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What did abolition of petrol excise indexation cost?

Possible future petrol prices under different oil market/carbon price scenarios (CSIRO)

What’s John Howard’s 2001 decision to abolish automatic indexation of the petrol excise costing the nation? According to ABC journalist Annabel Crabb, the then-PM’s “state of electoral existential panic” more than ten years ago is now costing the Federal budget a massive $5 billion per year.

That’s a huge amount. It’s more than Gonski says is needed annually to revolutionise our national approach to education. It’s enough to fully fund a major project like Melbourne Metro’s 9 km rail tunnel every year – with that sort of money, all Australia’s major capitals could be completely funded for new underground rail lines in five years. Or use it to service debt and the capital works possibilities are enormous.

I don’t know where Ms Crabb got her figure from but it fits the known facts. The petrol excise now brings in circa $17 billion a year and the CPI rose by around a third since 2001. Make allowance for John Howard also reducing the excise by 1.5c per litre at the time he abolished indexation and $5 billion is in the ball park.

If indexation hadn’t been abolished, the current 38.1 cents per litre excise would now be around 51 cents, meaning a present pump price of $1.40 per litre would instead be $1.52, or 12 cents higher.

Of course even if John Howard had held his nerve, there’s no guarantee the revenue wouldn’t have been squandered on some inefficient but politically enticing program, or wouldn’t have been given back in income tax cuts. But the lost opportunity isn’t just the foregone projects that might otherwise have been funded.

As the Productivity Commission notes, the excise on petrol effectively operates like a carbon tax, deterring people from driving. That “missing” 12 cents per litre is equivalent to a carbon tax of about $50 per tonne, according to calculations by the CSIRO.

A higher price would give drivers greater incentive to travel fewer kilometres and/or shift to a more fuel-efficient vehicle. It would also make alternative modes of travel like public transport relatively more attractive.

Even though a modest increase in petrol prices looms large in the eyes of motorists, a difference of 12 cents per litre wouldn’t have made them significantly worse off. That’s because standing costs like depreciation, insurance and taxes – which owners tend to ignore when estimating the costs and benefits of a particular trip – dominate the actual costs of car use.

If petrol indexation hadn’t been abolished, a driver who travels the average 15,000 km p.a. in a vehicle consuming petrol at the average rate of 11 litres per 100 km, would pay an extra $165 in 2012 compared to what she’s paying now. That’s not a lot in the context of the $10,523 it costs – taking into account both fixed and variable costs – to run even a medium-sized car like a vanilla Toyota Camry Altise for a year.

John Howard’s 2001 decision was enormously foolhardy. It’s hard to imagine any politician reinstating indexation in current circumstances, but the pressure needs to be applied. The existing 38.1 cents per litre excise on petrol is vital both for revenue and as an effective “price” on carbon. And well done to Annabel Crabb – that’s the sort of policy-related contribution to public discussion that journalists should be making.  I’m just a little disappointed it hasn’t had more airplay.

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  • 1
    RidesToWork
    Posted March 15, 2012 at 7:13 pm | Permalink

    Totally agree that abolishing the indexation was a bad idea.

    What happened to the proposals for much-needed taxation reform? Part for that reform should be the indexation of all taxes and thresholds for the effects of inflation.

    I wonder what the Greens and the Independents think of the idea? Would lobbying for indexation help?

  • 2
    IkaInk
    Posted March 15, 2012 at 7:48 pm | Permalink

    Good write up Alan. I feel similarly about not including petrol in any carbon pricing scheme. As a side result of that move any electric based public transport will have a price disincentive compared to driving that will continue to grow as the price of carbon (and electricity generation) goes up, and this price is reflected in ticket prices. Certainly not something a carbon price should do!

    (Also the link to the CSIRO figures isn’t working).

  • 3
    Alan Davies
    Posted March 15, 2012 at 10:04 pm | Permalink

    #2 IkaInk: Link works, you probably just got done in by the general flakiness the Crikey site has exhibited over the last few days. Hopefully the new servers installed last weekend mean its only short-term.

