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May 9, 2014

Ignore rentseekers, the petrol excise should be indexed

The government has made a good call in unfreezing the indexation of the fuel excise, and future treasurers will be grateful. But the decision will herald recurrent political problems for Joe Hockey.

If indeed the government has decided to restore fuel excise indexation, it’s a gutsy and correct policy decision for which it deserves credit.

It also shows the Coalition has come a long way, not merely from the Howard era when indexation was abandoned, but from the petrol price scare campaign it launched in the early days of the Rudd government — although at least that produced one of Brendan Nelson’s (unintentionally) funniest speeches.

That the Abbott government plans to restore the indexation of the petrol excise is being rumoured and reported on in the media ahead of Tuesday’s budget. There’s a strong case for higher petrol excise. Ignore the rentseekers of the NRMA and Australian Automobile Association — the current ~$15 billion per annum in excise revenue does not cover the costs that motorists inflict on the community, which include not just road building and maintenance but congestion costs, which are currently around $15 billion a year alone and predicted to reach $20 billion per annum by 2020.

Moreover, higher petrol excise will function as a de facto carbon price: based on 2008 CSIRO figures, a 10 cent per litre increase would be equivalent to a carbon price of $40 a tonne (2008 prices). This is considerably braver than the Gillard government managed — it refused to place the carbon price on petrol and would only have levied it on heavy vehicles from July 1 this year. So full credit to the Coalition for being prepared to implement a carbon pricing measure even Labor and the Greens didn’t want.

Restoring indexation won’t help the immediate return to surplus, but the treasurers of later this decade and the 2020s will benefit from billions in extra revenue as a consequence — just as all now rue the freezing of indexation 13 years ago.

Politically, however, it risks potentially greater damage than the deficit levy, which now looks like it will only apply to the very top income-earners and thus be unnoticed by most voters, regardless of the high dudgeon accompanying its announcement. It’s not so much that the indexation will represent a clear broken promise — yet another, despite Treasurer Joe Hockey’s embarrassing insistence that the Coalition never promised no new taxes, that black is in fact white and that water isn’t wet. For all the talk about Abbott’s “Julia Gillard moment” and losing trust, governments can get away with breaking promises as long as they convince voters it’s in the national interest — John Howard did it repeatedly. Gillard’s biggest failure was to not convince voters that a carbon price was good for Australia, rather than about securing the support of the Greens.

Instead, the problem will be that every six months — if that is the regularity with which excise will be indexed — there’ll be occasion for a new blow-up about petrol prices and the role of government taxation, and a reminder to voters of the government’s decision. If Labor opposes indexation, it will be a political gift that keeps on giving, twice a year.

It’s also particularly problematic in electorates where large numbers of voters are highly car-dependent, like in western Sydney. In early 2013, Abbott tried to sell himself as a kind of honorary westie, leading a party that would make western Sydney its new heartland. Despite copious assistance from The Daily Telegraph, that failed to transpire at the election. Higher petrol prices will make the chances of future success even dimmer. It’s reported that the government will try to offset this by emphasising its infrastructure investment — but, of course, there’s no point in raising excise if all of the rise is going straight into more roads, unless you cut roads spending elsewhere and pocket the savings that way.

Nonetheless, if Hockey and Abbott can manage the restoration of indexation, they deserve credit for a substantial contribution to fiscal sustainability. The treasurers of the future, of both sides, will thank them.

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26 comments

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26 thoughts on “Ignore rentseekers, the petrol excise should be indexed

  1. Hunt Ian

    Spot on Bernard, even if the NRMA is not a “rent seeker”. Indexing the excise for inflation ensures that it does not decline in real terms and the environment calls for that, as does the cost of maintaining roads, as you say. I doubt that the Greens will try to block this, though Labor will, if only because it is a gift that will keep giving.

    Nevertheless, Western Sydney is in a bad position and a lack of public transport, to which Abbott is ideologically opposed, is part of it. Perhaps a Western Sydney rail loop, which Vienna has will help out if only the public gives this mob the toss next election. That will be a real gift that keeps giving!

  2. Honest Johnny

    Kind of like a ‘Claytons’ GST. Broad-based and user pays. Howard should never have frozen it. Bernard is right. It will also be a de-facto carbon tax, indeed will have a bigger impact on the price of petrol than the carbon tax ever did.

  3. Emoticom

    Petrol prices vary from week to week by up to 20 cents and we drivers just swallow hard and pay the pump price. It escapes me why we would get outraged by an extra couple of cents per litre going to the government to provide infrastrucure or to pay down the national debt. It is also a subtle form of carbon pricing.

    Even with indexation of the petrol tax, our petrol prices will remain low by world standards. Of course, the fuel rebates given to big industry should also be adjusted down to zero over the next five years as well.

  4. Dez Paul

    It may be a gutsy decision, viewed from a stand alone perspective, but it still comes from a pissweak, lazy, visionless administration, wracked by contradiction and confused purpose. The Coalition has not made any progress since Howard blamed Labor for the Budget woes of 1996. And don’t mention to them it’s a de-facto carbon tax or they’ll not proceed with it.

  5. klewso

    Some Kismet to Honest John-Cosjello’s economic legacy?

  6. Richo T

    Interesting that Bill Shorten has been far nuanced in his response to the fuel excise announcement compared to the deficit ‘levy’. I would say based on that, they will let it go through while still attacking the decision

    Out of interest, what is the likelihood of Labor and the Greens blocking budget measures in the Senate? It seems all the measures the Coalition are proposing involve tinkering with existing taxes/spending programs? Would blocking the measures be in effect blocking supply?

  7. Yclept

    And it will hit those at the bottom of the ladder the hardest. But that seems to be an Abbott/Hockey given.

  8. zut alors

    How fortunate we are that it’s only an excise – not a tax.

  9. Electric Lardyland

    So, essentially it’s a probably permanent carbon tax, that will go into the construction of more roads, which should increase the amount of people driving and the amount of carbon emissions.

  10. bushby jane

    I love the carbon tax comparison-hope the useless Labor opposition pick it up. However, it seems like yet another Abbott attach on the GP rather than the other fuel move they could have made raising heaps more, that of getting rid of the tax deduction on diesel fuel excise for miners and farmers. (Have you ever met a farmer (or fisherman) who doesn’t drive a diesel vehicle?)

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