Fuel duty cut 'could cost £6bn a year'

George Osborne, the Chancellor, has been warned that his plans to cushion the impact of soaring oil prices for motorists will backfire and create another "black hole" in the public finances. A study for the Green Alliance environmental group has found that a fuel duty stabiliser could cost £6bn a year, which would have to be found by raising taxes or through deeper public spending cuts.

After the price of unleaded fuel rose to more than 140p a litre in some areas, Mr Osborne is under mounting political and public pressure to announce some relief for drivers in his Budget. He is expected to scrap the 1p per litre above inflation rise in fuel duty planned by the previous Labour government and may bring in a mechanism to protect motorists from future rises in world oil prices.

Before last year's general election, the Conservatives promised a stabiliser under which the Government would cut fuel duty when the global price increased to smooth out the effect of fluctuating prices. But the Green Alliance report warned that such a stabiliser would give oil companies and petrol retailers an incentive to raise prices, in the knowledge that taxpayers would soften the blow.

The group claims the cost of a stabiliser could be even greater because of the instability in the Arab world. Chris Hewett, a tax specialist at the Green Alliance, said yesterday: "The recent price increases, driven by events in the Middle East, only serve to underline how dangerous it would be for the Government to use tax revenues to keep prices down."

Analysis by the Policy Studies Institute research group found that if a stabiliser had existed for the 12 months to last December, during which the price of petrol rose by 13p a litre, it would have cost almost £6bn.

Mr Osborne has dropped strong hints that he will act in his Budget. "I understand how families are hit hard by the rising cost of oil around the world, caused in part by the Libya crisis, and I am seeing what I can do to help," he has said.

Nick Clegg, the Liberal Democrat leader, is not opposed to action to help motorists, but is pressing for a further rise in income tax allowances to help the low paid, his party's flagship policy.