CNBC’s UK Exchange newsletter: Pain at the pump stokes trouble at the top

The reason for this reluctance goes back more than a quarter of a century — to a time when some of the current cabinet were still at school.

As recently as Feb. 5, when its latest quarterly inflation report was published, the Bank of England was forecasting that Consumer Prices Inflation (CPI) would fall to 2.1% — just above its target rate — in the second quarter of this year.

The surge in crude prices unleashed by the Middle East conflict upends that and piles further pressure on the public finances.

Starmer has already announced a £52.4 million ($70 million) package to support “vulnerable” households — a third of them in Northern Ireland — hit by a surge in the price of heating oil which, unlike gas and electricity, is not capped by the energy regulator Ofgem.

But higher petrol and diesel prices are a bigger problem. Ministers remain haunted by events in September 2000 when former Prime Minister Tony Blair’s government, with a majority as large as Starmer’s now, was rocked as farmers and hauliers blockaded refineries and fuel depots amid fury over taxes levied on petrol and diesel.

Shortages quickly followed, resulting in school closures, rationing in supermarkets and postponements of operations and postal deliveries.

The Chancellor Gordon Brown reacted by cutting duty on ultra-low sulphur petrol, freezing duty on other grades of motor fuel, putting more vehicles into the lowest vehicle excise duty band — a tax cut for most lorries — and taxing foreign truckers using British roads.

The protests were sparked by tax increases due to the fuel price escalator, a measure aimed at tackling climate change, under which fuel duty would rise by more than inflation annually.

Introduced at inflation + 3% in 1993, it was at inflation + 5% when Blair was elected in 1997, before Brown raised it to inflation + 6% in March 1999.

This meant that, when the fuel protests erupted, government taxes (Value Added Tax is added on top of fuel duty) accounted for more than 80% of the price of a liter of petrol.

George Osborne, Brown’s successor-but-one, scrapped the escalator in 2011 and cut fuel duty by a penny a liter before freezing it. Subsequent chancellors, terrified of angering “white van man” (a catch-all for self-employed tradesmen), have since maintained the freeze which, according to the independent Office for Budget Responsibility, now costs the Treasury £6 billion annually.

Rishi Sunak, as chancellor, even temporarily cut fuel duty by 5p a litre in 2022 after Russia invaded Ukraine, but Reeves, prior to the attack on Iran, had planned to phase this out after September. That now looks unlikely.

The RAC, a breakdown services and motor insurance provider, warns that, with oil at $100 a barrel, petrol is heading to 150 pence a liter — a level not seen since June 2004 —  while diesel is approaching a three-year high of 180 pence.

This price surge poses a dilemma for the Bank of England which, prior to the strikes on Iran, was expected to cut interest rates this week, but is now unlikely to.

For ministers, mindful of events that unfolded when some of them were still at school, it is more toxic still.

— Ian King

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— Holly Ellyatt