NZ has cut its fuel excise tax: Will Australia follow?

·4-min read
New Zealand petrol prices sign above $3 a litre and man filling up car.
Petrol prices in New Zealand reached over NZ$3 a litre. (Source: Tess Emery, Facebook/Getty)

As fuel prices spike well above $2 a litre, calls for the Australian Government to cut or reduce the fuel excise tax have grown louder.

Yesterday, independent senator Rex Patrick called on the Federal Government to follow the New Zealand Government, which has cut its fuel excise and road-user charges by NZ$0.25 a litre for three months.

Petrol prices across the ditch had soared above NZ$3 a litre, which is around $2.80 a litre.

PM Scott Morrison has not out-right dismissed the idea of cutting the fuel excise tax.

Treasurer Josh Frydenberg also alluded to relief for petrol customers, according to an unnamed senior government source who spoke to The Australian.

So far, it’s not clear which way they will go.

So, should the Government scrap or reduce the fuel excise tax? And what impact will it have?

The first point to make, as highlighted by economist Stephen Koukoulas, is the fuel excise tax - like all taxes - goes towards government spending on aged care, health, education and roads.

Koukoulas said cutting the tax, even temporally, would be "economic stupidity" as it would blow out the budget deficit further, which would need to be made up through other tax hikes.

Halving the fuel excise from 44 cents a litre to 22 cents would cost the budget close to $10 billion per annum, he said.

Will it even make much of a difference?

Grattan Institute transport and cities program director Marion Terrill said reducing the fuel excise tax wouldn’t make a huge dent in fast-rising prices.

Halving the fuel excise would reduce the price per litre by 22 cents but Australia Institute senior economist Matt Grudnoff said prices had increased far more than that in the past month.

“So, there’s no guarantee that the savings won't be completely eaten up in a few weeks,” Grudnoff said.

Terrill said cutting the tax would reduce prices a little but said people were not very responsive to increases in petrol prices in the short term.

“If you need to go somewhere that week, then you’ll still fill up and go,” she said.

However, sustained high fuel prices do influence decision making in the long term, she said. For example, people may choose to buy a fuel-efficient car, start car pooling, buy a bike or even move closer to work if petrol prices stay high.

No more carbon cutting

Terrill said the fuel excise tax also worked as a de facto carbon tax and helped bring down road transport emissions.

“Given that it's the only instrument we really have for slowing down the use of or slowing down carbon emissions in the sector, which is a reasonably important sector, then I think it's unwise to get rid of it without replacing it with something else,” she said.

Will temporary fuel tax relief work better?

Grudnoff said the temporary tax relief installed by the NZ Government was the better option but warned tax cuts were hard to reinstate.

“If you get rid of the fuel excise now, governments traditionally find it incredibly difficult to reimpose those things,”Grudnoff said.

“And so it essentially becomes a lost stream of revenue.”

For example, in 2001, then-PM John Howard halted fuel excise indexation in response to political pressure and election issues. This cost the Commonwealth budget around $42 billion by the time it was reinstated in 2014.

Blunt instrument

Terrill said cutting the fuel excise tax would be a blunt instrument to alleviate cost-of-living pressures that disproportionately hurt lower-income households.

“By cutting or reducing the fuel excise tax, some of the people who will benefit are people who are really struggling financially, and plenty of them will be people who are not,” she said.

“It’s very broad-brushed.”

She said if the goal was to reduce the cost of living for people who were struggling, cutting the fuel excise tax was “not a very targeted way of doing it”.

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