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Mar 15, 2012

What did abolition of petrol excise indexation cost?

What’s John Howard’s 2001 decision to abolish automatic indexation of the petrol excise costing the nation? According to

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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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