George Osborne freezes fuel duty until end of year

George Osborne has embarked on another budget U-turn by announcing that fuel duty would be frozen for the rest of the year, reversing a planned increase in August at a cost of £550m.

Motoring organisations and business groups welcomed the decision to postpone the planned 3p rise, which will ensure that the average Ford Focus driver will be £160 better off between 2011 and 2013.

Ed Balls, the shadow chancellor, who had used a Sun article to announce that Labour would call a Commons vote next week to stop the planned rise, accused Osborne of embarking on the "fastest U-turn in history".

Treasury sources denied that Osborne, who only finalised his decision in discussions with David Cameron yesterday, had carried out a panicked U-turn in response to the Sun campaign. But on Monday the transport secretary, Justine Greening, appeared to rule out any such move when she told the Daily Telegraph that she would focus on challenging petrol companies to cut the cost of fuel.

Greening was one of two ministers left exposed by the abrupt change. Chloe Smith, the Treasury minister, endured a painful series of television interviews yesterday as she attempted to explain that the £550m cost would be funded by a £4bn underspend in departmental spending last year.

In an interview on BBC Newsnight Smith was unable to identify which departmental budgets would contribute. "It is not possible to give you a full breakdown at this point because the figure is evolving somewhat," she said.

Smith ran into trouble when she insisted that the government's main priority remained the elimination of the structural budget deficit. The Newsnight presenter Jeremy Paxman said: "Is this some sort of joke? How can you possibly have as a number one priority cutting the deficit when you choose to spend an underspend on funding a tax cut?" Smith responded: "The plan overall has not changed."

Labour said that Smith's uncertain performances on Newsnight and Channel Four News showed the government's plans had little credibility, particularly after an announcement that the double dip recession had prompted a £2.7bn increase in borrowing last month compared with the same period last year. A Labour source said: "The borrowing figures were dreadful so where these fabled underspends come from I have no idea."

Downing Street defended the decision not to inform other ministers about the announcement. "Tax is a matter for the chancellor," the prime minister's spokesman said. Government sources said that Osborne took his time to make up his mind. The chancellor discussed the plan on 28 May at a meeting of the "quad" - the group of ministers which includes himself David Cameron, Nick Clegg and Danny Alexander - attended by the Bank of England governor, Sir Mervyn King. The sources said it was wrong to compare the fuel duty announcement to the recent budget reversals. They said that the planned fuel duty increase was introduced by the last government, which established a "fuel duty escalator". Under Labour's plans, fuel duty was due to increase by the retail price index (RPI) plus 1% every April until 2014.

Osborne started to dismantle the formula in the 2011 budget when he abolished the increase over 1% over RPI and cut fuel duty by 1p. He then deferred the April 2011 increase to January 2012. In his autumn statement last November, Osborne cancelled the increase due in January 2012 and deferred the April 2012 increase to August. That has now been delayed until January. Osborne told MPs yesterday: "Fuel duty will be 10p a litre lower than planned by the last Labour government."