  • 4
    IkaInk
    Posted March 16, 2012 at 11:01 am | Permalink

    Ah, now I see. The link on the image up the top is working fine, the link in the text “according to calculations…” is pointing back to the homepage of this blog.

    IkaInk: Point taken: correct link now inserted. AD

  • 5
    S Karl
    Posted March 16, 2012 at 11:30 am | Permalink

    I agree with IkaInk.. I can’t believe fuel was not included in the carbon pricing scheme considering transportation contributes a solid ~15% of Australia’s total carbon emissions each year. We all know the reason why though, the same reason why abolition of petrol excise indexation was brought in: Australia is a country addicted to motor vehicles and the masses will scream and shout if their daily 4km trip to drop the kids off at school and then drive to work is going to cost them a few cents extra. This is why I am looking forward to fuel prices sharply rising in the coming years due to peak oil and general lack of supply. Hopefully this will force people to re-think their transport choices and priorities. But will it be too late by then?

  • 6
    Socrates
    Posted March 16, 2012 at 5:00 pm | Permalink

    If you totalled the cost for all the years between now and 2001 ($3bn + $3.3Bn + $4Bn…), ignoring interest, it would total over $4oBn, enough to pay for the NBN, and probably account for more than half of Australia’s net federal debt of $80 billion.

    Howard certainly put the “Con” back into Fiscal Conservative.

  • 7
    michael r james
    Posted March 16, 2012 at 5:27 pm | Permalink

    @Socrates.

    Just a small (maybe not so small) point. Despite all the hotair from the usual suspects, the NBN will in fact be self-funding so it is not a good example.

    Alan’s examples of funding city Metro is better; and shows how, despite the naysayers such “expensive” public transit can be built in Australia. Queensland even directly subsidizes fuel costs! No accident that we have the poorest public transport and most sprawled city in Australia.

  • 8
    Last name First name
    Posted March 16, 2012 at 7:42 pm | Permalink

    Parker Alan OAM, I agree with Alan 50 $ carbon price and Socrates plus a few more policies needed to sort the mess that Australia things that need to done.

    INSTITUTIONAL CHANGES TO REDUCE CO2 AND OIL USE

    Carbon trading will have an important role to play in world trade andin reducing the competitive advantage of fossil fuels which will encourage the growth of renewable energy infrastructure.

    There is also a need for institutional changes to be implemented as soon as possible: -
    o•. green the tax system to embody the costs of oil depletion into the price of diesel, petrol and aviation fuel and use the funds raise to decouple the growth in oil consumption from the growth of GDP provide tax incentives and constraints reduce size of cars in the Australian car fleet.
    • introduce a Commonwealth government target to reduce Australian Greenhouse gas emissions to 30% below 1990 levels by 2020. Ratify the Kyoto protocol and negotiate a post-2012 global emission reduction treaty which commits Australia to serious, legally binding reduction targets. See Greens policy “Re energising Australia” (Milne 2007).
    • .use the green taxes raised to build bikeway networks in all Australian cities, enhance rail infrastructure and extend rail services and express bus services into all outer urban areas and provide secure bicycle parking at all modal interchanges and railway stations. Fund Travel Smart programs in all urban areas directed to reducing the number of multi car households
    • change current planning legislation to enable land use planners to eliminate urban sprawl and provide public transport services in new residential and industrial areas and make urban areas more permeable for walkers and cyclists.
    o change the constitution of road planning agencies to make it their responsibility to reduce the; demand for road space, unsustainable travel, road congestion and the creation of a continuous arterial bike network within the overall hierarchy of roads. When there is room for bike lanes on main roads speed limits would be reduced to 50 kph. When there is not room for a bike lane or bike path in the road reserve a safe alternative route would be provided on residential streets. There would be more short cuts for cyclists, more bridges over barriers, safe mid block main road crossings linking and better route signage.
    • upgrade the Commonwealth Greenhouse Office and state environmental agencies to further encourage the take up of renewable energy resources and encourage the widespread use of rooftop solar electric cells and solar hot water heating. Focus on providing solar electricity on providing peak air conditioning, refrigerators and .the use of electric bicycles and electric scooters with overnight battery charging. There many synergetic benefits from an integrated approach to the use of domestic solar electricity.
    • change commonwealth and state laws and taxes to make better use of the car fleet by increasing in fuel efficiency by 50% by 2015; introducing car “fuel efficiency standards so that the average fuel consumption of the car fleet including most 4WDs be 5 litres/100 km and for the SUV and light truck fleet to be 6.5 litres/100 km. Promote and fund telecommuting, eco-driving, car sharing and car co-ops.
    • establish a 6 month strategic reserve of an appropriate mix of crude oil and refined oil products based on need and necessity.
    • promote the use of national gas as a transitional fuel and ban the import of large petrol and diesel fuelled cars whose engine not designed to be converted to efficiently burn natural gas
    • remove Australia from involvement with US plans to solve their oil problem by military force and to work within the Asian region for an equitable regional rationing of oil and mineral resources.

