What will the government do to buy off the fuel revolt?

As the pickets head home from two key oil refineries in Scotland and north-west England, BusinessEurope looks at what the government could do in its November draft budget to buy off a second round.

British Prime Minister Tony Blair today came as close as he could to admitting that he would cut fuel taxes in the coming draft budget in November.

In a press conference convened to mark the end of a tanker drivers' strike that left the UK within days of power cuts and food shortages, Blair stressed: we do listen. We listened to the hauliers' and we listened to the farmers.

The government was never going to offer concessions while pickets remained outside the UK's top oil refineries and the tanker drivers refused to deliver petrol and diesel to service stations.

But now the pickets have been removed, work has begun in the Treasury to alleviate the burden on hauliers, who have seen their margins savagely squeezed over the past three years by the rising fuel price and aggressive pan-European competition.

However, the Treasury's margin for manoeuvre is also tight. Chancellor of the Exchequer Gordon Brown is extremely reluctant to budge from his statement this week that it would be the worst of short-termism to make a lasting cut in fuel duty which would have to be paid for year on year, because of a one off- change in oil profits and thus oil revenues that might never be repeated.

Tax (flat-rate fuel duties together with 17.5% value-added tax) makes up the bulk of the cost of petrol and diesel (82%). Moreover, tax has risen well above the average inflation rate, largely because of the introduction by the previous government of the 'fuel duty escalator' in 1993. This was set at 3% above inflation, but was hiked by Brown to 6% in 1997, before its abolition in the last budget.

The Institute of Directors, an influential club representing 48,000 top managers, today proposed a series of measures to hack at fuel taxes.

They propose that Brown should cut duty on unleaded petrol by 5 pence per litre at a cost of 2.75 billion pounds, which would be paid for by a windfall from taxes imposed on North Sea revenues linked to the rising crude price.

A survey of small-business opinion by the Forum for Private Business found 89% of respondents favouring a freeze in the amount of tax payable per litre even though the cost of fuel fluctuates. Only 11% opposed the idea.

The problem with this proposal is that it would require VAT to be frozen rather than levied a percentage of the sale price. This would have to be approved by the other 14 members of the European Union; something Brown is certain to avoid.

The UK is the only EU state to have a fuel duty rate above the minimum level suggested for road fuels by 2002 in the European Commission's now-defunct proposal for energy taxation (500 euro for petrol and 393 for diesel per 1,000 litres).