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Cars & traffic

May 16, 2014

Is Labor right to oppose indexation of fuel excise?

John Howard's 2001 decision to abolish fuel excise indexation was poor policy. Indexation is a sound principle; Labor shouldn't repeat Howard's cynical action and sacrifice it to expediency


Revenue from indexation of fuel excise compared to Commonwealth expenditure on roads (source: Budget 2014/15 Building Australia's Infrastructure)

I’m really disappointed Labor is opposing the eminently sensible Budget measure to restore indexation of the fuel excise which was abolished by John Howard in 2001. Notwithstanding some of the ideologically-driven horrors elsewhere in the Budget, this is good policy; Labor and the Greens should be supporting it (1).

While I suspect Labor’s opposition is more about political tactics than anything else, the nominal objections to indexation are:

  • It hits lower income members disproportionately.
  • The increase in revenue will be hypothecated (i.e. tied) to road funding.

But there are solid arguments in favour of indexation.

Most importantly, it’s not a tax increase; all indexation does is maintain the rate of tax in real terms. A host of other costs including public transport fares routinely keep pace with the rate of inflation; that’s not an increase, it’s maintaining the status quo.

Neither Labor nor the Greens, quite rightly, oppose the principle of taxing motor fuel. But instead of effectively advocating a lower rate, Labor should be fighting hard to protect the principle that if a tax is worth having then its real value should be maintained.

Governments have to raise revenue to pay for programs and they need a broad tax base. The additional revenue that will be raised by indexation isn’t trivial. It will raise a net $2.2 billion over 4 years. It will bring in $1 billion in the fourth year, which is much the same as the annual revenue from the “temporary budget repair levy” on high income earners.

Abolition of indexation in 2001 provided an incentive for driving by making it cheaper. That’s rewarded those who drive more and/or use less fuel-efficient vehicles.

The petrol excise is effectively a tax on carbon because it discourages consumption. You can’t argue the $7 co-payment is a disincentive to visiting a GP without also acknowledging that failing to index the fuel excise promotes driving (see more: Should the fuel excise be increased? Yes Minister!).

Fuel is now 12-15 cents/litre cheaper in nominal terms than it would’ve been if indexation hadn’t been abolished 13 years ago. The impact on motorists of restoring it would nevertheless be modest relative to the fluctuations in fuel prices caused by international price changes.

At the current rate of inflation, indexation will raise the real pump price of petrol over 4 years from around $1.50/litre to $1.55. In the fourth year, the extra tax paid by the average driver of a medium-sized car will be around $65 per year.

Compared to other OECD countries, taxes on motor fuel in Australia are extraordinarily low. We pay around a third of what British and French motorists pay.

The hypothecation argument is nonsense. The government proposes to spend much more on roads over the next four years than the net $2.2 billion extra indexation is expected to raise (see exhibit). Indeed, the Treasurer claims the government’s outlays will catalyse over $90 Billion in road spending over the next four years.

Without hypothecation, the government will build roads and find the funds elsewhere. Hypothecation isn’t generally a good idea because it reduces flexibility to respond to current priorities, but what’s proposed in this case isn’t a sound basis for opposing indexation.

There are other ways the government can raise additional revenue; for example, by winding back the fuel tax credit for miners as the Greens propose. That’s not an argument, though, for allowing a tax that captures a lot of the social costs of driving to progressively weaken.

Indexation is a sound principle. While the temptation is understandable for an Opposition, Bill Shorten shouldn’t repeat John Howard’s populism and sacrifice indexation of the fuel excise to political expediency. If it hadn’t been for Mr Howard, there’d be less driving today and the Government would have an extra $3 billion of revenue available each year.


  1. There were reports prior to the Budget that the Greens would support indexation (which is consistent with the party’s position in the past e.g. here and here). Christine Milne’s Budget reply speech doesn’t oppose it (in fact she doesn’t mention indexation), suggesting the reports were right. Ms Milne needs to make an explicit public statement explaining the Party’s position. Update: there are other reports saying the support of the Greens is tied to hypothecating some proportion of excise revenue to public transport expenditure.


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One thought on “Is Labor right to oppose indexation of fuel excise?

  1. Dudley Horscroft

    Labor is definitely wrong. So is the Government, it should have increased fuel excise to the level it would have attained had not Mr Howard made a bad mistake.

    Indexation of taxes is right, if inflation puts prices up. Note that in the USA failure to index fuel taxes – usually set at “X cents per gallon” has meant the Highway Trust Fund is either bankrupt or close to being bankrupt.

    Mind you, the Government is proposing grossly wasteful road spending, possibly in the mistaken view that more money spent on roads makes then more productive, but this is doubtful. Possibly still an adherence to Keynesianism – we must keep spending up else we will have a depression!

    The Greens are right – assuming they support indexation – what a relief to say they have got something right at last!


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