Tax windfall enough to cover fuel duty freeze, says IFS

Windfall gains made by the Government from taxes on North Sea oil would more than pay for a postponement of the 2p rise in fuel duty scheduled for this October.

Research exclusively conducted for The Independent by the Institute for Fiscal Studies reveals that the Government will make a gain of around £1bn in this tax year, compared with the estimates made in the Budget. That is because the Treasury bases its estimates on the average oil price forecast by independent observers, which stood at only $83.80 per barrel in March. The price of a barrel touched $135 recently, and the consensus of independent forecasts now stands at $103 for the year, with Government oil revenues rising commensurately.

In 2009-2010 the windfall gain could be even higher at £1.25bn, according to the IFS. The cost of postponing the 2p increase in fuel duty, by contrast, is about £550m. Indeed, the Chancellor, Alistair Darling, could also afford to postpone the controversial rise on vehicle excise duty for older cars, a move designed to raise an extra £465m in 2009-2010.

Carl Emmerson, the deputy director of the IFS, said: "The direct impact of higher oil prices on the profitability of North Sea oil companies would in isolation boost tax revenues by enough to delay October's planned 2p increase in fuel duty by up to a year."

At least on paper, the benefits to the public finances of soaring oil prices could be spectacular. Should the price of oil stabilise at $130 a barrel, the annual windfall gain to the public finances could be as high as £3bn. Researchers at Capital Economics put the figure even higher: "The Treasury estimates that each $1 increase in oil prices boosts North Sea revenues by around £200m. The recent increase, if sustained, could eventually boost revenues by £9bn per annum if other things remained equal."

The Government has encountered intense political resistance, inside Parliament and outside, to its plans to increase taxes on fuel and vehicles. Plans announced this week to bring more North Sea oil fields into production seem unlikely to satisfy the MPs and fuel protesters who have been most resentful about the policy. They will seize upon the IFS figures to prove that the Government is failing to tell the full truth about the public finances. Even if the Chancellor puts off the 2p rise, the pressure will continue. Mr Emmerson added: "Any temporary delay to the increase in fuel duty might become permanent – politically it might be easier to cut it when oil prices are high than to increase it when oil prices have fallen back."

However, economists agree that the situation is not so simple, once the effects of soaring oil prices on the rest of the economy are taken into account. Thus, the Chancellor's room for manoeuvre may be limited. Profits in the transport, distribution and retail sectors are being badly affected, as recent results from British Airways made plain, so tax revenues here will be depressed, offsetting what additional funds the Treasury will receive from the oil companies.

Jonathan Loynes, chief European economist at Capital Economics, said: "While the rise in oil prices may have some beneficial effects on the public finances in the short term, these pale into insignificance compared to the threat of a much deeper and longer downturn in the economy than the Chancellor's current fiscal projections assume."

The Treasury's ready reckoner suggests a 1 per cent reduction in GDP increases public sector borrowing by 0.7 per cent of GDP, or about £10bn. In the Budget, Mr Darling forecast growth of about 2 per cent this year, and 2.25 per cent and 2.5 per cent in 2009 and 2010. Given that those outcomes are likely to be much lower, public borrowing could be £20bn per annum higher. A full-blown recession would blast a £100bn hole in the Government's plans.

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