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If, instead of rising, oil prices had fallen since the Budget, fuel duty would have risen. Prices at the pump would have fallen, but not by as much as they would have without the fair fuel stabiliser. Government revenues would again not have differed from the Budget forecast. The overall effect of such a stabiliser is to dampen the impact of fluctuating oil prices, softening the blow of an increase in oil prices on the pump price of petrol and
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diesel, but dampening also the downward movement when oil prices fall and duty rises to offset part of the drop. Therefore, on every count the fair fuel stabiliser would deliver a better result than the current system, as well as being more transparent and predictable. A fair fuel stabiliser would help to stabilise family finances, stabilise the public finances, dampen inflationary pressures and improve long-term signalling of the price of carbon. When oil prices rise, family budgets are put under pressure. The fair fuel stabiliser would moderate the impact of oil price increases on families by offsetting about half of the increase with a corresponding reduction in fuel duty, so the pump price would rise by about half the amount it otherwise would.

Mr. Jamie Reed (Copeland) (Lab): Does the hon. Gentleman believe there is any evidence to suggest that speculation in the markets increases the price of oil?

Mr. Hammond: That is slightly wide of the question we are dealing with, but from what I have seen there is no evidence that speculation is driving the price of oil in the markets. Obviously, speculation plays a role in the oil markets, but I have not seen any evidence that suggests that curbing oil futures trading activity would solve the problem we face today, as that is based on more fundamental factors.

To return to my earlier comments, of course there has to be a flip-side. When oil prices fell, the duty would go back up again so that prices at the pump would fall more slowly than they would under the current system. The hon. Member for Edinburgh, South (Nigel Griffiths) asked what would happen if oil prices did not fall, implying that only when oil prices fell and the duty rose again could the public finances be put back into balance. I want to disabuse him of that notion. The balancing item in the public accounts is the windfall increase in North sea taxation that the Government receive when oil prices increase.

I would have thought that helping families by smoothing the violent fluctuations in the pump price that can otherwise occur might appeal to someone who once claimed to have ended boom and bust.

Dr. Ladyman: I am not going to viciously attack the hon. Gentleman’s ideas because I do not think he stole them from the Scottish National party or the Foreign Secretary; instead, I think he stole them from an article I wrote in Progress magazine. However, he seems not to have taken account of the following point. It is true that when fuel prices increase, we might get more from VAT on the fuel, but if the price of fuel is taking up more of an individual’s spend, the other areas of the economy will lose spend and the revenue will go down in those areas. Under the hon. Gentleman’s measure, how will the Exchequer take account of such changes in the economy?

Mr. Hammond: If those comments represent the hon. Gentleman’s line of approach, I certainly did not take my ideas from his article. He is right that this is nothing to do with VAT. There can be arguments at the margin, but, broadly speaking, the VAT balances itself out across the economy. I also agree that oil price increases
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have a negative effect in other parts of the economy. However, if he will bear with me for a few moments, we will come to the evidence from the National Institute of Economic and Social Research about the net impact on Treasury revenues across the economy as a whole.

What will be the impact on the public finances? Let me deal with myth No. 1, which for shorthand I will call the Labour myth. The Chief Secretary has claimed that our proposal for a fair fuel stabiliser would lead to a £3 billion “black hole” in the public finances. Never mind the fact that she should not be the first person to talk about black holes in the public finances, but this is far from the truth, as I believe she very well knows. The truth is that the only independent UK economic forecaster who has done the necessary work to comment definitively on this issue is the National Institute of Economic and Social Research, and it has concluded that oil price rises generate a positive impact on the public finances, even after taking into account the secondary effects of oil price rises on the economy overall, and thus on non-North sea Government revenues. According to the National Institute of Economic and Social Research, the net benefit to the Treasury is about £140 million for every $1 dollar change in the price of a barrel of oil. So, when the oil price increases, net Government revenues, after taking into account all the effects across the economy of that oil price rise, also increase. It follows logically that when the oil price falls, Government revenues will also fall, by the amount of reduction in North sea tax revenues, less the positive effect from the increase in activity across the rest of the economy with which an oil price fall would normally be associated. Overall, there is a loss of revenue for the Government when oil prices fall. In other words, there is a spectacular misalignment of interests. An oil price rise, which is bad for families and for businesses, delivers a windfall to the Treasury, whereas an oil price fall, which is good for families and for businesses, creates a hole in the Treasury’s revenues.

The fair fuel stabiliser aligns the interests of consumers with those of the Treasury, and it shares the pain and shares the gain. It makes the public finances more stable, by reducing the impact of changes in oil prices, upwards or downwards, on Treasury revenues, making it easier for it to project what future revenues will be and making those projections less vulnerable to the vagaries of the international oil market.

