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Cars & traffic

Jun 25, 2014

Shouldn't the Greens and Labor be supporting fuel excise indexation?

The Green's and Labor's opposition to indexation of the fuel excise is a triumph of political expediency over good public policy. The Rudd Government should've done it; Labor should support it now

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Fuel tax in OECD countries, in $ per gallon (source: Wiki)

I was disappointed to read Peter Martin’s report on Tuesday that the Greens will oppose the Government’s plan to restore indexation of the fuel excise (Green opportunity lost in Christine Milne’s road rage). Greens leader Christine Milne said indexation would:

add more congestion to our cities, more pollution from vehicles, and not do a thing for public transport, for getting people to be able to drive less and, when they do drive, to drive more efficiently.

Then on Wednesday Bernard Keane writes that Labor will almost certainly oppose it too (Green-Labor stupidity on fuel excise could be prevented with an X).

The fuel excise has been frozen at 38.1 cents per litre since John Howard abolished indexation in 2001. At current CPI, restoration would increase the tax – and hence the price at the pump – by one cent per year over each of the next four years.

I’m disappointed because I’ve been advocating restoration of indexation in these pages for a couple of years (see What did abolition of fuel excise indexation cost?). I also argued in May that it should be endorsed by political parties with pretensions to a progressive agenda (see Should the fuel excise be increased? Yes Minister! and Is Labor right to oppose indexation of the fuel excise?).

Here’s a quick recap of the key arguments for restoration of indexation I put last time:

  • It would generate significant revenue for public purposes ($2.2 billion over the next four years).
  • It’s not a “new tax”; indexation only maintains the real value of an existing tax.
  • It would claw back some of the currently unpaid social costs of driving (see also Should cars be subsidised?).
  • It would discourage driving by giving motorists an incentive to make fewer journeys and shorter trips, as well as shift to more fuel-efficient vehicles.
  • It would encourage mode shift by making alternative modes like public transport, walking and cycling more attractive relative to driving.
  • As even the Prime Minister acknowledges, it’s a tax on carbon (see What did abolition of petrol excise indexation cost?), as well as a de facto form of road pricing.
  • Taxes on motor fuel are already extraordinarily low in Australia compared to other OECD countries (see exhibit).
  • The Government is promising that only the extra revenue from indexation will be hypothecated to roads, not the existing revenue from the base 38 cents per litre.

Yes, indexation would increase the cost of running a car; an “average” motorist driving a medium-sized car would fork out an extra $65 p.a. by the fourth year compared to what they’re paying this year.

It should be understood though that the abolition of indexation in 2001 means motorists have been getting, and are continuing to get, a progressive reduction in the level of tax and hence in the ‘real’ pump price of petrol.

Peter Martin says that at the time indexation was abolished in 2001 it made up around 38% of the retail price of petrol. Without indexation it will fall to less than 20% when the (nominal) price reaches $2 per litre.

Restoration of indexation wouldn’t increase the ‘real’ level of tax, it would remove a tax ‘cut’.

It’s also important to understand that motorists’ incomes will increase in the future; just as the fuel excise would increase by CPI, so too salaries, wages, pensions and transfer payments will increase at, or in many cases above, the CPI. (1)

Labor and the Greens will inevitably seek to bolster their  position by arguing indexation would be regressive. However Harry Clarke points out that “what matters is the overall incidence of the tax-transfer system, not the equity character of a small part of the tax base.”

In any event, the poorest 20% of households could be compensated for indexation if just 8% of the additional revenue raised was returned to them through the tax-transfer system, according to the Grattan Institute.

So far as hypothecation is concerned, it’s an empty promise, as I’ve pointed out before. The Government will spend much more on roads over the next four years than indexation is expected to raise. The Treasurer claims the Budget will catalyse over $90 Billion in road spending over the next four years.

Contrary to what Christine Milne told Parliament, indexation would lessen congestion in our cities, reduce pollution from vehicles, and make public transport more competitive. It would encourage people to drive less and to drive more fuel-efficient efficient vehicles.

It’s the sort of policy that the Greens and Labor ought to be supporting, not opposing. In fact Labor should’ve restored indexation when the Rudd Government took office.

