The price of arrogance

HOW much damage could the fuel crisis inflict on industry? And what could the government quickly do to repair the damage?

With every day of disruption, businesses across the UK are facing growing dislocation, extra expense, cancelled or delayed orders, and mounting confusion and uncertainty over contingency planning.

Much of the cost, in terms of precautionary measures, delays and the huge disruption of staff and management time is almost impossible to quantify, But the losses in terms of production shut-downs and staff lay-offs are all too real.

Digby Jones, director general of the Confederation of British Industry, warned yesterday that some companies have already started reducing the size and scope of their operations.

He said: "It is clear that large parts of the economy will have ground to a halt by the weekend, unless fuel supplies get through."

The British Chambers of Commerce yesterday estimated the cost to business at about #250 million a day. But the overall loss could quickly increase if the disruption continues.

According to the Centre for Economics and Business Research, a three-week blockade of oil refineries and distribution centres could reduce overall output by #9.7 billion in the third quarter, equivalent to #410 for every household in the country. Even if the Prime Minister's plan to solve the dispute works, it calculates, the average household will still be #28 out of pocket from reduced overtime and bonuses, and higher prices.

The hope, of course, is that the immediate crisis will be defused by the end of the week, and that industry will soon be back to normal.

But the huge latent danger is that any prolonged dispute could tip the economy into a widespread slowdown and possible recession. This could come about through a combination of further weakness in sterling against the dollar, forcing up industrys raw material and fuel costs, a possible rise in interest rates and a generalised slump in business confidence.

A tipping of the economy into recession seems unlikely - the #43 billion of public spending increases unveiled by the Chancellor should see to that. But the worry is that it is the private sector and households that will have to take the strain.

Tim Congdon, the iconoclastic monetarist economist, has warned that any cut in fuel duty would deliver an untimely boost to consumer spending just when government spending is set to take off.

In this, he is half right: the Treasury should be taking the opportunity at this benign point in the economic cycle to reduce government spending rather than enter into expensive new commitments that are bound to act like millstones when the economy turns down in time.

But with continuing deflation in the high street, the core measure of inflation now at a 25-year low of 1.9 per cent, house price rises slowing, and a further slowdown in average earnings announced yesterday from 4.1 per cent to 3.9 per cent, there is no serious immediate or even latent inflationary threat.

What is it that the government could swiftly do? It could announce, without much loss of face, an immediate review of fuel tax policy in the light of the latest unexpected oil price rise.

Because of this higher price the government looks set to enjoy an enormous windfall gain in the form of extra tax revenue over and above what was expected at the time of the budget. This windfall is estimated at about #2 billion, sufficient to afford a straight 10p a litre cut in duty on diesel which is the form of fuel most widely used by industry.

Fuel duty is now expected to bring in some #23 billion this year, the governments fifth largest source of revenue and equivalent to more than 10p on income tax. But it is not just fuel duty that is causing the pain. There is the extra VAT revenue, as VAT is levied on the duty as well as the petrol (a vicious tax on tax). The higher price of oil (plus the fuel duty) should net the government a windfall gain from higher VAT receipts of #500 million and take the total revenue rake from petrol and diesel to well over #27 billion.

Now add to this what Gordon Brown hopes to rake in from North Sea oil companies. Taxes on North Sea oil and gas are expected to rise sharply this year, from #2.5 billion to #4.5 billion from a combination of Petroleum Revenue Tax, royalties and Corporation Tax.

This revenue is on the assumption of oil at $22.40 a barrel. But with the price now more than $30, North Sea taxes should rise by some #1.5 billion over and above the total budgeted due to the higher oil price.

The political case for handing back this windfall to fuel users is self evident. The moral case is powerful: governments do not think twice about levying windfall taxes on the likes of banks who enjoy extra profits in periods of high interest rates: the revenue generated has not been "earned" in the form of extra activity or service.

But likewise, the government should not be allowed to enjoy windfall tax revenues because the price of a commodity outside of its control has risen so steeply.

But there is also a sound economic case for putting in place a price/tax regulator so that road fuel duties should fall as the oil price rises, and rise when the price falls.

Maurice Fitzpatrick, head of economics at one of the UKs top accountancy firms, says a self-financing "Road Fuel Price Regulator" (RFPR) would solve the crisis. "When crude oil prices are high", he says, "Chancellor Gordon Brown gets more North Sea oil tax revenue than when it is low. Therefore, if the price of crude oil is relatively high, Mr Brown can simply use the extra revenue to reduce petrol pump duty with no extra cost."

Towards the end of each month, the Treasury could make an assessment of the average crude oil price and then adjust fuel duty. "Mr Blair has categorically rejected the idea that road fuel duties might fall when the crude oil price was high, and then rise when the crude oil price fell," said Mr Fitzpatrick, of London company Chantrey Vellacott DFK.

"In fact, such an idea is eminently sensible from an economic viewpoint. It would have the effect of regulating the price of fuel at the pump, and would smooth out the fluctuations in the pump price arising from variations in what has become a volatile oil price.

"This could represent a solution to enable the government to get off the road fuel prices hook on which it has impaled itself, in a face-saving way.

"Some might be concerned the Prime Minister does not appear to be getting the best possible advice from the Treasury," he added.

But Brown repeated his nosurrender message again yesterday. He will not allow tax revenues to be cut in the face of widespread protests to which some 90 per cent of the British public are sympathetic. He may think that he is saving the public purse by such intransigence. He may well find that his arrogance will cost the economy far more than a timely 10p a litre cut in the tax on diesel.

Thursday, 14th September 2000

http://www.business.scotsman.com/cfm/home/headlines_specific.cfm?section=OE&headlineid=1950

-- Martin Thompson (mthom1927@aol.com), September 14, 2000