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.