  • 9
    Tom the first and best
    Posted March 16, 2012 at 10:35 pm | Permalink

    7

    Queensland no longer subsidises fuel. It did until the removal of it after the last election took effect. This removal is one of the unpopular budget decisions made after the last election that will have a big effect on this one.

  • 10
    Posted March 17, 2012 at 4:07 pm | Permalink

    I agree that it was bad to stop indexing the petrol excise, but the Howard Government was under very considerable pressure at the time and I understand why it thought ‘something’ should be done. Perhaps the Government could have suspended the increase for 6 months but I’m not sure that even that would have mollified the car lobby.

  • 11
    Simon
    Posted March 18, 2012 at 11:57 am | Permalink

    The Liberals removal of fuel excise indexing and now Labour’s proposal for fuel to be exempted from the carbon tax show how vote driven all Australian governments are.
    Compounding the policy debacle is that public transport in the form of fuel for buses will be subject to carbon tax, as they are lumped into the same bucket as other heavy vehicles. This equates to an incentive to move transport mode share from public transport to cars.

  • 12
    David Hand
    Posted March 18, 2012 at 9:47 pm | Permalink

    The “tax and spend” sentiment expressed here ignores the economic impact of taxes and tax cuts on the whole economy. The Billions not collected by the ATO stayed in taxpayers’ pockets and were spent on something else, thus stimulating on the economy. Tax has a contractionary impact on the economy.

    I illustrate this by referring to the way the Flood levy was sold. Its cost was the equivalent of a cup of coffee. Though this is not very significant individually, collectively, collectively it has real impact. Imagine if we all had in fact reduced our coffee intake. A lot of coffee shops would have gone out of business.

    It is an issue for this government. They think taxing us more and spending it for us is efficient even though this was disproven in the 70′s. Swann is reduced to wheeling out a billionaire to flagellate to justify his taxes. The debilitating impact on economic growth is just not talked about.

  • 13
    suburbanite
    Posted March 19, 2012 at 8:36 am | Permalink

    So David Hand, where does the money go when the government spends tax dollars on infrastructure projects? “Tax and spend” is not contractionary, but it does allow projects to be built that we might all benefit from but can’t individually fund. Do you in fact use any infrastructure that you didn’t personally fund?

  • 14
    David Hand
    Posted March 19, 2012 at 10:06 am | Permalink

    Suburbanite,
    Infrastructure is a good thing and I support public spending on it. I absolutely support governments taxing us and then spending it on common good services and projects.

    But governments are not the most efficient way to use our money to grow the economy. So the point I was making is not that taxation is bad in principle. I am merely saying that the “lost” $5 billion a year has had a positive impact on economic growth in the most efficient way possible – through private hands – and this article and discussion has completely ignored the fact. To the writer, it’s as though the $5b has dissapeared into a black hole nevert to be seen again whereas it is actually circulating through the economy, to beneficial effect, through private hands.

