A lament for lost fuel excise indexation

Crikey

The real damage from the Treasurer’s blunder on petrol prices last week was the serious setback it gave to the case for restoring indexation of the fuel excise.

Any sensible discussion around maintaining the real value of the excise is now distorted by the meme that it’s a mean-spirited hike in the price of petrol; it’s callously targeted at the poor; and its motivated by the sort of hard-line pro market ideology associated with the likes of Thatcher and Reagan.

Notwithstanding other problems with the budget, restoration of indexation (it was removed by John Howard in 2001) is sound policy. I discussed those reasons two months ago (Shouldn’t the Greens and Labor be supporting fuel excise indexation?) so I won’t elaborate on them at length now.

Suffice to say that indexation would help encourage travellers to drive less and to use more fuel-efficient efficient vehicles. It would help lessen traffic congestion in our cities, reduce pollution from vehicles, and make sustainable modes like public transport more competitive.

It’s the sort of outcome a carbon tax is intended to achieve. And a key point lost in the brouhaha is that it wouldn’t increase the real price of petrol.

The purpose of indexation is to maintain the value of the excise in real terms, just as currently happens when governments routinely increase charges like public transport fares or car registration fees in line with inflation.

At worst, indexation would eliminate what in reality is a gradual reduction (at the rate of CPI) in the tax on petrol. Without it, motorists will get an estimated one cent per litre annual real decrease in the cost of petrol over the next four years – i.e. a litre will cost four cents less in real terms by 2018/19.

Of course indexation would proportionately hit those on the lowest incomes hardest. That’s true of most taxes and virtually any price increase you can think of. But the appropriate public policy response isn’t to continue to under-price petrol with all the negative externalities that entails.

As is so often the case with equity issues, the key problem is low incomes. That’s especially true for those heavily reliant on welfare payments; they’re expected to get by on cruelly low incomes.

Figure 1: Median daily travel distance by weekly equivalised income, Melbourne 2006-07.

Source: Charting Transport

The sensible course is to restore indexation but increase the incomes of those with the least capacity to pay by at least as much as the increase in costs they face. (Some might advocate increased investment in public transport but that’s not a viable response to fuel indexation for a number of reasons, not least because it would take way too long to set up.)

But that’ll be a lot harder if sources of revenue are denied to governments. Indexation of fuel excise is a way of generating revenue; the government estimates indexation would raise an additional $2.2 billion over four years. (The government has committed to hypothecating the additional estimated $2.2 billion raised by indexation over the next four years to roads expenditure – the res, the vast bulk , is not tied to roads or anything else. That could benefit low income drivers but could also increase negative externalities from driving. The important point, though, is any government has a choice in how it spends its revenue.)

The equity of the tax system should be considered as a whole, but it’s worth noting the Grattan Institute calculates the poorest 20 per cent of households could be compensated for indexation of the fuel excise if just 8 per cent of the additional revenue raised were returned to them through the tax-transfer system.

Greens’ leader Christine Milne says she opposes indexation because the government wants to hypothecate the additional revenue to roads expenditure.

As I’ve explained before I think that’s a weak justification; it’s more about posturing than good policy. She could’ve avoided the charge that her party is “the left wing of the Liberals” by insisting its support would be conditional on low income earners being compensated.

Joe Hockey’s blunder has likely set back the prospects for restoring indexation, but at least he’s unintentionally given the neglected issue of transport disadvantage some attention.

Originally published on Crikey's Urbanist blog. Reproduced with permission.