Budget Statement — House of Lords, 2017-03-14
Topic: Macroeconomics
Mark Schreiber (Conservative, Centre-right): My Lords, I fear that the Chancellor did make a political misjudgment in what he did to the self-employed. I can understand that, as a tidy-minded man, he would fall for the seduction of the symmetry so loved by the Treasury and so elegantly described to us this afternoon by the noble Lord, Lord Macpherson of Earl’s Court. But did the Chancellor really think through the strange fact that unemployment in the UK is so much lower than in, say, France or Spain? In part it is because we have such a large number of self-employed people that unemployment is so low. The asymmetry of the NIC system helps them greatly. In addition, they have the benefit of the high VAT threshold. At £85,000, it is the highest in Europe; in Spain, it is zero and there they have unemployment of around 25% for many of the young. This threshold is a boon to the small entrepreneur when offering services to those for whom VAT is not reclaimable and enables them to undercut the big boys by a straightforward 20% But to criticise without offering an alternative is sterile. I have a specific suggestion about how the Chancellor should raise the additional funds that he needs. Every year since David Cameron became Prime Minister, at Budget time the Chancellor has raised Back-Bench applause by saying that he will freeze road fuel duty. That has been very expensive applause. It is also counterintuitive in a whole number of ways. First, there has been a period of seven years of big fluctuations in oil prices and thus also in pump prices. In general, prices have been falling more recently from the highs of more than $100 a barrel, hitting $126 a barrel in July 2012, to below $30 a barrel in February 2016. For the present, it has settled in the region of $55 a barrel Secondly, public policy has been to encourage more efficient use of fuels. Thirdly, almost all new vehicles have become much more fuel efficient during this period. I was brought up with the idea that a family car would go between 20 miles and 30 miles per gallon of petrol, but now it is much more like 40 miles to 50 miles per gallon. Fourthly, at the retail level there is a remarkably inelastic response to fuel prices. HMRC estimates the elasticity of demand for road fuel to be 0.07% in the short run and 0.13% in the medium term, which is very low. A more obvious indicator of the inelasticity is to take actual examples. I have taken the example of fuel prices in Suffolk. Fuel prices in America are very low—but then, of course, they are uninsulated from oil prices. When oil prices go up, fuel prices go up enormously. We have a much higher proportion of duty. Currently, fuel duty is 57.9 pence per litre for petrol or diesel, which is more than 45% of the pump price My recommendation is that the Chancellor should increase road fuel duty by 10p per litre. With VAT, this would mean a price rise of 12p per litre. Petrol prices have a weighting of about 3% in the CPI and RPI. The Treasury estimates that the inflation effect of a 10p rise in road fuel duty would be only a 0.3 percentage-point increase in the CPI and RPI. Of course, any increase would immediately fall out of the index at the end of 12 months. Yet the fiscal impact—the benefit, the revenue gained from this increase—would be £4.6 billion a year. That is an extra £4.6 billion to spend on the NHS or any number of other good causes. These figures come from HMRC’s ready reckoner The impact of such a rise would be very moderate, as I will illustrate with actual figures. I have taken the price of Shell petrol in Woodbridge, Suffolk, where I live. In May 2010, it was £1.29 per litre. Today, it is £1.22 per litre. If you increase the May 2010 pump price by the RPI inflation of 19% up to December 2016, it would be £1.53. My 10p extra plus VAT would make today’s price £1.34. That would be 19p per litre cheaper than when Cameron first moved into Downing Street—and the Chancellor would have an extra £4.6 billion to spend each year Would this be unpopular politically? Initially, probably yes. Ernest Marples once said that if you have to have a political row, have a big one with a result worth getting. My proposal would produce £4.6 billion a year and the inflation increase would be negligible. I recommend this to the Chancellor.