  • 15
    NeoTheFatCat
    Posted March 19, 2012 at 10:19 am | Permalink

    In som circumstances, Government can be highly efficient way of getting money out into the economy. That is because people tend to save a portion of the cash that goes through their hands, businesses save, retire debts and pay out dividends – but Government programs spend 100% of their funds.

    There is a case for discussing the efficiency in delivering the outputs vs the efficiency in spending money. But in some cases – like the response to the GFS – the real output was getting cash into the economy not necessarily the school hall, insulated homes etc. The nice thing about what Government did was it achieved two useful outputs – cash in the economy plus long-term infrastructure.

  • 16
    Alan Davies
    Posted March 19, 2012 at 12:52 pm | Permalink

    #14 David Hand: The article talks about lost opportunities, not lost money. Markets aren’t going to fund the sort of programs mentioned in the article e.g. Gonski’s education proposals; urban rail infrastructure. They rely largely on government expenditures financed from revenue raised via taxation.

  • 17
    Savonrepus
    Posted March 19, 2012 at 3:44 pm | Permalink

    What a joke lamenting over a decision made over 10 years ago. This is not the outcome of just a Howard decision in 2001 it is also the joint decision of every Federal Government since then not to change it. It is no wonder the process of Government becomes paralysed when those bold enough to make decisions are subject to close scrutiny and those that fail to make them are handed a free pass.

  • 18
    Alan Davies
    Posted March 19, 2012 at 4:03 pm | Permalink

    #Savonrepus: John Howard made the easy, politically popular decision to remove indexation. The decision to reinstate indexation would be politically unpopular. These are not equal decisions.

  • 19
    Scott
    Posted March 20, 2012 at 11:57 am | Permalink

    $5 billion a year seems a little high to me.

    In 2009/2010 according to the budget papers, the entire petrol excise produced $6.3 billion in revenue a year (estimates put 2011/2012 to be 5.8 billion) so it is unlikely that stopping indexing resulted in the loss of almost that entire amount from the government coffers.

    Petrol is slightly inelastic over the short run, but over the long run there will be reductions in demand due to price rises (as people fill up less, use more public transport or buy more fuel efficient cars). This would feed into less revenue to the Government. Also, higher prices of basic inputs produces a lag on economic growth which can also negatively effect company and income tax receipts. I think who ever came up with the 5 billion figure needs to go back and do some more economics training.

    In 2004, Treasury estimated the cost to government of the loss of indexing to be in realm of $310 million a year by 2012/2013. This is probably a little on the low side, but it would be more in the ballpark than $5 billion. I might do some analysis myself to see what a more accurate figure would be (though I would believe Treasury over Annabel Crab any day of the week)

  • 20
    Alan Davies
    Posted March 20, 2012 at 12:05 pm | Permalink

    #19 Scott: you might be referring to the net figure after fuel tax credits etc have been deducted.

  • 21
    Burke John
    Posted April 25, 2012 at 4:14 pm | Permalink

    It was just a few months ago I figured out that all our money goes into cars, fuel and associated infrastructures. That the petrol excise indexation could have paid for a major infrastructure project is clear, but the incredible thing is that it is just a drop in the bucket relative to the whole car money-sucking syndrome that occurs in our country. Most of Australia’s wealth goes on propping up a car culture which is deemed necessary, but only because that is what we are used to now. Other than that they have virtually destroyed every aspect of our lives socially and economically.
    I would defy anyone not to be amazed at the waste after finding out just where money goes to, which is indeed to cars in the main. That is our religion.
    There is hardly a political (or urban planning more pointedly) debate worth having relative to this one, which sadly will probably never occur until cars have bankrupted the country.
    Now, I’m just waiting for the knock at the door…….eeek…I’ll get a toothbrush and a few things together.

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