Thursday, March 24, 2011

Budget 2011

What effect will the budget have on cycling? Close to none at all, I suspect, in the short term. There's money to fix potholes, so that's good, and will create jobs. Osborne could have created more domestic jobs building decent cycle infrastructure, and that investment would have paid back, as other countries are finding.

For motorists he cut fuel duty by 1p, postponed the inflation increase and abolished the fuel duty escalator. He's paid for this largesse by increasing the oil and gas production levy. However, he did say that "if the oil price sustains a fall below $75 - and we will consult on the precise figure - we will reintroduce the escalator and reduce the new oil tax in proportion".

So it seems that Osborne as in fact introduced a 'fuel price stabiliser', and that he's replaced one tax on oil with another tax on oil. Hmmm.

How well will it work, and what effect will it have?

Those in the oil and gas industry have been protesting that this will cause exploration companies to go and explore where it's more worth their while. I can see why, but it all depends on where the oil price goes. These companies were in business a year ago when oil was $80/barrel, so I would guess they can make money at $115/barrel even with extra tax. So the key will be to set the floor price below which the exploration tax tapers off at a level at which the exploration companies can make money. If the Government get it wrong, the danger - according to the analysts - is that exploration companies desert UK waters, and in the long term this will damage energy security as we become more dependent on imported oil.

The unintended consequence of the Chancellor's oil tax changes will be that they will encourage demand for oil - by holding the retail price steady - but more of the money may go into the coffers of the oil-producing nations, and less into the UK treasury (by virtue of lower receipts from retail fuel duty and possibly also production tax). This is the precise opposite of what Osborne is trying to achieve with his corporation tax cuts, the idea there being to attract companies to do business in the UK by offering lower tax rates.

As I've pointed out before, there's a serious downside risk to the economy from high oil prices, and Osborne as both made the exposure to this risk slightly worse, and failed to take any steps to wean the UK off oil dependency. The Guardian reports that Chris Huhne is unhappy that Osborne's move flies in the face of his speeches saying that higher oil prices should be the cue to become less dependent on oil.

Sustrans have boldly attacked the budget, saying:

"measures to reduce and limit the cost of fuel mean that once again we are incentivising people to use their cars while failing to offer alternatives that would provide a transport lifeline to poorer households without access to a car...we do ourselves no favours by continuing to ignore the obvious – oil is a finite resource and will become unaffordable long before it finally dries up.

They've got it about spot-on. The UK Government really don't have a strategy for dealing with an increasing oil price. They still haven't given a clear signal that the UK should prepare for significant further oil price increases. Every 1p decrease in fuel tax costs the treasury around £500M, so Osborne cannot continue to cut fuel tax with every oil price increase. By talking about the 'stabilizer' mechanism, he's implied that he expects the oil price to go down. It may do, of course, but the downside risks of a higher oil price are much more significant than the benefits of a lower oil price. Put very simply, either Osborne is deluded, or he's deluding the public.

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