Today, we’ll be debating an Opposition Day motion on fuel duty, which I want cut. It’s shocking that 60% of the pump price of petrol is tax. Nevertheless I won’t be supporting Labour.

It’s one thing to be supported by Labour on a important constitutional point — Parliament’s control over our EU budget contribution, for example — but it is another to support them on an Opposition Day designed to injure the Government. In any case, fuel is 10p a litre cheaper than it would have been under Labour’s plans, something they would like us to forget.

Based on a CEBR report, FairFuelUK argue that a cut would stimulate economic growth. Of course that’s right: tax is destructive and lower taxes would mean greater prosperity.

It’s true that fuel duty is far too high. Widespread public concern about the excruciating levels of fuel duty, air passenger duty and the beer duty escalator has meant all three have been specifically debated in the Comons during this Parliament. And it is not just these three taxes that are very high. Has anyone forgotten that VAT is 20%?

But the Government needs eye-wateringly high taxes to pay for its eye-wateringly high expenditure on, particularly, welfare, health and education. Together just these 3 items amount to 2/3 of the 2012 budget.

Click for Red Book

In 2012-13, the Government planned to spend around £683 billion. The top four items – social security, health, education and debt interest – accounted for 74% of total spending.The Government expected an income of £592 billion, leaving a shortfall of £91 billion. That deficit was to be covered by borrowing. However, we just saw that money creation by the Bank of England will provide the Chancellor with a handy £35 billion by next March from the interest on debt held by the Bank. That’s a massive help today, but it could backfire.

What could the Chancellor do? Debt interest has effectively been cut down to a quarter by QE. Suppose social security, health and education are protected and 10% was taken off every other budget. Even though that is hard to imagine because defence, policing, local government and others are already under such pressure, it would still leave a shortfall of over £38 billion.

So, suppose for the sake of argument that the Chancellor broke his promises to protect the NHS and international aid and demanded 10% cash cuts across the board with the same output. That’s often normal in the private sector but scarcely conceivable in the public sector: the Chancellor always planned to increase total cash spending in every year of this Parliament (ignoring the Royal Mail Pension Plan transfer) – see page 86 of the Red Book.

If the Chancellor achieved a 10% cash cut across government then, together with the debt interest cut by Bank of England money creation, he could achieve a surplus of £7.7 billion.

Here are the figures:

The difficulty of balancing the books

And as bar charts:

The difficulty of balancing the books in bar charts
Click for larger version

That is, the Bank’s QE so far plus a 10% cash cut across the board could balance the books.

But now to the obvious problems:

  • QE can’t go on forever. The Bank says it plans to sell the bonds eventually. Interest rates are bound to rise, sooner or later. The Chancellor simply cannot rely on the Bank of England to slash debt interest costs in future.
  • The public sector today cannot cope with cash cuts. Even the present overall cash increases at a reduced rate are proving painful.
  • Even if the Cabinet were prepared to abandon commitments to protected spending, reductions would be extremely difficult without thoroughgoing public support. Social security and health (54% of total spending) would be exceptionally problematic. Education is a precious budget for good reason. Defence and policing are already under tremendous pressure. And so on.

In reality, even under these wildly unrealistic imaginary public spending cuts, the Chancellor would still need the £27 billion raised by fuel duty. The FairFuelUK report is right that cutting fuel duty would be good for growth. However anything less than a complete reassessment of what society expects government to provide out of taxation, debt and debasement would be sticking our heads in the sand.

I wonder how much longer we will keep that up.

This video from LearnLiberty shows how dire the situation is in the USA. If they cut everything that needs annual approval — defence, justice, foreign affairs, education, transport … — their social security programmes and debt interest would still cost more than they raise in federal taxes.

Across the western world, real life is catching up with the seductive and damaging promises of politicians who won votes by offering electorates things that could not be paid for honestly out of tax in the long term.

As ever, it’s the poor who suffer most.

Fuel duty should be cut. But so should spending. That will require a more mature politics or a greater crisis. I won’t support Labour’s partisan games today.


  1. Steve …… do you honestly think that the electorate will stand for a 10% cut in both health and education???????????? That would be political suicide !! At least with fuel duty , we have a choice whether to pay it or not…..unlike income tax.

    • No he plainly does not think that Gary. That’s why he calls them “wildly unrealistic imaginary public spending cuts” that would be “exceptionally problematic” in practice.

      It seems to me he is saying if we carry on spending more than we can afford to pay for even with high taxation – and therefore have to borrow – eventually the taxes will kill off growth and the debt will kill off the spending (because so much will be spent on paying interest). Double disaster!

      • Yeah I missed the bottom half of the post below the spreadsheet Eric…..!! But agree that sooner or later, spending more than income is gonna become a mega issue.