__________________

  1. If a transfer payment doesn’t keep pace with CPI, the proper course is to seek to ensure it does, not to oppose indexation.
Alan Davies — Editor of The Urbanist

Alan Davies

Editor of The Urbanist

The Urbanist is edited by Dr Alan Davies, a principal of Melbourne-based economic and planning consultancy, Pollard Davies Consulting.

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13 comments

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13 thoughts on “Shouldn’t the Greens and Labor be supporting fuel excise indexation?

  1. Jacob HSR

    Alan #12,

    Yeah alright. So Phoney Tony is being dishonest by saying that the fuel excise will be hypothecated for roads.

    There are ways to negotiate with The Greens, eg, exempt electric cars from the Luxury Car Tax or ban new coal power stations from being built. Or cut the GP co-payment to $1/visit.

  2. Alan Davies

    Jacob HSR #11:

    The Government’s proposal isn’t to increase the fuel excise; it’s to index it against the CPI so that it’s value is maintained in real terms. Further, only the additional revenue from indexation (i.e. expected to be one cent on top of the existing 38 cents in the first year) is proposed to be hypothecated to roads. The Government intends to spend much more on roads over the next four years than indexation will raise; the hypothecated revenue won’t be spent on additional roads – hypothecation is just a way of conning their own pro-road supporters.

  3. Jacob HSR

    Raising the fuel excise to build more roads is like having a carbon tax and giving the money to coal power stations.

  4. IkaInk

    It’s silly and lacking in moral fibre to oppose a good policy for short-term political gain.

    Thanks for summing up the state of almost all Australian politics so eloquently and simply Alan.

  5. kd

    I believe Labor should support it and are doing the wrong thing in not supporting it. As the alternative government, they should be making pragmatic decisions of which restoring fuel indexation is a no brainer (should never have been frozen in the first place).

    I think the Greens’ position is interesting. As a party of principle, they should be demanding that the government have a coherent intellectually defensible basis for their reindexation policy, and the current government’s policy is certainly not that. So I think I support the greens’ position with qualifications.

  6. Alan Davies

    Waffler #7:

    Ms Milne’s party is again risking cutting off its nose to spite its face.

    The party’s policy of allowing the fuel excise to continue falling in real terms encourages driving and discourages public transport use. Had John Howard not abolished it, the pump price of petrol would now be 12-15 cents/litre higher. The party is effectively saying tax on petrol should be lower.

    Restoration of indexation would provide a tangible benefit in terms of the Greens stated values whereas the advantage of opposing it is all symbolism: is Tony Abbott going to spend less on roads because the Greens oppose indexation? No, he’ll get the revenue elsewhere by reprioritisation (and probably derived at least in part from taxes that are more socially damaging than the excise on petrol). Is it going to lead Tony Abbott to spend more on public transport? Hardly (and as if denying him revenue would enhance the chances of that outcome).

    Restoraton of indexation will go a lot further toward lessening driving and increasing public transport use than anything Christine Milne gains from her position or, for that matter, any roads Tony Abbott might build with the increment in revenue it provides.

    Indexation is much, much more important strategically for good transport policy than whatever benefit comes from posturing. Unfortunately, both Abbott and Milne are cynically using indexation as an opportunity for politicking, not for good policy.

    It’s also pertinent to note that a substantial part of the Commonwealth’s road funding program is outside capital cities in areas where, realistically, the scope for alternatives to roads for moving freight and people is very limited.

    In any event, the Greens (and Labor) should give primacy to supporting the principle of indexation of both taxes and transfer payments. If they’re worth having they should be maintained in real terms, not allowed to quietly erode.

    Unless it’s entirely lacking in imagination, there are plenty of other ways the parliamentary wing of the Greens can promote its position on roads and public transport. It’s silly and lacking in moral fibre to oppose a good policy for short-term political gain.

  7. Waffler

    I thought she said she couldn’t support indexation with the proceeds directed to roads as proposed by Abbott because:
    a. We certainly don’t need more investment in roads; and
    b. without investment in PT instead, those most susceptible by rising fuel prices would have no alternative.

    It is probably pretty closet to certain that investing any indexation proceeds in increasing road space would lead to a greater increase in road travel, emissions, etc. than the marginally higher price would reduce!