Mr. John Redwood (Wokingham) (Con): I am glad that my hon. Friend is making this point, because it is idiocy to say that there will be a black hole under this scheme when the oil price rises. As he said, there is a 60 per cent. tax at the pump. If the oil comes from the North sea, there is a further tax, which is not included in that 60 per cent. There is an average tax rate of about 42 or 43 per cent. on the economy as a whole, so, of course there will be more revenue when the oil price rises. I find it extraordinary that people go on making these idiotic remarks about black holes when the opposite is true.

Mr. Hammond: We can speculate on why the Government have taken the line that they have. We do not rule out the possibility that, notwithstanding the Chief Secretary’s fairly virulent attack on this policy when we launched it, we will find it in the pre-Budget report or in next year’s Budget as the centrepiece of new Labour’s fight back.

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Mr. Jeremy Browne (Taunton) (LD): Given that oil prices have risen by more than the Chancellor predicted at the time of the Budget, will the hon. Gentleman inform the House what has happened to stamp duty revenues compared with the Budget estimates? Does he think that there should be a stabiliser in place to try to balance that part of the economy too?

Mr. Hammond: Unfortunately, because we have not been given an interim statement from the Government, we do not know precisely what has happened to stamp duty revenues. I hear a whisper that they are substantially down, but that is a different argument, because we are talking about what is happening to oil prices and the impact on the economy of an oil price increase.

As we are dealing with the Lib Dems, let me address myth No. 2, which is propagated, surprisingly, by the hon. Member for Twickenham (Dr. Cable). For the purposes of shorthand, I shall call this the Lib Dem myth, although there are many Lib Dem myths. The hon. Gentleman, who likes to think he knows a thing or two about oil, says that the fair fuel stabiliser would require the Government to predict the future price of oil. I am surprised at him, because although I do not always agree with what he says, I find that it is usually based on fact, and nothing could be further from the truth than that comment. The stabiliser will mean that Government revenues remain broadly the same, whether oil prices go up or down, because any windfall or shortfall from the North sea will be offset by a decrease or increase in fuel duty. The truth is that the present system requires the Government to predict future oil prices, when they make their revenue forecast in the Budget, thus leaving the public finances exposed to fluctuations in the oil market. Under the fair fuel stabiliser, that volatility in public revenues is removed, and the Lib Dem myth is demolished.

We are consulting on the precise level of the reduction in duty that should be associated with any given increase in oil prices. The example we have used and published, where the fair fuel stabiliser reduces the price increases at the pump by half, is broadly revenue-neutral to the Treasury on a conservative estimate of £100 million of net revenue gain for each $1 change in the price of a barrel of oil—that is a far lower figure than the National Institute of Economic and Social Research’s model predicts.

At some stage this afternoon—I believe that this would be called a pre-emptive strike—I am expecting to hear from the Chief Secretary, in an attempt to shore-up the Labour myth, about the Institute for Fiscal Studies. She is fond of quoting that highly respected body when it suits her, but on this issue, for very good reason, it has little to say. The IFS correctly says that its modelling leaves it “unclear” about the precise size of the positive impact on the public finances from an increase in the oil price, over and above the cost of the 2p U-turn that the Government have done today. However, the IFS is in no doubt that the impact is positive.

The Chief Secretary has produced the IFS’s statement with a flourish, as though it demolishes the NIESR analysis. It does not. “Unclear” means precisely what it says and the IFS is unclear for a reason. It does not have a dynamic macro-economic model that would allow it to analyse the likely impact of an external shock such as an oil price increase. That is not the business that it is in.
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The NIESR has such a model and is in the business of conducting such analysis. It is the body with the authoritative view on the subject and the Chief Secretary can quote the IFS as loudly and as often as she likes—its position, which we have checked again with it during the past few days, is that it simply does not know the answer to the question because it has not done the work and, what is more, it does not have the tools to do the work. So, the Labour myth is demolished, too.

Rob Marris (Wolverhampton, South-West) (Lab): Will the hon. Gentleman give way?

Mr. Hammond: At last, the hon. Gentleman! I thought that I was going to get to the end of my speech without his intervention.

Rob Marris: I am grateful to the hon. Gentleman for his usual generosity. He is talking about the research. I do not know the answer to this question—a lawyer should never ask a question to which they do not know the answer—but is any other country using such a mechanism? If so, what does the research in that country suggest is its effect?

Mr. Hammond: I do not have a precise answer about the work that has been done in relation to other economies. I have looked only at the work that has been done in relation to the UK economy. That is a fair question, and I shall kick myself for not having looked at it and I shall go away and do so. The hon. Gentleman’s comment is very useful, and I am sure that my colleagues have looked into the matter—I shall talk to them about it.

The Labour myth is demolished. A fair fuel stabiliser would stabilise family finances and the public finances, but it will do more than that. It will also help to stabilise inflation. If half the increase in fuel prices over the past year had been offset by lower fuel duty, consumer price inflation would be 3.3 per cent., not 3.8 per cent. The pressure for wage increases and the industrial action behind them would be accordingly reduced. So there would be greater stability in family finances, greater stability in the public finances and lower inflation in a period of rising oil prices.

