So what might the Government actually do, when they get around to having an economic policy in two months’ time? Whatever Osborne’s actual economic theory is, it’s likely that the political imperatives (i.e. Downing Street) will force him to announce something.
It doesn’t look like the BIS-led effort to define a growth strategy is going to come to anything - Vince Cable doesn’t seem to have any authority left, and anyway any such effort would need a budget. Devolving any funds from the Treasury to BIS would probably now require a change of chancellor.
On the other hand, we’ve just had Boris Johnson demanding to know where his pony is. Presumably a tax cut would be more Osborne-palatable, even though it would be entirely incoherent with a massive fiscal retrenchment. So Adam Bienkov is probably on to something when he notes that both Osborne and Johnson are on record as supporting a “fuel stabiliser”. This basically means a giveaway from fuel duty.
Unfortunately, as the OBR points out, there’s no evidence to think that higher oil prices necessarily produce a pool of tax revenue that could be dipped into for a giveaway budget. Also, the principle of subsidising fuel is a really bad idea - arguably, with the North Sea reserves running down, we should be trying to concentrate as much production as possible on exports, and anyway trying to use less fuel.
Worse, once you start subsidising fuel, you link the government’s spending directly to the oil market. If it surges upwards, it automatically sucks money out of the budget into roadhog welfare. And it is very hard to stop - ask Mahmoud Ahmedinejad. Even if you have dictatorial powers, you can’t turn back.
If you have an aggressive shrink-the-state agenda, of course, there are good reasons why you might quite like the idea of a sink for government spending you can’t turn off. It would tend to crowd-out any other discretionary spending and frame all arguments about the budget as questions of VAT on fuel. Also, it’s worth remembering that the Murdoch press has a long-term obsession about this. Rupert Murdoch remarked about the Iraq war, after all, that $20 a barrel oil (and doesn’t that look amusing now) would be the biggest tax cut ever. It used to be said that anti-semitism was socialism for idiots, but the same might be said for subsidised petrol - a toxic substitute for a genuine concern for workers’ interests.
According to Duncan Weldon, a penny change in fuel prices due to VAT equals a £500m swing in government revenues. So how much peace will Osborne try to buy? And, thinking of the Murdoch issue, who will he be trying to buy it from?