Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The increase in fuel prices generally, and the increase in the price of diesel, is an international phenomenon. Fuel prices are driven by a number of factors including the price of oil on international markets, exchange rates, production costs and refining costs. The rise in oil prices over recent periods reflected additional factors such as geopolitical uncertainty, supply disruptions and strong economic growth in countries such as China. Excise duty rates in Ireland for both auto-diesel and petrol are €368.05 and €442.68 per 1,000 litres of fuel respectively. These rates are lower than the EU 15 average, and our main trading partners particularly our nearest neighbour, the UK. I would also like to point out that excise rates for both diesel and petrol have not been increased in the last four Budgets.

The Exchequer yield from excise, as excise is set at a nominal amount, does not increase as the price of fuels increase. On the other hand, the yield from VAT, as VAT is set as a percentage of the price, increases as the price of fuels increase. However, in this regard it should be borne in mind that to the extent that spending in the economy is re-allocated to petrol and other oil products, and away from other VAT liable spending, and to the extent that the overall level of economic activity is reduced by higher oil prices, there may be little or no net gain to the Exchequer.

In relation to the rate of VAT applicable to auto-diesel, the position is that the VAT rating of goods and services is subject to the requirements of EU VAT law with which Irish VAT law must comply. Auto-diesel is subject to the standard VAT rate which in Ireland is 21%. It would not be possible to reduce the VAT rate applicable to auto-diesel without reducing the rate for all goods and services subject to the standard VAT rate. A decrease of 1 percentage point in the standard VAT rate would cost the Exchequer €483 million per annum. Such a reduction would have little or no impact on the price of fuel. It should also be noted that the VAT content of purchases of auto-diesel, kerosene, marked gas oil (MGO or green diesel) and fuel oil used in the course of business is a deductible credit for business in the Irish VAT system.

Given the impact high oil prices can have on growth rates, the Informal ECOFIN in September 2005 discussed the issue of an appropriate policy response to the then price increases. The Ministers agreed that distortionary fiscal and other policy interventions that prevent the necessary adjustments should be avoided. This continues to be the appropriate policy response, as was confirmed during an exchange of views on the subject at the most recent ECOFIN meeting earlier this week.