Why not offset oil price fall by raising fuel excise?

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By Leith van Onselen

The Pascometer, Michael Pascoe, was on point yesterday afternoon, recommending that the Abbott Government should offset falls in oil/petrol prices by raising fuel, and in the process undo the Budget damage caused by the Howard Government’s decision to freeze the fuel excise in 2001. From The SMH:

[The Government should] seize the opportunity of crashing oil prices now to recoup all the indexation that has been forgone.

Yep, I’m saying increase the price of petrol by about 12 cents a litre…

Hey presto, around $5 billion a year would disappear from Joe’s troublesome deficit.

And he could claim all of that as a “direct action”, carbon-reducing measure, allowing him to scrap the silly $2.5 billion allocated for burying charcoal and such…

John Howard’s excuse for scrapping indexation back in 2001 (and actually cutting it by 1.5 cents a litre as well) was to alleviate the impact of higher petrol prices…

With oil prices nearly halving in six months, there are no higher petrol prices needing alleviation.

…most of the world pays considerably more [than Australia], which encourages them to use it more efficiently, taking with all the inherit benefits that efficiency delivers.

Petrol becoming cheap again would send a different message.

I could not agree any more.

As noted by Pascoe, Aussie petrol taxes are the fourth lowest in the OECD (see next chart).

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Raising the cost of petrol (or rather stopping prices from declining too much) would drive greater efficiency of use, since it would act as a defacto pollution tax that discourages car use and/or encourages the use of more efficient vehicles. It would also be difficult for the Greens to argue against such a policy, given their vocal championing of an emissions trading scheme and/or a carbon tax, as well as lobbying to reduce Australia’s dependence on fossil fuels.

In my opinion, the Howard Government’s freezing of fuel excise in 2001 was one of the worst budgetary decisions this century. Because of it, the real net revenue from fuel excise has been falling (see next chart), which now costs the Budget some $5 billion in foregone revenue. It also narrowed the tax base, making it even more reliant on inefficient personal income taxes – precisely what you do not want with an ageing population and a falling worker share.

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According to the Henry Tax Review, lifting fuel excise would improve taxation efficiency, since fuel excise creates a “marginal excess burden” (i.e. the loss in consumer welfare relative to the net gain in government revenue) of only 15%. This efficiency loss compares relatively well against personal income tax (24% marginal excess burden) and corporate tax (40% marginal excess burden).

Moreover, the claimed 15% excess burden is probably overstated because it does not account for the positive externalities arising from lifting fuel excise. As noted by the Henry Tax Review:

…the excess burden of fuel excise may be overstated to the extent that there are social and environmental costs of fuel consumption. These externalities may be reduced as excise curbs fuel consumption, which would improve welfare.

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Put simply, there are sound financial, economic and environmental reasons for the Abbott Government to counter falling oil/petrol prices by lifting fuel excise, and in turn righting one of the wrongs from the Howard era.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.