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OPINION: Why cutting the petrol excise is a stupid idea

·4-min read
Petrol prices displayed at a petrol station next to a man filling up his car.
Petrol prices have never been higher in Australia. (Source: Getty)

Petrol prices may be skyrocketing right now, but any decision to cut the petrol excise, even temporarily, would be economic stupidity.

It will feed directly into a bigger budget deficit, it would be funded via extra borrowing - which future tax hikes will have to cover - it will add to government debt and will mean there is less money available for the government to spend in areas such as aged care, health, education and, ironically for some, even roads.

Should I stop there?

Also by Stephen Koukoulas:

A halving in the fuel excise, cutting it from 44 cents a litre to, say, 22 cents would, for example, cost the budget close to $10 billion per annum.

This is a substantial shortfall, given the latest budget numbers from Treasurer Josh Frydenberg have deficit forecasts of $99 billion in 2021-22, a further $99 billion in 2022-23 and a still-massive $85 billion in 2023-24.

From an economic standpoint, now is not the time to further undermine the Government’s financial position by tinkering with tax and excise changes on petrol, or any other goods and services.

Indeed, with inflation running rampant and the economy at full employment, there is a stronger case that the Budget in a fortnight’s time should look to start the massive task of steadily repairing the Budget, not undermining it.

Anyone proposing a cut to the petrol excise must be asked what the implications are for the budget bottom line? Where’s the money coming from to cover the revenue shortfall? What services will be cut to fund this?

They should also be asked what interest rate will be paid on the extra government debt and how much will that add to government spending on interest payments each year?

Even a 2 per cent interest rate on $10 billion will add $200 million a year to the government’s interest costs, further undermining the ability of the budget to get back to balance or even surplus.

Interest costs surging

The need for budget repair and not policy largesse is even more in focus with the recent rise in government bond yields. This is the interest rate the government pays on its debt.

The yield on the benchmark 10-year bond is now around 2.5 per cent, up from a level below 1 per cent a little over a year ago. The 3-year bond is now yielding 2 per cent, up from the 0.1 per cent the Reserve Bank was targeting as it set about driving inflation higher.

While there are timing issues with the interest costs and bond maturities, the recent rise in yields will add to the government’s borrowing costs unless the budget deficit is significantly lowered.

It is likely the rise in yields will see the government spending more than $20 billion per annum just on paying interest on its debt.

If interest rates rise in the next few years and the budget remains in substantial deficit, the debt-servicing costs for the government will continue to rise, and that will negatively impact on its ability to provide other services.

Oil price determined outside Australia

It is also important to emphasise that the petrol price in Australia is driven largely by global events. At the end of the day, global demand relative to supply will drive the price.

The current spike in prices has been driven by a supply disruption due to the Russia-Ukraine war.

Local Ukraine residents are seen next to a destroyed armoured vehicle and building.
Russia's invasion of Ukraine has had a huge impact on global oil prices. (Source: Reuters)

That said, there is evidence that other oil producers, especially in the Gulf states, are increasing their output to take advantage of the high prices, which in the not-too-distant future will push prices lower.

Already the price of West Texas Intermediate crude oil has fallen by more than US$27 a barrel in the past week to be just above US$100. If prices remain around these levels, the local price of petrol will stabilise or even edge down a few cents a litre.

Forecasting oil prices is difficult, but there is a high probability that in the weeks and months ahead, the global oil price will continue to track lower and that this will feed into local petrol prices, even without an excise change.

For now, consumers and businesses simply need to live with the oil price rise. It will be tough for many.

If it is a permanent shift, it will be a further blow to cost-of-living pressures, which are already acute for many householders.

If the petrol price lift is temporary and, in the weeks and months ahead, global and domestic prices fall back, the current angst about petrol will prove to be a storm in a teacup that did not require any change to the excise we all pay on petrol when we fill up the tank.

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