Should taxes be used to reduce swings in petrol prices?

michaels

Any look at historic oil price graphs shows what a roller-coaster the price follows. UK transport fuel price are considerably damped by the high levels of taxation but still fluctuate sharply; things like domestic fuel with much lower taxation vary even more.

This is not costless to the economy - the increases bring big economic headwinds, taking 'spending power' out of the economy and leading to growth spurts and recessions. Petrol prices in particular knock on to the real economy as people at the margin travel less and then spend less elsewhere.

Reducing taxes overall might boost the economy but at the expense of the enviroment so what about:

Adjusting fuel taxes to remove 50% of the variability in fuel prices whilst maintianing the same overall tax take via a stabilisation fund.

So perhaps £1.25 would be the par value at which the current tax would apply - if the price fell to £1.05 tax would increase by 10p/litre to stop the price falling below £1.15 and symmetrically if the price rose to £1.45 the tax stabilizer would limit the price increase to £1.35.

Thoughts?

(Prompted by the discussion of fuel prices on the Inflation thread)

beecher2

Yes, using taxes to reduce fuel price fluctuations (whilst keeping the same overall tax) makes sense

The SNP have been campaigning for a Fuel Duty Regulator for years - this was the recent attempt at debating this issue
https://www.theyworkforyou.com/pbc/2016-17/Finance_Bill/06-0_2016-07-07c.225.3#g225.4

TrickyTree83

No - price is an important market signal to drive the correct allocation of resources

Voted no on the basis that at some point in the future we are going to have to move away from petrol and diesel, it must be addressed. It will do us no favours to shield the population from this, politicians will be all too happy to continue to subsidise this as not doing so would lose votes.

I believe it should be done on a case by case basis during budgets as it currently is so that dramatic increases can be managed but small increments need to be passed on to encourage all of us who would happily continue to pay very little for fossil fuels to change our habits, we won't change otherwise.

michaels

Yes, using taxes to reduce fuel price fluctuations (whilst keeping the same overall tax) makes sense

I guess it would work really well for an independent Scots economy where flucutaions in oil prices lead to big swings in their oil tax revenue so having a reverse mechanism on fuel would help to keep the overall budget on an even keel.

steampowered

No - price is an important market signal to drive the correct allocation of resources

No.

In a free market society it is not the role of government to try and fix the price of private sector goods.

I also think it doesn't work in practice. A stabilisation fund only works if the government can predict the long term average price of oil. It can't. A few years ago people thought $100 oil was the new normal. Now prices have fallen and are stubbornly remaining at $40 a barrel.

Long term price swings would either cause a stabilisation scheme to fail or mean that the scheme has to effectively operate as a "blank cheque" from the government in a situation where there is a long term increase in oil prices.

Conrad

Another way of wording this;


Should taxes be reduced so that mental heath services, maternity care services, flood defences, care in the home visits and Guide Dogs have even less funding?


I hate paying tax, but I also see the reason it needs paying, but I would be in favour of ending our daily net £28 million EU club fee (US services are sold in huge quantity to Europe, no club fee required) and slashing FA

michaels

Yes, using taxes to reduce fuel price fluctuations (whilst keeping the same overall tax) makes sense

Conrad wrote: »

Another way of wording this;


Should taxes be reduced so that mental heath services, maternity care services, flood defences, care in the home visits and Guide Dogs have even less funding?


I hate paying tax, but I also see the reason it needs paying, but I would be in favour of ending our daily net £28 million EU club fee (US services are sold in huge quantity to Europe, no club fee required) and slashing FA

The thought experiment was that overall tax paid on fuel would remain the same, so when oil prices were low we would pay more tax and when they were high, less. A stabilisation fund would be used to ensure that the govt did not need to change its level of spending (on the NHS or whatver else) in response to price changes.

Castle

steampowered wrote: »

Long term price swings would either cause a stabilisation scheme to fail or mean that the scheme has to effectively operate as a "blank cheque" from the government in a situation where there is a long term increase in oil prices.

Indeed; it seems that Fuel suppliers could simply just keep raising their prices so that their profit margins increase, whilst the fuel duty falls.

wotsthat

It does somewhat assume the current price of fuel is 'correct'. If the 'correct' price for fuel is 85p/ litre or £2/ litre then why maintain it at £1.11?

Like most ideas you wouldn't start here because the oil price is already low and the government already need every penny of the tax. So if the oil price rises tax would have to be raised elsewhere.

TrickyTree83

No - price is an important market signal to drive the correct allocation of resources

michaels wrote: »

The thought experiment was that overall tax paid on fuel would remain the same, so when oil prices were low we would pay more tax and when they were high, less. A stabilisation fund would be used to ensure that the govt did not need to change its level of spending (on the NHS or whatver else) in response to price changes.

But that's based on the premise that they will continue to fluctuate up and down, when the reality is that (at least eventually) they will increase over time as the resource becomes more scarce.

If those movements in price are vast for whatever reason then the government can intervene at that point but if they are incremental then we need to adjust. A stabilisation fund would just paper over the cracks, whilst products we import would increase in cost anyway.

antrobus

michaels wrote: »

I guess it would work really well for an independent Scots economy where flucutaions in oil prices lead to big swings in their oil tax revenue so having a reverse mechanism on fuel would help to keep the overall budget on an even keel.

Yes, but what are the options when (as is currently the case) oil tax revenue reaches zero, and you've spent every penny of the previous largesse?