June 27, 2012 • 2:18 pm

Jeremy Paxman: “[The delay to the fuel duty rise] is going to cost now about £550 million in contrast with your figure from 23 May which was about £1.5 billion.”

Chloe Smith: “They actually refer to two slightly different things. The question being asked in May was about a full cancellation, but today we have been talking about deferring the rise to January.”

Newsnight, 26 June 2012

Economic Secretary to the Treasury Chloe Smith received a rough ride from Newsnight anchor Jeremy Paxman yesterday evening as she defended the Government’s decision to postpone a planned increase to fuel duty.

While the move was welcomed by Shadow Chancellor Ed Balls among others, Mr Paxman queried whether the Government could afford to defer the increase, which would help to ease pressure on strained Government coffers.

On top of this, it was put to Ms Smith that the claimed cost of the ‘u-turn’ had changed significantly, dropping from £1.5 billion to £550 million in little over a month. So can we account for this change?

Analysis

In the 2009 Budget the previous Labour Government announced that:

“fuel duty will increase by 2 pence per litre on 1 September 2009, and by 1 penny per litre in real terms each year from 2010 to 2013.”

Subsequent planned increases were in fact postponed and even cut in the 2011 Budget. However the Coalition Government reaffirmed the principle of the plans it had inherited in its first budget of 2010.

Fuel duty currently stands at 57.95 pence per litre, and with inflation at 3.5 per cent at the time of the last Budget, the planned increase would have seen fuel duty rise by slightly over 3 pence per litre this August.

Jeremy Paxman is correct that, as recently as last month, Chloe Smith herself had estimated scrapping the planned rise could cost the Treasury £1.5 billion. She told MPs on 23 May that:

“Calls for the August increase to be scrapped raise an important question, because we would need to consider how to replace the £1.5 billion it would cost. That money would need to come from higher taxes or lower spending elsewhere.”

However Ms Smith is right that this estimate differs to the more recent one as it refers to the cost of scrapping the rise altogether, rather than postponing it until 1 January 2013, which is what was proposed yesterday.

As the Treasury confirmed to Full Fact, if the policy was scrapped, the next rise would not take place until the following August, meaning that the Treasury would lose a full year’s worth of increased revenue.

By postponing it by four months, the higher rate will still be in place for eight months before the next rise is due, meaning the Treasury will still collect two-thirds of the higher revenues. £550 million is roughly one-third of £1.5 billion (although seasonal variations in demand for fuel mean it doesn’t scale precisely).

It is interesting to note that the same calculations were applied when the previous Chancellor, Alistair Darling, postponed April 2010′s fuel duty increase until October of that year. Then it was reported that postponing the rise by six months would cost the Treasury £750 million, which would again suggest that the rise would raise £1.5 billion over the course of a year.

Conclusion

The Treasury weren’t willing to give details on the basis for their cost estimates, saying that they would provide more information at the time of the Autumn Statement.

However while it may be legitimate to question the sums behind these figures (as well as Ms Smith’s claim that any cost to the Treasury will be covered by Departmental underspends), it does appear that the two figures put forward are at least consistent with one another. Whether or not this offers any comfort to Chloe Smith after her brush with Jeremy Paxman remains to be seen.

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