  8. David Penington

    The Greens and Labor should support the increased indexation with it dedicated to State revenue, not federal. The states have the big revenue problem at the moment.
    Howard’s abolition of indexation was financially irresponsible, a populist response to being unable to sell the GST properly.
    Of course the road funding dedication is meaningless, since governments can just take the money out from other parts of the roads budget (Howard did just this same with the sale of Telstra money and the environment, and I expect the same if the “medical research fund” gets up) but asking the Greens to support a dedicated roads-only funding from this is asking the impossible.

  9. michael r james

    Even some right-wing ideologues have come to similar conclusions. I can’t help but cite the former rightwing thinktanker and former Liberal staff, current Murdoch hack, Adam Creighton in today’s The Australian:

    ” “PRIVATE opulence and public squalor” may well spring to mind when considering Australia’s public transport infrastructure, to borrow a famous line from the eloquent American JK Galbraith.

    Australia, ensconced among the richest handful of countries per capita in the world, has only a few ageing airports and no high-speed rail lines. Only a few years have passed since completion of a four-lane highway between Sydney and Melbourne.

    Sydneysiders returning from London, Paris, Berlin, Hong Kong or even much smaller Washington DC inevitably feel more than a tinge of embarrassment as they hop on to a bus and train network whose quality and frequency is, despite the best efforts of the new state government, a national embarrassment.”
    ……………….
    On the same page (p23) is Warren Truss:
    “Our selected projects include investments of $7.6 bn to fix the Bruce Highway, Queensland’s main commercial artery; $5.6bn to complete the duplication of the vital eastern states artery, the Pacific Highway; and up to $1.285bn towards the Toowoonba Second Range Crossing. We are also augmenting the successful Roads to Revoery and Black Spots programs with the #300m Bridges Renewal Program.”

    Road, roads and more roads. And he doesn’t even get around to his support of the twin $12bn (ie. $24bn at least) road projects of West Connex (Sydney) and East Freeway (Melbourne).

  10. michael r james

    AD is mis-quoting Milne. She quite lucidly explained that the most important factor was the transport policy of the Abbott government, which is roads, roads and more roads. Abbott went so far as to promise not to give a dime towards public transport (alienating state and city governments in all the big states, even Qld & WA). Have a read of Warren Truss’s piece in today’s News Ltd rags, and it is stark and scary that this is what this lot considers “efficient and modern”.

    So yes, it is a political calculation but in the peculiar political circumstances, the right one. The claim that “indexation would lessen congestion in our cities, reduce pollution from vehicles, and make public transport more competitive” is only true over very long timespans. It will take years and years to make any impact as the histogram shows, ie. to use a price signal to decrease the number of drivers (other than the genY effect), especially if Abbott manages to get his roads built.

    But, while the road lobby will always exist, Australia is approaching a turning point. More and more people are becoming aware that the roads-only approach in our biggest cities, even between those cities, is not working and not sustainable. It is yet another important issue Abbott has totally wrong and with so much public reaction against so many of his policies this represents a good opportunity for Labor and Greens to help it along. (Heck, even Clive is hip to this opportunity.) The message, at least as presented (quite clearly IMO) by Milne, is that a fuel tax makes sense in the context of big investment in public transport. In other words an actual rational transport policy. Indeed as a correlation study with those countries in the graph would show (those three climate criminal states at the bottom are also the most car-dependent on the list).

    But I do agree that Labor should’ve restored indexation when the Rudd Government took office.

  11. Jacob HSR

    Milne wants the fuel excise to be spent on public transport.

    Abbott is stuck in the last century and believes everybody has a driving licence and everybody should drive.

    Raising the fuel excise to build road tunnels is wasteful and unfair.

    We need to direct any future stimulus program to removing level crossings, not pink batts and school halls.

  12. Dylan Nicholson

    I suppose the problem is that there IS no proposal to do anything to counter the regressive nature of the excise re-indexation (which I support, though personally I’d rather just see price on carbon), and no indication that public transport will be improved to help those who will now realise that driving everywhere is quite expensive.
    Eventually though I still foresee a day where we globally hit an emergency need to de-carbonise our economies, and petrol will necessarily become enormously expensive, meaning that only the rich will be able to consider driving as realistic for everyday transport, at least until low-carbon forms of personal transport become cheaply and widely available.

  13. boscombe

    I thought we were in agreement on this, but then you cited Harry Clarke. If Clarke is for something, surely I should be against it.

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