The idea of creating some sort of mechanism to smooth out fuel price changes is a highly attractive one if it can be made to work. It’s something which Plaid Cymru have called for for some years, and which the Conservatives put forward as a proposal in last year’s election.
Giving businesses and individuals a more stable basis, free of sudden and unexpected fuel price changes, on which to plan their finances is clearly advantageous. The devil is in the detail, though, and I’m not really surprised that Cameron has had second thoughts on his plan. I’m disappointed, though, at the apparent reasoning behind his change of heart.
The Office for Budget Responsibility did some work on the question over the summer and produced this report on their conclusions. The first thing that struck me is that the remit was rather more complex than the political rhetoric would suggest. Certainly it starts out by talking about whether ‘a Fair Fuel Stabiliser could support motorists when the cost of living is rising, by reducing fuel duty when oil prices rise (and vice versa)’; but it goes on to talk about ‘a key principle underlying a Fair Fuel Stabiliser should be that it reduces the sensitivity of the public finances to oil prices and improves the long-term stability of the public finances’.
The title of the report (Assessment of the Effect of Oil Price Fluctuations on the Public Finances) itself betrays where the emphasis lies, and indeed, most of the detail of the report then goes on to consider the second point in rather more detail than the first, in what seems like a pretty significant departure from the original objective. And, somewhat counter-intuitively many might feel, it actually concludes that the Treasury lose out overall from higher fuel prices because of wider economic effects and the impact on other tax revenues. I think we can probably assume that the idea is pretty much a dead one as far as the current government is concerned.
My main reservation about the idea of such a mechanism is not about the impact on the public finances, but about the practical difficulty of knowing whether a given change in fuel costs is a ‘temporary’ one or a ‘permanent’ one. The report itself makes that very point, noting: ‘In practice the distinction between what constitutes a ‘temporary’ and a ‘permanent’ oil price shock is highly subjective. It is extremely difficult to identify in real time whether movements in the oil price are temporary or are likely to persist beyond the near term’.
That, in my view, is a much more serious objection to the idea. The simple concept of reducing fuel duty when the price fluctuates upwards, and increasing it again when the price fluctuates downwards carries within it an implicit assumption that the fluctuation is happening around a fixed point. And we all know that that assumption is an invalid one.
The problem could be overcome to an extent if the government were to set the fixed point – whether in absolute terms for a fixed period, or in terms of the expected ‘normal’ rise around which the price might be expected to fluctuate, or even in terms of an indexation against some other factors, such as overall inflation. But these approaches have their own problems.
Setting a fixed point for a defined period merely stores up the price shock until the start of the next period, when the jump is then likely to be larger.
And publishing any sort of expected price trend for a period in advance has political problems as well as the obvious financial one (that the government might simply get their prediction wrong). Telling us all in advance that a given level of rise in fuel prices over a given period is both expected and acceptable sounds to me like something which Sir Humphrey would describe as a ‘very brave decision’.
Can the core idea of government intervention to provide a more stable price regime for fuel be somehow rescued from the practical difficulties? I’d like to think so, but I don’t immediately see how it can be done whilst oil prices are set by the markets as at present.
Posts
8 comments:
John
Raw material costs will always reflect extraction processing and transport costs to end users.
Super markets can only market fuel below cost if you and I are paying for it in another way there is no such thing as a free meal
The big problem is that of Taxation
Fuel costs particularly petrol are high because tax revenue is required for Government expenditure
good bad and downright crazy
An independent Wales would I submit be a neutral country and taxation would fall as we would not be involved in the likes of Suez Korea Falkands Iraq and Afghanistan all tragic symbols of an English colonial empire in terminal decay
"Raw material costs will always reflect extraction processing and transport costs to end users."
True, of course. And the cost of oil is on a long term rising curve. But the cost of oil also includes a significant element due to speculation which can cause sudden large movements unrelated to those underlying costs. Separating those out - and determining whether they really are merely short term - is no easy task.
"The big problem is that of Taxation. Fuel costs particularly petrol are high because tax revenue is required for Government expenditure"
Again, completely true. And governments could decide to reduce fuel duty and get their tax revenue elsewhere if they wanted. It wouldn't eliminate the huge variability of oil prices though, and the impact of that on individuals and businesses.
