The Treasury is not happy with the idea that it could scrap its proposed 2p increase in fuel duty AND its new tax on gas-guzzling cars – and still beat the relevant revenue forecasts by more than £4bn if oil prices stay at their current highs.
Here is the theory of Maurice Fitzpatrick, senior tax manager at Grant Thornton, the accountants:
Tax revenues from North Sea oil would jump from an estimated £10bn – struck when oil was only $84 a barrel – to £16bn at the current price of about $128 a barrel.
Since the Budget in March, the Treasury has already taken an estimated £820m more than its forecasts in North Sea oil tax.
The £6bn of surplus revenue would easily cover the cost of U-turns on both fuel duty and vehicle excise duty, where ministers are introducing new bands which could cost an extra £200 for drivers of inefficient cars.
Deferring the 2p increase in fuel duty by six months would cost £550m. Scrapping the revamped vehicle excise duty altogether would mean the loss of an estimated £465m next year and £735m next year – although ministers may only remove the retrospective element of this tax.
But Number 10 has disputed this, saying this afternoon: “The Treasury has always made clear that the impact of high oil prices on public finances tends to be revenue-neutral over the long-term.”
Here is their argument:
The increased revenues from oil when prices are high are offset by a number of factors including:
* an increase in pump prices leads to an increase in inflation. This knocks through to the inflation-linked payments that the government has to make, including benefits, pensions, tax allowances, and government bonds.
* reduced demand for fuel from filling stations, which reduces revenue from fuel duties – as this is fixed at 50.35p per litre if people buy less fuel, revenue from this falls.
* receipts from profits made by North Sea oil companies have in recent years been to some extent offset by capital costs, and the costs that have been rising for plant and machinery and labour costs too.
So there is a net offsetting effect.
That is the theory, anyhow.
Jim Pickard
Kiran Stacey