There is one other environmental benefit of the fair fuel stabiliser. Environmental taxes, such as fuel duty, can play an important role in reducing carbon emissions. They work mainly by encouraging a long-term shift towards lower emission vehicles and alternative methods of transport in response to higher fuel prices at the pump. A stable carbon price, as the Stern review argued, helps individuals and businesses to factor environmental costs into medium and long-term investment decisions and behaviour.

The fair fuel stabiliser would allow the average real value of fuel duty to be maintained to take inflation into account, as is supposed to happen now. When oil prices were rising, pump prices would rise, but by less than they do now. The long-term signal to consumers would be maintained. When oil prices fell, the price of fuel at the pump would fall, but by less than it would do otherwise. The incentive to consumers to adopt green behaviour would be strengthened. The risk of the message being undone by a downward movement in oil prices would be reduced. Overall, clearer, less volatile signals would be delivered, creating a stronger, more consistent environmental message.

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So, we would have relief for families when oil prices were soaring, greater stability and predictability in the public finances, a reduction in the upward pressure on inflation and stronger, clearer and more consistent environmental tax signals. The fair fuel stabiliser is a practical, deliverable response to the challenges that fluctuating oil prices bring. As an oil producer, Britain is almost uniquely able among the industrialised countries to introduce such a measure and to give ourselves a competitive advantage in the globalised economy.

The proposal makes sense at every level. It would provide a long-term stabiliser for the British economy and much-needed relief for hard-pressed families facing soaring fuel bills and hard-pressed businesses struggling to compete with those who have access to lower duty fuel.

Nigel Griffiths: Will the hon. Member give way?

Mr. Hammond: I am finishing now.

When times are hard, people look to their Government for leadership. They look to their Government for a helping hand. They look for practical actions to address the pressures that they are facing. They do not want excuses that it is all someone else’s fault, or self-congratulatory lectures about how well prepared Britain is to weather the storm when it patently is not well prepared. People want practical help and, as we develop ideas such as the fair fuel stabiliser, they will know that a future Conservative Government—unlike this lot—will be on their side, not on their backs.

4.45 pm

The Chief Secretary to the Treasury (Yvette Cooper): I beg to move, To leave out from “House” to the end of the Question, and to add instead thereof:

I welcome the chance to reply to this debate. The entire world is affected by the big increases in the price of oil. A year ago, oil cost $77 a barrel, but this week it reached almost $145—nearly twice as high. Ten years ago, oil cost $10 a barrel, but it recently went up by $10 in just one day. The impact of the high oil price is being felt right across the world. It is driving up prices at the pump, and people’s gas and electricity bills as well. We are seeing those price increases right across Europe and the world.

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The effects are being felt here at home too. In Castleford this morning, unleaded petrol was going for more than £1.20 per litre. That places pressure on household budgets, and that is why we have deferred the fuel duty increase that was set for April. It is also why the Chancellor has announced today that the 2p fuel duty increase proposed for the autumn will not go ahead.

Pete Wishart: Can the right hon. Lady do something that the Prime Minister failed to do earlier this afternoon and concede that the 2p postponement is all to do with the by-election? If the Scottish National party can achieve that just by threatening one of Labour’s most solid majorities, imagine what we can achieve when we win that by-election.

Yvette Cooper: I have to say that that is complete nonsense. Fuel duty is often set to increase in the autumn, but on a number of occasions, the rise has been either postponed or put back. In 2004, for example, the deferral of the autumn increase was announced on 20 July. Similar decisions in 2005 and 2006 were announced on 5 July and 19 July, respectively. The date today is 16 July, which means that today’s announcement is entirely in keeping with decisions taken in previous years.

Justine Greening (Putney) (Con): Will the Chief Secretary clarify for the House the impact of today’s announcement on the forecast for public finances set out in the Red Book?

Yvette Cooper: The hon. Lady is right that the announcement will reduce the amount of fuel duty revenue for this year. The precise figures will be set out in the pre-Budget report, as happened in 2004, 2005 and 2006. That is the normal practice that we have always followed.

Mr. Kenneth Clarke (Rushcliffe) (Con) rose—

Mr. Redwood: rose—

Yvette Cooper: I shall make one more point and then give way. The figures show that fuel duty has risen just three times since 1999, when we abolished the fuel duty escalator introduced by the previous Government. Fuel duty has fallen in real terms by 17 per cent. since then.

I am spoiled for choice as to who to give way to first, but I shall give way to the right hon. and learned Member for Rushcliffe (Mr. Clarke) and then to the right hon. Member for Wokingham (Mr. Redwood).

Mr. Kenneth Clarke: I find it quite incredible that the Chief Secretary can talk about a tax change that has been announced this morning yet refuse to tell the House what the cost will be. It is completely incredible that the Treasury is not capable of giving her a precise figure for the estimated loss of revenue. It is quite scandalous for her to say that the House of Commons will not be told the cost until November.

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