Treasurer Joe Hockey has made the mother of all political mistakes: to downplay the impact of petrol prices on household budgets.
In trying to defend the fairness of the measures in his budget, Joe Hockey told ABC Radio:
“What we’re asking is for everyone to contribute, including higher-income people. Now, I’ll give you one example: the change to fuel excise. The people that actually pay the most are higher-income people, with an increase in fuel excise, and yet the Labor party and the Greens are opposing it. They say you’ve got to have wealthier people or middle-income people pay more.
“Well, change to the fuel excise does exactly that; the poorest people either don’t have cars or actually don’t drive very far in many cases. But they [Labor and the Greens] are opposing what is meant to be, according to the Treasury, a progressive tax.”
As you’d expect given the almost hysterical sensitivity surrounding petrol prices amongst the community, this statement has got Hockey into a world of trouble.
Howls of anger have emerged from a range of sectors accusing him of being out of touch with the common man, and of failing to appreciate the plight of many in rural and regional areas and outer suburban areas of cities (which have a concentration of low-income households), where people lack access to public transport and need to drive long distances for work and to access services.
Now, in the end Hockey has made a mistake suggesting that his plan to make petrol excise levels keep up with inflation is a progressive tax (a progressive tax is one where it takes a greater percentage of a person’s income the wealthier they are). Also, suggesting a large proportion of the poor don’t have cars and don’t make much use of them is also incorrect.
Nonetheless when you look at the underlying numbers, specifically in relation to the proposal on the table – ensuring fuel excise keeps pace with inflation – it’s apparent that this is a complete storm in a teacup.
The chart below illustrates car ownership by income quintile based on the 2011 census. It shows that a very substantial proportion of Australian households in the bottom and second bottom income quintiles own motor vehicles. Sure, the rich own more cars but almost 90 per cent of households in the lowest income quintile own at least one motor vehicle.
Figure 1: Passenger vehicles per household by income quintile – 2011 census
So Joe Hockey is clearly wrong in his assertion that the poor don’t have cars. But when you delve down into how much money households spend on petrol you start to wonder why this topic elicits so much political heat.
Below is a chart providing a breakdown on the weekly expenditure of different income quintiles in Australia based on the ABS’s 2009-10 Household Expenditure Survey. Hockey is right that the rich spend more money in absolute terms on petrol than the poor. The lowest income quintile spends about $20 per week, while the richest spends $85.30.
Figure 2: Average weekly dollar expenditure by income quintile
But in the overall scheme of things, petrol is not a huge expenditure item for either the rich or the poor. Meals out and fast food are about even with petrol in the weekly budget. Alcohol and tobacco as a combined total are not far behind.
And, critically, the extra expenditure households will incur as a result of indexing petrol excise is absolutely tiny (second item from top of chart). According to the ABS, households across all levels of income are likely to spend on average more on potato crisps and savoury confectionary then the extra cost incurred from excise indexation over five years.
To shift our gaze from absolute expenditure to consideration of fairness and whether excise is likely to take a noticeably bigger bite out of poor people’s income, I’ve rearranged the data in the chart below to show each budget item as a percentage of the weekly budget.
The poorest quintile dedicate about the same fraction of their income to petrol as do the rich, with those in the middle three quintiles spending slightly more. Overall, it represents somewhere between 3.7 per cent and 4.38 per cent of weekly expenditure.
Figure 3: Proportion of total expenditure dedicated to different items by income quintile
In terms of the excise increase, Hockey is wrong about it being a progressive tax measure, but it’s not outrageously unfair.
The table below lists what the indexation would represent as a proportion of weekly expenditure across each quintile, showing the richest fifth would see the smallest bite as a share of their overall expenditure at 0.11 per cent. But there’s not much difference across the second, third and fourth quintiles and the lowest quintile sees the second smallest bite.
Figure 4: Excise indexation after five years – proportion of weekly expenditure
by level of income quintile
What would be a far bigger issue for fairness would be to extend the GST to food and health care, as the bottom two quintiles spend a noticeably greater proportion of their weekly budget on these items than the other quintiles.
Also worth noting is that while electricity and gas represent a larger share of low income households’ budgets relative to the more wealthy, when the carbon price was introduced a range of compensating measures were made to income tax scales, pensions and other government benefits which entirely mitigated its larger impact on lower income groups.