---

Finance Bill

I will explain why that is not the case, and why the proposal will produce perverse results. When oil prices rise, the premise is that the Government receive a windfall from either increased North sea tax revenues or greater revenues from VAT on fuel. As I argued last year, however, that is not the case. Although high oil prices might push up revenues from North sea oil taxes, there is no automatic link, as the significant increase in costs for oil companies that accompanied the last price spike showed. The impact of high oil prices on the wider economy means that the increase in North sea revenue is offset by falling revenues elsewhere for the Government. Lower GDP growth and higher energy costs reduce the yield from income and corporation taxes, while higher fuel prices lead to lower fuel consumption and lower revenues from fuel duty. For example, in 2008-09, when oil prices reached record highs in the summer, fuel duty receipts were £300 million below their 2007-08 level. In that sense, there is no windfall. [Interruption.] It is easy for Opposition parties to spend windfalls, but they do not exist as net windfalls for Government revenues, as I have just demonstrated. Turning to VAT and the alleged windfalls that form the basis of the Scottish National party's regulator mechanism, high fuel prices at the pump do not produce an overall increase in VAT receipts. When consumers have to pay more for fuel, they tend to buy less of other goods, thereby paying less VAT elsewhere. To prove that, in 2008-09, when crude oil prices and fuel prices reached record levels, total VAT receipts were almost £2 billion below their 2007-08 levels. Again, Opposition parties are trying to spend windfalls that do not exist in net form for Government receipts. They are trying to attach automatic mechanisms that would oblige us to spend windfalls that we do not have. Such distortionary effects on public spending would do great damage and achieve the opposite of stability—volatility, with large, sudden holes in public finances, which could be avoided without such mechanisms. As well as that fundamental objection to the principle of the fuel duty regulator, there are also serious practical problems with its implementation. Under the proposed Scottish National party mechanism, the Chancellor would produce at each Budget an oil price forecast for the coming year, which would act as what is described as a baseline price. Fuel duty rates would be reduced when oil prices rose above that baseline, and would rise when oil prices fell below it. We should take a bit of time to focus on how important the baseline—and the amount at which it was set—would be. It would have a real effect on tax duties, yet it would be very subjective.