"An independent Wales would I submit be a neutral country and taxation would fall"
I'd like to think so, but those statements are by no means as certain as the previous ones. And, even if they were, it still doesn't address the underlying problem of rapid, unexpected variations in fuel prices which play havoc with the plans of individuals and businesses.
Those calling for some sort of fuel duty regulator have identified an important issue for all of us, and I'd like to think that thee was a simple solution available. I just don't see that at present though.
John
Yes but the effect of tax has on the procees is to accelerate the rate of increase in fuel prices irrespective of the origin of the increase.
Remember the fuss over the £1 per litre benchmark soon we may see the £1.50 mark broken
Its like drug addiction with the government the dealer once a new price regime is established then it is maintained so the tax take can be increased
"the effect tax has on the process is to accelerate the rate of increase in fuel prices"
Up to a point. There are two different aspects to tax on fuel. The VAT per litre certainly increases with an increase in prices, but fuel duty itself is set at a price per litre, so doesn't automatically vary with the price of fuel. (Although it's not unknown for governments to increase the rate of fuel duty as and when they wish; it's just not automatic.)
"once a new price regime is established then it is maintained so the tax take can be increased"
The OBR paper which I referred to in the original post suggests that rapid increases in fuel prices actually depress rather than increase total tax take. I wouldn't necessarily accept all their assumptions - there's a certain amount of guesswork involved - but I'd accept that the relationship is by no means as linear as political rhetoric might suggest.
I understand why the debate focuses on the tax element - firstly because tax represents such a high proportion of the total price, and secondly because the tax element is the element which governments can control and vary. But isn't the real issue about price stability rather than about tax?
John
The oil market is now fundamentally unstable as global supply is almost certainly in terminal decline.
End users face a spot price at refineries unless they have bought on the futures market
There is as you say no easy answer.
as the upward cost spiral goes on ever upwards.
My point was that only Government can exert a degree of stability by using the taxation system as a damper or by promoting alternatives to oil which is the only way forward.
Given the Con dems current obsessions with tax revenue to reduce National debt I fear thatwe will pay a very high short term price here in Wales and lose sight of essential long term realities
"My point was that only Government can exert a degree of stability by using the taxation system as a damper or by promoting alternatives to oil which is the only way forward."
Entirely agree with the second part; it really is the only way forward. I'd like to agree with the first part as well - indeed, that was the point of the original post.
The problem is in knowing whether a price movement is 'temporary' or 'permanent'. If the government reduces fuel duty in response to a price increase in the belief that it's a temporary blip and it then turns out to be part of the inexorable long term increase in prices, all it has actually done is to implement a tax cut. Hooray, many might say, of course, and I'd understand that reaction.
But governments will come under pressure to reduce fuel duty in response to any and every rise in fuel prices. Some of those reductions would be reversed if it is indeed nothing more than a blip; others would not when the price does not reduce again. Over a period, therefore, the net effect is likely to be a progressive reduction in fuel duty, until eventually there is no duty being paid at all - and no flexibility left to respond to future changes in price.
Now, I would wish it could be otherwise - the idea of using fuel duty to damp down changes is a highly attractive one; I just don't see how governments are going to be able to distinguish between two very different types of price rise.
Two things I like to say about these excellent posts from yourself and Anonymous (I like the cut of his? Jib) is
1. HMG dependence on the revenue from fuel through duty and VAT gives them no incentive to ensure there is proper competition at the pumps which owing to the VAT content would suppress their tax take and this makes the oil industry, too big to fail – heard of any oil companies going bust??
2. Having not read the Report, but if the formula is set by the English Parliament as a one size fits all throughout the realm, it will not benefit Wales as much as England as disposal incomes and levels of pay are lower in Wales. The solution until a Welsh Government is restored, is to set different levels and criteria in Wales and Scotland to gain a fairer system – but don’t hold your breath.
Spirit,
"if the formula is set by the English Parliament as a one size fits all throughout the realm, it will not benefit Wales as much as England"
I'm not sure that any sort of fuel duty regulator is likely to be able to address the issue of regional differences in prices, which are driven more by the nature of local competition. I suspect that we need to look elsewhere - road tax perhaps - for a mechanism to counter the additional costs faced by rural communities.
Post a Comment