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Chancellor George Osborne has announced the government will not go ahead with the 3p fuel duty hike which was due this August.
The coalition disappointed motorists when Osborne failed to drop plans for the fuel duty increase in the Budget in March. Osborne argued that he had already scrapped the annual fuel tax escalator and cut fuel duty by 1p in his 2011 Budget, saving motorists £4.5 billion.
However, following pressure from motoring groups and a Labour threat to force a House of Commons vote on the issue, the chancellor has said fuel duty will be frozen for the rest of the year.
Osborne told MPs: 'Rising global prices have increased the cost of living for families here in Britain...this coalition government will do everything it can to help.
'We have already frozen council tax, kept mortgage bills low and abolished the fuel duty escalator. We will now stop any rise in fuel duty in the autumn and freeze it for the rest of the year. This means fuel duty will be 10p a litre lower than planned by the last Labour government.'
He added: 'We are on the side of working families and businesses and this will fuel our recovery at this very difficult economic time. The one-off cost will be fully paid for by the larger than forecast saving in departmental budgets.'
Shadow chancellor Ed Balls had urged the government in an interview with The Independent today to use the £500 million Olympics underspend to cover the cost of scrapping the increase in fuel duty.
Balls said allowing the fuel duty rise to happen would be an 'own goal' for the government and add more pressure to families. He added that there had been a 20% fall in oil prices this year but pump prices had failed to come down.
John Walker, national chairman of the Federation of Small Businesses, said: 'The 3p rise in fuel duty which was due in August was going to damage small firms that are already being crippled by the high cost of petrol. So it is excellent news for businesses and households that the chancellor had postponed it until the end of the year.
'We would urge the government to not put a fuel duty stabiliser in place to remove the volatility of fuel prices and help small businesses plan ahead.'
The fuel duty U-turn follows climb-downs over the 'pasty tax' and the taxation of static caravans. Osborne had planned to add VAT on to hot takeaway food but following lobbying by bakers, including Greggs, the government changed the rules to exempt just-cooked foods from VAT. It also U-turned on its plan to add VAT to the price of static caravans to bring them in line with mobile caravans.