Think tank warns of sharp tax rises ahead on petrol, child benefit & pensions

Freezing fuel duty has become a central plank of government policy under the chancellor. He could be forced to look at raising the tax, however, to fill a £3 billion hole in the country’s finances, according to the Institute for Fiscal Studies (IFS).

In its annual “green budget”  the think tank said that Mr Osborne might have to impose significant tax rises or spending cuts at short notice to meet his target of balancing the books by 2019-20. The chance that more belt-tightening would be needed by 2020 was put at one in four.

With a surplus of £10 billion forecast for the last year of this parliament, or 0.5 per cent of national income, the chancellor has little margin for manoeuvre and could be knocked off course by bad news on GDP growth, share prices or wages.

Any increase in petrol prices would come despite the Tory manifesto’s boast of freezing fuel duty.

Treasury advisers believe that an inflation-linked change would allow them to raise fuel duty and still argue that they had “frozen” it in real terms. If they did not raise the duty, the chancellor would need to find £3 billion by the end of the parliament, the IFS said.

Although petrol prices fell sharply last year they are still higher in Britain than in many other countries because of the duty imposed by the Treasury. The average price of a litre of unleaded is 102p, with 73 per cent of this going to the exchequer, according to the AA. In the United States a litre of unleaded is 36p. It is 95p in France, 86p in Spain and 96p in Germany. Quentin Willson, of the pressure group FairFuelUK, warned that raising fuel duty would damage businesses and high street shops.

The chancellor must also find £8 billion a year to pay for the manifesto promise to raise the personal income tax allowance and increase the starting point for people paying 40p income tax, according to the IFS.