Thursday, 9 June 2011

Fueling inflation

This week, the rail companies announced that there had been a 5% increase in passengers in the first quarter of this year. Bus operators report similar increases. They said this was because high petrol prices were making commuters look for a cheaper alternative.

In itself, this is no bad thing. In our area, the dramatic increase in commuting by car followed the deregulation of the buses by the Thatcher government twenty-five years ago. This was particularly the case in South Yorkshire, with its low fares and high frequency service policy. Many people, who lived in North Derbyshire, but worked in Sheffield, commuted by bus. Deregulation meant increased fares, fewer services and dramatically fewer passengers – resulting in big increases in car use and massive increases in congestion.

In opposition, David Cameron promised to keep down the cost of fuel by pledging to introduce a ‘fair fuel stabiliser’: this would vary taxation on fuel based on changes to petrol prices. He said "when fuel prices go up, fuel duty would fall. And when fuel prices go down, fuel duty would rise. This is regardless of the wider economic situation.” He claimed: "If a Fair Fuel Stabiliser had been introduced at the 2008 Budget - fuel would be 5p per litre cheaper". It was little surprise that his announcement produced newspaper headlines proclaiming “Tories vow to slash fuel duty” in the week before the general election.

So, what happened to this promise? Last September, Cameron’s newly established Office For Budget Responsibility advised against a ‘fair fuel stabiliser’ as it would have a significant negative effect on UK finances. So, there appears to be very little prospect of that promise being kept.

And what has happened to fuel prices? World energy prices have increased considerably and the prospect is for further increases. However, George Osborn did keep his promise to reduce fuel duty – by 1p a litre – but at the same time increased VAT to 20%, increasing fuel prices at the pump by 3p a litre! So, it’s been give with one hand, but take three times as much with the other.

The result has been a very high cost of fuel which is driving up costs to business of transporting goods and therefore prices in the shops, hitting families in the pocket twice. It’s been a policy which has driven inflation and halted growth, at the very time when we need a strategy which cuts inflation and promotes growth.