Curious numbers behind the fuel duty cut

It’s worth watching Krish’s interview with economic secretary to the Treasury Chloe Smith.

While many millions of motorists will be cheering today’s announcement of the five month delay to 3p fuel duty rises, there are some interesting economic curiosities about the timing and the funding for this rather unexpected announcement.

Firstly, if this is the sudden result of concern of some sort of domestic living standards emergency, then why was it announced now? Number 11 says that an average family with a car will save £159 over two years when all of these freezes are taken into account, versus plans inherited from Labour. (I’ll check if that includes the loss from VAT rise)

Petrol prices this week average 133p per litre. Yet at the time of the March Budget, when the Chancellor ruled out this change, they were 5p higher, at 138p.

The long run petrol price is determined by crude oil prices. Well today Brent crude was trading at $91 per barrel. On Budget Day it was massively higher at $125 per barrel.

When you put this to Number 11, they say that you would never announce such a change so long before it was due to take place. If this was always the plan, then why did the Chancellor categorically rule it out in March, and indeed members of his Cabinet defend this decision even this week?

It certainly seems like reasons other than pure economics are driving this decision.

On funding, the government is right when it points to underspends in departmental spending so far this year. As my table shows, in April and May, spending growth has been just 0.6 per cent versus the 2.7 per cent pencilled in for the year. But the very latest figures for May alone showed an overspend. Benefit spending at 10.2 per cent year on year growth, however is running well above government projections of 5.8 per cent. This is being driven by the recession, and unemployment. Interest payments too are an “overspend” against projections of a decline.

All in all, it can’t be certain that the government will underspend. It might. But it might not. Will it definitely be more than the £550m cost of this move? This announcement does have the character of an unfunded cut of a planned tax rise. All things being equal, it will require hundreds of millions of extra borrowing between August and the Autumn statement (probably in November). One might even dare to call it a temporary minor fiscal stimulus. All of which begs the question of why we are not immediately heading for Athens-style debt crisis, as suggested by numerous cabinet ministers?

Read more on the cancellation of the 3p fuel duty rise , from Gary Gibbon

The government might argue that it is spending some of its hard-won fiscal credibility. So vigorous is the trust of the markets in the chancellor, that they dutifully accept his promise that the cut will be funded. But I have no doubt that George Osborne in Opposition would have described today’s move as an unfunded tax cut.

It may yet cause a twitch of the eyebrows at some of the ratings agencies that have already put Britain on negative watch. The chancellor has always emphasised that he would be flexible. It rather begs the question of whether a prolonged recession would see more of this stuff on the way.