I want to propose now something that is both urgent and I believe will be hugely popular as well as economically prudent.
The increase in fuel prices at the pump threatens to trigger a new inflationary spiral, and once that gets into the system it will spread like a cancer. Once established it will be painful to squeeze out again resulting in job losses, business bankruptcies and higher interest rates and government debt costs.
The good news is that it is not your usual general monetary inflation but a single source cost push inflation. That means it can be nipped in the bud at source before it does any further damage. Indeed we could insert a small counter-inflationary step for good measure.
I have in mind a price capping system which will both stabilise prices as well as phase itself out again when wholesales prices fall back, as I am sure they will when the Straits of Hormuz are reopened. Unfortunately that is not looking like being imminent despite being in the interests of both sides. A flat subsidy or cut in fuel taxes would not achieve either of those objectives.
I propose a cap of 150p per litre for unleaded, 165ppl for premium and 180ppl for diesel, though those can of course be altered. The refund subsidy would consist of three parts:
1. A standard industry gross fuel margin – this keeps it simple and fair. The CMA reports 10% as being an average in 2025, but observes that is high by historical standards, being more in the region of 5ppl ten years ago. So let’s use 7.5ppl.
2. The difference between the cap and delivery cost, which will vary frequently. This margin is added if a loss and vice-versa.
3. The difference between the cap and actual selling price. This would be deducted if the latter is higher but not the other way round. Competition will keep prices down to the cap.
I am not envisaging a mandatory cap, and we don’t want swarms of policemen checking on prices. The above formula will do the job just as well. Single independent retailers can apply online daily and be refunded by return. Large chains could be required to consolidate their claims into a single weekly claim, though could use the official website to gather data by forecourt.
I recommend that the Treasury seconds a senior executive from the industry to oversee and administer the whole thing. Give him a separate bank account so he can authorise payments immediately he accepts them rather than having to wait for the normal Treasury cogs to turn. He will have to be appointed a few weeks before any announcement is made so that he can ensure an operational website is proven and up and running when the cap comes in.
The CMA reports that in March 2025 total litres of fuel sold were 3.41 billion. If we assume the above formula gives 10ppl, that gives a cost to the Treasury of around £1bn per quarter.
A Tobin tax (turnover tax or stamp duty on FX transaction) has been considered many times but never implemented. The most comprehensive review was carried out by the University of Sussex IDS in 2011 which concluded that such a tax is feasible if it covers all instruments and currencies up to a rate of 0.00006 before market distortions and migration start to arise. The Bank of England’s April 2025 review gives a total annual turnover for the UK FX market of £748trillion, which at 0.00005 would raise £37.5bn a year, or over £9bn per qtr, ie 9 times the amount we need for this purpose. I suggest going in at 0.00001 to test and calibrate the policy, which will still give nearly double what we need, and then we can decide later how much more we can afford to front-load the fiscal cycle generally.
It is interesting that the reason the Coalition did not proceed with a UK Tobin tax was that the EU was simultaneously proposing a financial transfer tax. That concern has of course now been superseded by Brexit, so it would appear that this is yet another Brexit opportunity we have not taken up.
John Poynton 