Leader: Fuel at this price puts a brake on economy

ONE of the biggest risks, as much to the government's deficit reduction plans as to the UK economy as a whole, has been the surge in oil prices since the start of the year.

It has acted like a tax, suppressing consumer demand - but not a tax that brings Chancellor George Osborne any comfort: tax revenues, far from going up, have fallen.

Figures from the AA show that motorists bought one billion fewer litres of petrol and diesel in the first quarter of this year compared with the pre-crunch January-March period of 2008. The 15 per cent drop in petrol sales is due to a combination of a weak pound, sharply rising crude oil prices during the Middle East turmoil and pressure on household budgets as incomes have lagged inflation.

The figures will cause a revision of the long-held belief that petrol demand was impervious to rises in price, given the continuing rise in car ownership and motoring. It is a measure of how badly households are being hit that the public has reacted by curtailing car journeys or switching to other forms of transport.

And little wonder the Chancellor was anxious to cut fuel duty in his budget - though the continuing rise in the oil price resulted in motorists barely noticing. The AA calculates that the drop in sales deprived the Treasury of 637 million in tax during the first three months of this year. But the effect on transport costs has added to the general level of inflation that continues to reduce real incomes.

The one grim consolation is that as the spending squeeze continues, petrol pump price rises will be difficult to sustain.