There’s a lot of commentary today suggesting that lower petrol prices are providing a benefit to households equivalent to up to two rate cuts. From The AFR:
Deutsche Bank says households are receiving a $7 billion boost from lower petrol prices.
“That’s equivalent to more than 50 basis points of interest rate cuts, or roughly 2 per cent of retail trade and 1/3 the size of the Rudd government stimulus payments,” Deutsche analysts write in a note…
Bank of America Merrill Lynch’s Saul Eslake [says] the fall in petrol prices equates to a sizable rate cut.
“Retail petrol prices have fallen by around 48 cents per litre (or 32 per cent) since last July, which we calculate will save households an average of close to $50 a month – a similar saving to that which would result from a cut in interest rates of 45 basis points.”
Fitch Ratings agency has released similar research today arguing that the savings to Australian households is equivalent to a 0.35% reduction in the Standard Variable Rate (SVR) on the average mortgage balance of $210,625:
Borrowers with small loan balances benefit more from the petrol price change: for example, the yearly change in petrol prices for the average consumer is equivalent to a 74bp SVR cut on a AUD100,000 mortgage.
Those on a larger balance are better off with a 25bp rate cut: for example, the effect of the price drop on a AUD500,000 mortgage balance would be equivalent to 15bp. The potential savings to households may be higher, given Australian households’ average of 1.5 cars.
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As I argued in December, I believe now is an opportune time for the Abbott Government to use the fall in petrol prices to raise fuel excise.
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.
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.
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.
