Fuel tax cut not a long-term fix for cost-of-living pressures

The promise of a tax cut is always tempting – even irresistible – for a government in the lead-up to a federal election.

Reducing the tax on petrol — if only temporarily – may be politically popular at a time when people are worried about cost-of-living pressures. But it is unlikely to achieve a longer-term economic benefit.

As chief political correspondent David Crowe reports, a political row over the cost of living is building pressure on Prime Minister Scott Morrison to cut some of the federal government’s $20.8 billion in petrol and diesel excise. This comes as the war in Ukraine drives up global oil prices.

A change to the excise will be the subject of internal debate before the March 29 budget. Petrol now costs about $2.20 per litre and may even rise higher. South Australian Premier Steven Marshall, who is facing a state election on Saturday, is among state leaders calling for a temporary cut to the tax.

Consumer network One Big Switch is also calling on the federal government to freeze the fuel excise and even reduce it temporarily during the Ukraine crisis.

Others believe that the next increase in the tax, likely to be about 1 cent under rules that index the excise to inflation, would be eclipsed by changes to global oil prices if the budget included any temporary pause.

Tax economist and former Treasury official Steven Hamilton is unenthusiastic about a fuel excise cut. But if it goes ahead, he says it should be temporary and for a specific time period, without any freeze on indexation.

His other worry – shared by some economists including Richard Holden from the University of NSW – is the potential for petrol stations not to pass on the full tax cut to consumers.

CommSec economist Ryan Felsman says while any move to reduce the fuel tax may provide some relief to households it is ultimately a “Band-Aid solution” because it would also reduce government revenue, which would then need to be replaced.

With higher inflation looming, many people on lower incomes will feel like they are going backwards without a significant pay increase.

Economists are tipping a rise in inflation from its current level of 3.5 per cent, putting the government under greater pressure to show how its March budget can support household incomes. Pump pain will be felt the most by lower-income households and those in regional and outer suburban areas with unavoidable car travel needs. While axing the fuel excise would help those households, economists have argued they could be better targeted with lower income tax cuts or a one-off pension or benefits boost.

There is no simple solution to cost-of-living challenges, but it is incumbent on politicians to level with Australians about what they can do to address the problem which has been exacerbated by a war in Europe, global oil embargoes and ongoing pandemic struggles.

United States President Joe Biden has told Americans that “Putin’s price hike” is driving up the cost of oil around the world. Prime Minister Scott Morrison has also blamed Russian President Vladimir Putin and his invasion of Ukraine for the cost pressures and says Australians understand the issue.

But while they may understand, Australians will also expect the government and the opposition to have a clear plan for how they will help households weather higher costs for housing and groceries, beyond the bowser. A tax on fuel also provides an environmental benefit in discouraging car use.

The best you could say about a reduction in the fuel excise is that it will be popular. But it will also create a budget hole that will need to be filled in some other way. If the government wants to help households with the cost of living, it needs concrete policies, not symbolic gestures.

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