spending for many households, so the salience of the issue is unsurprising. In 2009, vehicle fuel made up on average 4.9% of household spending, and more than one in five households spent over 9% of their budget on fuel. As prices have risen since 2009, fuel's prominence in household budgets has probably grown further.
In real terms, fuel prices are now about 17% higher than they were in autumn 2000, the period of the fuel price protests. Taxes now make up around 61% of the price of a litre of diesel and 63% of the price of petrol (for petrol, 46% of the price is duty and 17% VAT). The total tax paid for a litre of petrol amounted to around 80.2p in January 2011 following rises in both duty and VAT, though this is below the real-terms peak of 82.5p/litre seen in July 2000.
Fuel duties are set to rise by one penny above inflation each April up to 2014-15 as part of a duty escalator introduced by Labour in the 2009 Budget and extended in the March 2010 Budget. Even with no real increase, duties would rise by just over 2p/litre to reflect inflation (the inflation rate used is the expected RPI in the third quarter following the Budget , currently forecast at 3.5% by the Office for Budget Responsibility, OBR). Cancelling the one penny real increase would cost about £500 million. Freezing duties in cash terms would cost just over £1.5 billion. The latter figure would be higher if inflation forecasts for the third quarter are revised upwards in the Budget (RPI inflation was 5.1% in January 2011). If oil prices remain high, future planned increases in duties would also come under pressure. Cancelling all the real rises to 2014-15 would leave revenues about £2 billion lower each year from then. Cancelling all inflation-adjustments as well would leave revenues about £6 billion lower.
Given the scale of the deficit, the government has little room for manoeuvre to make any concessions on tax that are not paid for through tax rises elsewhere, or deeper than planned spending cuts. One particular consideration for fuel taxes must be that reductions in fuel duties would also make the government less likely to meet its objective to raise the share of total receipts generated from environmental taxes.
Beyond the fiscal issues, there are two particular problems with a FFS:
That said, one could argue that while no formal fuel stabiliser policy has been in place before, the previous Labour government did informally help to stabilise pump prices with their fuel taxation policy. The chart shows real-terms petrol pump prices and duty rates between January 1990 and January 2011. Aside from the autumn 2000 protest period, there was a relatively steady upward trend in pump prices throughout much of the 1990s and 2000s. This was caused first by the previous duty escalator introduced in 1993.During this period oil prices were relatively low and stable and so higher prices were driven by higher taxes. The escalator was abandoned in 1999 as oil prices began to rise, and duties were frozen in cash terms for a number of years, meaning higher prices were driven by the pre-tax cost of fuel.
Source: Calculated from DECC energy price statistics (http://www.decc.gov.uk/assets/decc/statistics/source/prices/qep411.xls)
It may be that a formal stabiliser policy would be preferable to ad-hoc adjustments to duty rates made Budget by Budget, adding (hopefully) more transparency and predictability to the process. But it should not be sold on the basis that it would stabilise the public finances: a formal stabiliser would - at least according to the OBR's estimates - lock in even more uncertainty to the overall fiscal position.
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Cutting the deficit: three years down, five to go?
The UK is in the fourth year of a planned eight-year fiscal tightening. Following further announcements made in Budget 2013, this fiscal consolidation is now forecast to total £143 billion by 2017–18. The UK is intending the fourth largest fiscal consolidation among the 29 advanced economies for which comparable data are available. By the end of this financial year, half of the total consolidation is expected to have been implemented. However, within this tax increases and cuts to investment spending have been relatively front-loaded, while cuts to welfare spending and other non-investment spending have been relatively back-loaded.
The March Budget forecast that borrowing would fall by £0.1 billion from £121.0 billion in 2011–12 to £120.9 billion in 2012–13. On Tuesday, the Office for National Statistics is due to release its first estimate of public sector net borrowing in March 2013 and, therefore, for the whole of 2012–13. Borrowing could easily end up being higher or lower than it was in the previous year, either due to backwards revisions, the uncertainty inherent in forecasting borrowing even a month in advance, or both. However, whether borrowing is slightly up or down in cash terms is economically irrelevant. Either way, the bigger picture is that having fallen by roughly a quarter between 2009–10 and 2011–12, borrowing is forecast to be broadly constant through to 2013–14.
Women working in their sixties: why have employment rates been rising?
Employment rates through the recession have been remarkably robust, with today’s ONS figures showing employment remaining close to 30 million. The young have experienced historically low employment rates and high unemployment rates but the employment rate of women aged 60 to 64 has increased as fast since 2010 as it did during the 2000s. An important explanation is the gradual increase in the state pension age for women since 2010, which has led to more older women being in paid work. Without this policy change, the employment rate for 60 to 64 year women would have been broadly flat since 2010.