Back in 2001, when former Prime Minister John Howard made the politically expedient but short-sighted decision to abolish the twice yearly indexation of fuel excise, I bet he never imagined (or cared) that his protege, Tony Abbott, would be left carrying the bag.
The decision to stop fuel excise indexation now costs the Federal Budget some $5 billion in foregone revenue per year – a figure that would grow over time as inflation takes hold. Along with the proportionate shrinkage of GST revenues, caused by fast growing expenditure on exempt items like health and education, the freezing of fuel excise indexation has also helped foster an unhealthy budgetary reliance on personal income tax just as the large scale retirement of the baby boomer generation is set to shrink the workforce.
Now, facing a long-term deterioration in the Federal Budget, brought about primarily by the secular decline in the terms-of-trade and population ageing, the Abbott Government is scampering for ways to plug revenue holes.
Reinstating fuel excise indexation has gained a tick of approval from economists (including from yours truly), who laud its relative tax efficiency as well as its environmental efficacy. As far as taxes go, it is far better than taxing productive effort.
Unfortunately policy, and ultimately governments, are not formed on the back of rational argument. Rather, it is the court of public opinion that often takes precedence. And it is here that the Coalition’s proposal to reinstate fuel excise indexation could run into trouble.
As reported in The Australian today, the Coalition plans to increase excise by 1 cent per litre in each of the next four years by reinstating indexation, raising around $2.4 billion over the forward estimates.
Already, the motoring lobby has hit back hard, vowing to forcefully campaign against the tax increase, while demanding greater road expenditure:
“Any increase in fuel excise in this budget would be unjustified,” said AAA’s chief executive, Andrew McKellar. “The government must be honest with motorists and confirm that there will be no increase in fuel tax,” he said…
“Motorists already pay around $15bn a year through fuel excise and only $4bn of that is spent on roads, so motorists are already contributing heavily to general revenue,” NRMA spokesman Peter Khoury told Guardian Australia. “If the government wants to spend more money on roads, they should spend some of what they are already raising in excise.”
Sadly, both Labor and the Greens seem intent to oppose fuel excise indexation, instead preferring to gain political capital, whilst also arguing that the Government should abolish fuel excise rebates granted to miners rather than slugging ordinary motorists.
Ultimately, the whole ruckuses over reinstating fuel excise indexation illustrates how difficult it is to make any type of reform, and why governments should think long and hard before taking politically expedient, but ultimately deleterious, policy decisions.
Unfortunately for Tony Abbott, his predecessor John Howard was the master of such decision making, which will leave Abbott (or a successor) in the unenviable position of ultimately having to close his mentor’s tax lurks, as well as cutting back on the myriad of unsustainable spending programs implemented by both the Howard Government and Labor.
Governing was never going to be easy once the rivers of gold from the mining boom receded and demographic headwinds stiffened. And nearly every major Budget decision from now on are likely to be treated with similar disdain.