Printable version | E-mail this to a friend |
The effect of oil price fluctuations on the public finances
Issued by the News Distribution Service on behalf of the Office for Budget Responsibility
Today the OBR publishes its report into the effect of changes in oil prices on the public finances. The report concludes that the overall effect of a temporary oil price rise would be close to zero. A permanent rise would create a loss to the public finances.
Higher oil prices would raise revenues of corporation tax,
supplementary charge and petroleum revenue tax from UK oil and gas
production. There are a number of offsetting effects on the public finances:
• higher pump prices would reduce the demand for fuel,
lowering fuel duty receipts;
• temporarily higher inflation would push up the indexation
of tax thresholds, benefits, public service pensions and
index-linked gilts; and
• higher oil prices would be likely to reduce real household
income and the supply potential of the economy, with detrimental
effects on receipts from labour and capital income as well as from
consumer spending.
The OBR Report looks at a temporary and permanent £10 a
barrel rise in the oil price, an increase of around 20 per cent.
While there are clear uncertainties around the estimates of the
effect of oil prices on the public finances, using central
estimates for a £10 a barrel higher oil price gives:
• a rise in pump prices of 7.4p a litre if fully passed
through. Changing fuel duty by 1p a litre has an effect of around
£500 million. To offset the whole rise in the pump price would
cost around £3.7 billion;
• a boost to UK oil and gas revenues of around £2.4 billion.
This could offset around two-thirds of the pump price rise, in the
absence of any offsetting effects; and
• allowing for offsetting effects, particularly from the
impact from a weaker economy means there is very little or no
improvement in the public finances that could be used for
stabilising the pump price.
Geoffrey Dicks, Member of the
interim Budget Responsibility Committee, said:
“This Report marks the conclusion of our work as the interim
OBR. It examines the effects of a change in the oil price both
directly on the public finances and indirectly via its effects on
the wider economy. Our analysis should provide the Treasury with
useful evidence as it formulates its policy on the fair fuel stabiliser.”
For table of the 'Effect on the Public Finances of a
temporary £10 rise in the oil price1 (£ billion)' please
go to:
http://nds.coi.gov.uk/ImageLibrary/detail.aspx?MediaDetailsID=2354
For table of 'Effect on the Public Finances of
a permanent £10 rise in the oil price1 (£ billion)'
please go to:
http://nds.coi.gov.uk/ImageLibrary/detail.aspx?MediaDetailsID=2355
1. An improvement in the public finances is shown as positive.
2. Includes effect on fuel duty, VAT and from indexation effects
Notes for Editors
1. The Report is available at :
http://budgetresponsibility.independent.gov.uk/publications.html
2. In the June Budget, ‘the Chancellor asked the Office for
Budget Responsibility (OBR) to undertake an assessment over the
summer of the effect of oil price fluctuations on the public
finances. Informed by this assessment, the Government will examine
options for the design of a fair fuel stabiliser’ (Budget 2010,
paragraph 2.100).
3. A Fair Fuel Stabiliser would reduce fuel duty when oil
prices rise (and vice versa). As the remit for this report notes,
a key principle for such a stabiliser would be that it ‘improves
the long-term stability of the public finances. Therefore,
understanding the size of any windfall accruing to Government as a
result of high oil prices ... is key to designing a workable Stabiliser’.
4. This report was signed off by the interim Budget
Responsibility Committee (Sir Alan Budd, Geoffrey Dicks and Graham
Parker) on 13 August 2010.
Contacts:
NDS Enquiries
Phone: For enquiries please contact the issuing dept
ndsenquiries@coi.gsi.gov.uk