The rise in fuel duty by around 3p per litre will now be delayed until the beginning of next year, postponing a hike due on 1 August – a change of plan that is projected to cost the public purse around £550m.
The Treasury revealed that it will make up the shortfall by imposing more cuts on the budgets of government departments.
Osborne’s change of heart was welcomed by business and motoring groups, and follows other abandoned taxes on pasties, caravans, and cathedrals, as well as a reversed decision to cut tax relief on charitable donations.
Backbench discontent over the planned tax hike is believed to have scared the government into a climbdown, while opposition parties threatened to force a vote on the policy in the House of Commons.
Two Conservative MPs from Essex constituencies – Harlow’s Robert Halfon and Clacton’s Douglas Carswell – have campaigned against the planned fuel rise.
“A big win for the Commons over the feckless Treasury!” Carswell tweeted.
“I think this was a decision taken by ministers when they realised the legislature was going to defeat them,” Carswell told City A.M. “It’s no surprise, really, it’s what parliament is for – to say ‘no Prime Minister, you can’t take more money’.”
Labour’s shadow chancellor, Ed Balls, jumped on the coalition’s announcement, describing it as “the fastest U-turn in history”. “Labour called for this help for families and businesses this morning and I welcome the fact the chancellor backed down this afternoon,” Balls boasted in a statement.
The Treasury said the decision means that fuel duty “will not have increased for two successive years” and will save the average family with a car £159, compared to how they would have fared under the previous plans.
Prices at the pump will be 10p per litre cheaper than under plans inherited from the previous Labour administration, Osborne argued.
Business groups said that the decision would help the UK with its tough economic recovery. “Freezing fuel duty was at the top of our members’ wish-lists for improving the UK’s competitiveness, so this is welcome news,” the Institute of Directors’ Simon Walker said. “Increasing the cost of making deliveries or of staff getting to work was only going to harm the economy; many will be relieved that the rise has been cancelled.”
The change of policy should also help ease the squeeze on consumers and provide relief to shop owners, the British Retail Consortium added.