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Monday, July 07, 2008

More uncosted promises

Beset with their own problems amid allegations of some of their MPs and MEPs being mired in sleaze and poor judgement on the part of the London Mayor, the Tories moved yesterday to distract us with an eye-catching promise to slash fuel taxes by 5p per litre.

In making this promise of course the Conservative Leader and Shadow Chancellor have abandoned all pretence at adopting the green agenda. This will not stop them continuing to use slogans pretending that they are a green party but the reality is very different. I doubt whether David Cameron will be losing any sleep over this.

More interestingly, we are still awaiting to see how the Tories propose to pay the £3 billion bill for this measure. George Osborne believes that the tax cut will be cost neutral because it will be balanced by windfalls coming to the Treasury as the result of rising oil prices but, as is pointed out by a Treasury political advisor, that means hiking government fiscal policy to the vagaries of the market with a very real danger that they will come unstuck.

George Osborne should not forget that the prices can go down as well as up. Both the Institute of Fiscal Studies and leading accountants seem to be questioning the wisdom of the approach taken by the Tories, whilst Vince Cable points out that a huge hole has been created in Tory spending plans.

The unanswered question in all of this lies with the assumption that if the tax is cut then prices will follow. There is no guarantee that this will happen. Indeed retailers may decide that they can use the opportunity to boost their profits as well. Will the Shadow Chancellor intervene in a free market to prevent that happening?
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