Julian Harris
Follow Julian
MAYOR Boris Johnson occasionally piles a spot of political pressure on his old Etonian chum, Prime Minister David Cameron.

Having complained about the government’s policies on immigration, City bonuses and the 50p tax rate, Johnson has now joined a chorus calling for the introduction of a “fuel stabiliser” – effectively a drop in tax rates when petrol prices increase, to relieve the burden on motorists.

“The price [of petrol] clobbers small businesses,” complained Johnson.

The Conservatives promised a fuel stabiliser before the general election, but the pledge did not make it into the coalition agreement – and what’s more, the coalition is continuing Labour’s policy of a “fuel escalator,” imposing a one pence increase on fuel duty.

Nine in ten small firms say the increase will cost them up to £2,000 in the next six months, the Federation of Small Businesses (FSB) has complained. Over a third of small businesses said they would have to reduce business investment because of high fuel costs.

But the government’s fiscal watchdog has cast doubt over the feasibility of the stabiliser. Robert Chote, head of the Office for Budget Responsibility (OBR) (pictured right), said yesterday that the measure would probably make the government’s finance “less stable than more stable.”

Government revenue actually falls when oil prices increase, the OBR found, due to a fall in demand and the inflationary effects of price hikes. In the first year of a rise in oil of £10 a barrel, tax revenues may increase by £100m, it said. But in year two of a price rise, revenues would fall by £700m. And offsetting the £10 increase in oil prices at the petrol pump would cost the Treasury £3.7bn.

“They would simply have to find money from somewhere else,” said Karl Emmerson of the Institute for Fiscal Studies.


The Prime Minister faces a political dilemma – appease small business and annoy environmentalists, or vica versa. Economic activity and growth rely on fuel, business groups explain. Increasing fuel duty to reduce emissions reduces this activity. A “fuel stabiliser” to iron out price fluctuations, will not work, economists say. The premise -- that government revenue increases when petrol prices rise -- is false, at least in the medium term. And short term fluctuations cannot be predicted by government, the IFS said. On petrol prices, the PM cannot please all the people all the time.