What will George Osborne do about fuel duty?

By Peter Hoskin
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In the end, last night’s vote on fuel duty did not yield the scare it might have: Tory backbenchers voted overwhelmingly in support of the government, and against Labour’s motion to postpone the 3p rise in duty that is currently planned for January next year. The government’s majority was 48.

But this victory may actually have been less easy than it looked — for, to stave off a rebellion, it appears George Osborne hinted that he will do something about fuel duty in the forthcoming Autumn Statement. As Robert Halfon put it yesterday, “the Government is in strong listening mode.”

This is not necessarily comfortable terrain for the Chancellor. He has already postponed the 3p rise on two occasions — and the fiscal conservative in him, eager to reduce the deficit, might balk at denying the Exchequer this money for another few months. This Osborne might want to draw a line in the sand before a third delay becomes a fourth, which becomes a fifth, and then a sixth, and so on.

But I do wonder whether the strategist in Osborne — the Osborne that surfaced in the Times today — will actually consider going further than is being demanded of him, and scrapping the rise altogether. There are three particular reasons why this might be tempting for the Chancellor:

i) The internal party politics. If Osborne does just postpone the rise, then there’s the continuing risk of more votes like that last night. And that would mean either cutting deals with Tory backbenchers each time, which could make the Chancellor look weak, or just succumbing to a damaging rebellion. Of course, scrapping the 3p rise needn’t prevent any calls for further action in future — particularly as fuel duty would still be rising in line with inflation, at least — but it would suck much of the poison from the immediate situation.

ii) The politics of the squeeze. We learn this morning that the squeeze on incomes goes on — headline inflation increased to 2.7 per cent in October, well above the 1.7 per cent rise in average wages — and all on the back of allegations about price-fixing in the energy markets. So it’s hardly surprising that Ed Miliband is eager to make the next election the “living standards election”; and even less surprising that Mr Osborne is responding with talk about “people who work hard and who want to get on”. But both will know that fuel prices have to be a key part of any pitch to struggling voters, not least because they were a furious, abiding concern even during the years before the crash.

iii) Do the economic benefits trump the fiscal costs? As my old workmate Jonathan Jones explained in a Coffee House post yesterday, the Treasury’s estimates suggest that postponing the 3p rise for three months would cost the Exchequer around £330 million. The National Institute of Economic and Social Research reckons it’s somewhere closer to £293 million. But the NIESR also adds that:

“Our estimates suggest that GDP growth will be 0.1 percentage point lower next year if this policy plan goes ahead than it would be if the rise in fuel duty were postponed (a loss of output equivalent to about £1 billion in 2009 prices), costing 35,000 jobs.”

And could that be an outcome to scare the Chancellor into postponing the 3p rise indefinitely?

As so often, it all comes down to whether money can be found elsewhere — which is no easy task, with the deficit and debt forecasts slipping as they are. But whether it’s a three-month postponement, a total annulment, or something in between, I’d be surprised if the Chancellor doesn’t spot some political gold in them thar hills.