petrol pumps
Fuel tax cuts could boost the recovery

Tax-cutting Tories have been delighted by chancellor George Osborne's claim that his Budget decision to cut fuel duty will boost Britain's economic recovery.

Backed by a report from the Treasury and HMRC, Osborne claims his decision to scrap the planned rise in the tax will boost GDP by up to 0.5% over 20 years, to a total of almost £7.5bn.

His announcement is a major boost for those Tories demanding more tax cuts and has been seen by them for precisely what it is, a calculated political attempt to regain the party's traditional low tax image with suggestions there will be more to come.

The Tory right have been dismayed by the apparent abandoning of the party's tax cutting agenda as it attempted to prove "we're all in it together" by targeting benefit to those at the lower end of incomes.

Both Osborne and prime minister David Cameron repeatedly insist they are natural tax cutters, but that the recession has imposed new disciplines on them.

Osborne has made some carefully-targeted cuts in his budgets but has faced demands for far more wide-ranging reductions which, supporters have long argued, actually boost income to the Treasury while stimulating growth and enterprise.

Before the recession made it redundant, Osborne's mantra was all about "sharing the proceeds of growth" between investment in public services and tax cuts. But with no growth there was nothing to share.

Now, with his eyes fixed firmly on the general election, Osborne has turned to the controversial "dynamic scoring" system, which attempts to look at all the widespread effects of tax cuts, to suggest that they can boost the economy.

According to the study, the 20% cut in fuel duties will boost growth by 0.02% a year, enough to pay for half the cost of the initial cut, partly because people will drive more.

That will anger environmentalists who will claim it is more evidence that the government has abandoned its green agenda.

But like the famous Laffer curve, which suggests increasing tax rates beyond a certain point actually reduces income to the Treasury, dynamic scoring is hugely controversial.

Critics claim both measures are speculative, are selective in the evidence they include and can only be judged over very long periods of time. And so far, the Osborne-created Office for Budget Responsibility has not adopted the methodology.

But Osborne has embraced it and wants it extended to other areas of taxation with the obvious aim it will allow the Tories to go into the election claiming they will be able to offer tax cuts without damaging the recovery.

As ever with the highly politically motivated chancellor, his announcement is also aimed at wrong-footing Labour and the Liberal Democrats.

His challenge to them is to match his tax cutting rhetoric, or suggest by default that their economic policies would inevitably lead to higher taxes.