The funniest part about the UK budget 2011

Since I am the UK correspondent for TVHE I thought I had better contribute something to the blog. Then I stumbled across this gem from today.

One of the centre-pieces of the budget was the reduction in fuel tax (it has had a lot of media coverage). Not only was the fuel tax increase cancelled, fuel tax was in fact decreased by 1p per litre. According to Chancellor Osborne, this move would lead to motoring costs falling for families and businesses.

Given the budget was a fiscally neutral one, in that all additional spending/tax cuts come from spending cuts/tax increases in other areas, how is this cut in fuel tax being funded?

By an increase in taxes on North Sea oil production, from 20% to 32%.

I’ll leave it to the reader to think about what effect this increase in production tax might have at the petrol pump.

5 replies
  1. kingsley
    kingsley says:

    The effect this increase will have at the petrol pump is additional pounds for the buyer to pay. It does not make sense. It will still increase the price of petrol.

  2. Royal Albert Ross
    Royal Albert Ross says:

    No. The costs of North Sea oil production do not set the wholesale price paid for oil. That is set by world market, where prices are high because of geopolitical tensions in the Middle East, nothing to do with North Sea production costs. Profits being made by North Sea producers are therefore true windfalls and can be taxed without the cost feeding through to consumers.

  3. Matt Nolan
    Matt Nolan says:

    @Royal Albert Ross

    Excellent point – and I mostly agree with you.

    However, it does rely on how much production from different destinations are in fact substitutes – for example, in the case of crude oil itself the way the gap between West Texan crude oil and Brent oil adjusts has always suggested there is some imperfect substitutability in the near term. Say if there is a relationship between firms that use North Sea Oil, then part of the tax will indeed fall upon them.

    As a result, if it is a temporary fuel tax cut (which it really should be, given that the tax should be initially set on externality grounds) there is a good reason to believe that these tax changes will get in each others hair in the short term – nullifying any implied stimulus and the “fall in motoring costs” the chancellor is banging on about.

    If this is a permanent tax shift, then the relative price of fuel will be lower – but so will investment in oil facilities and production in the North Sea. In that case we need to ask whether such a tax shift is capturing the trade-off we want between efficiency and equity – which depends on whether the previous fuel tax was set in line with externalities, and whether we think capital is already being taxed at the rate we think captures our perceived equity-efficiency trade-off.

    [Just to be clear here, I do agree with you regarding the price – I just have a poor view of the effectiveness of the policy, and find myself cynical with regards to the realpolitik involved. As a result, I have an implicit incentive to come up with the largest set of reasons why the policy would fail 😉 ]

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