Taxing times

Oil lows give Osborne chance to raise UK fuel tax

British finance minister George Osborne will be lucky if he delivers a promised £10.1-billion budget surplus by the end of the decade. But lower oil prices could yet be his saviour - if he decides to raise taxes on the price of fuel for the first time in five years. With a slowing economy and the prospect of higher borrowing costs ahead, a serious option for Osborne would be to tax motorists now while he still can and deal with the political fallout later.

Brent crude has fallen 71 per cent to below $28 per barrel since the duty on fuel was last raised in January 2011. Since then, Osborne has avoided the deeply unpopular measure of raising more revenue from the UK's estimated 30 million motorists. Instead of hammering drivers, Osborne chose to curry favour by scrapping the old fuel escalator tax model, which had allowed the government to increase taxes on diesel and gasoline by a higher rate than consumer price inflation as measured by the Retail Prices Index.
 
Back in 2011, the concern was that higher oil prices of around $115 per barrel were already weighing heavily enough on the economy, which needed a perk up following the financial crisis. Nowadays, Osborne may have to raise more revenue to meet his targets.

He does have room to turn at filling stations. Diesel in the UK is currently 14 per cent cheaper than its 10-year average price of 120.4 pence per litre, according to figures prepared for Breakingviews by the RAC Foundation. Assuming oil prices remain at their current levels for the next couple of years, Osborne could afford to increase duty by as much as 10 pence per litre. If he did, the combination of the duty and VAT would only drive pump prices back to the 10-year average, which in any case is nowhere near the 148 pence per litre of diesel peak reached in 2012. If UK motorists consume around 40 billion litres of fuel per year, then Osborne could raise an additional £4 billion annually to help plug any holes in future budgets.

Increasing fuel duty is politically risky for Osborne - who could succeed Prime Minister David Cameron. But it also could help him avoid imposing other austerity measures that play badly with voters ahead of a general election in 2020. Motorists should fill up quick.