Tories lay out cost neutral plan to cut fuel duty

A cut of 5p a litre in the price of petrol and diesel was proposed by the Tories yesterday, with radical plans to change the way tax is levied on fuel in the wake of record global prices for oil.

The shadow Chancellor, George Osborne, launched a consultation on plans to scrap the existing fuel duty escalator and to replace it with a "fair fuel stabiliser" which would automatically allow the tax on fuel to fall when the world price for oil goes up.

He said fuel would be 5p a litre cheaper and inflation would be lower if the Tories' proposed system had been introduced in the Chancellor's Budget last March. This would save up to £3.50 on each tank of fuel for a Ford Mondeo, or £2.60 for a Vauxhall Astra.

On Thursday, the Prime Minister, Gordon Brown, gave the clearest hint so far that the 2p rise in fuel duty would be cancelled before it is introduced in October. The announcement could come before the 24 July by-election in Glasgow East where the rising price of fuel is a key issue. The hauliers have also caused fears in Downing Street that there could be damage to the economy if lorry pro-tests were repeated this summer.

"We are proposing a totally different way of doing fuel duty," Mr Osborne said on the BBC's Andrew Marr programme. "Under the current system, you wait for Gordon Brown to drop hints at select committees or Alistair Darling to come on this programme to make hints about what he may or may not do with the 2p. Not only is that an insult to families who want some clear direction from the Government but it is also extremely destabilising for the public finances."

The average household would have saved more than £90 in fuel costs under the stabiliser regime, said the Tories. Inflation would have remained below 3 per cent – the trigger point for the letter to the Chancellor by the Governor of the Bank of England, Mervyn King – rather than hitting 3.3 per cent with the threat of higher interest rates.

The Tories claim that the Treasury has had a windfall of bet-ween £4.6bn and £9.2bn in revenue from oil at $130 a barrel, which would be enough to pay for the cut in fuel duty. Adopting the more cautious estimate, the consultation document says the best independent evidence suggests public finances gain about £100m for every $1 change in the oil price.

The Tories say that diesel prices in Britain are the highest in Europe and petrol prices have risen faster here than anywhere in Europe except Estonia. Under the Tory plan, duty would rise if fuel fell below $84 a barrel, the baseline forecast in the last Budget for the price of oil, but it would fall if it remained above that level. The threshold for a fall in duty would be reviewed to make sure the public finances did not suffer too much.

"If this money was used so that around half of the change in fuel prices at the pumps caused by changing oil prices was offset by changes in fuel tax, the public fin-ances would be much better insulated against fluctuating oil prices," said Mr Osborne

"Clearly, as the scale of North Sea oil production and revenues change over time, the optimal degree of stabilisation will change. The exact structure of a Fair Fuel Stabiliser should therefore be reassessed every Parliament to ensure it remains consistent with stable public finances."

About 60 per cent of the current retail price of fuel is accounted for by tax. The document says a 115p-per-litre price for unleaded petrol is typically made up of 50.35p in fuel duty, 17.13p in VAT, 37.35p for the cost of the product, and 10.17p for delivery and retail.

The AA welcomed the proposals, saying that it had proposed a similar system in January. The AA's president, Edmund King, said: "The Government needs to review fuel duty as the price of a barrel of oil has doubled in just 12 months."

Business advisers Grant Thornton added: "The basic concept of an FFS is sound in economics terms. There is a strong argument to the effect that it would help smooth out fluctuations [to the price of road fuel, to inflation, and to the public fin-ances] arising from the fact the UK is simultaneously a measurable oil producer, and an oil consumer."