British government Keir Starmer’s problems have increased due to rising prices of gas petrol.

Welcome to this week’s CNBC UK Exchange. Few issues are more troublesome for the British government than the cost of filling up a car. No government has dared to overturn the fuel duty freeze, introduced on a “temporary” basis 15 years ago, which has cost the Exchequer hundreds of millions of pounds in taxes and put enormous pressure on the public finances.

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

As recently as February 5, when its latest quarterly inflation report was published, the Bank of England was forecasting Consumer price inflation (CPI) will fall to 2.1% – In the second quarter of this year – just above our target rate.

The Middle East conflict has led to rising crude oil prices and increased pressure on 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 the rise in the price of heating oil, which, unlike gas and electricity, is not capped by energy regulator Ofgem.

But high prices of petrol and diesel are a big problem. Ministers are haunted by the events of September 2000, when former Prime Minister Tony Blair’s government, with a majority equal to Starmer’s, was shaken when farmers and freighters blockaded refineries and fuel depots amid anger over taxes imposed on petrol and diesel.

Shortages occurred rapidly, resulting in school closures, grocery shortages in supermarkets, and suspension of operations and postal delivery.

Chancellor Gordon Brown responded by cutting duty on ultra-low sulfur petrol, reducing duty on other grades of motor fuel, putting more vehicles into the lowest vehicle excise duty band – cutting the tax for most lorries – and imposing a tax on foreign truck drivers using British roads.

The protests were sparked by a tax increase due to a fuel price escalator aimed at combating climate change, which would see fuel charges increase annually by more than inflation.

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

This meant that, when the fuel protests began, 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.

Brown’s successor George Osborne abolished the escalator in 2011 and cut fuel duty by one penny per litre, before freezing it. Subsequent chancellors, fearing the wrath of the “white van man” (a catch-all for self-employed traders), have since retained the cap, which, according to the independent Office for Budget Responsibility, now costs the Treasury £6 billion a year.

As chancellor, Rishi Sunak temporarily cut fuel duty by 5p a liter in 2022 after Russia invaded Ukraine, but Reeves, before the attack on Iran, planned to phase it out after September. Now this seems unlikely.

Breakdown services and motor insurance provider RAC warned that, with oil at $100 a barrel, Petrol heading towards 150 pence per liter – a level not seen since June 2004 – while diesel is hitting a three-year high of 180 pence.

This price increase creates a dilemma for the Bank of England, which, before the attack on Iran, was expected to cut interest rates this week, but that is now unlikely.

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

– Ian King

Britain’s economy failed to grow in January ahead of the energy price shock from the Iran war. The latest figures show evidence of a weak British economy, which is now under further pressure following the outbreak of the US-Iran war.