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Opinion article

What is the fuel excise, and should we reduce it?

Cost-of-living is front of mind for many Australians and the upcoming Federal budget looks to be shaping into a true election budget. With the price of unleaded petrol over $2.10 a litre, up from $1.65 in January, there are calls for the Federal Government to reduce the fuel excise, but is this a good idea?

What is an excise duty?

An excise duty is a commodity-based tax on goods such as alcohol, tobacco, fuel and petroleum products. Many countries tax retail fuel, including other OECD countries such as Canada, Germany, United Kingdom and the United States. 

The historically stated objectives of excise taxation are to:

  1. raise revenue for general purposes
  2. discourage the use of products with long-term negative effects, or where the costs of the product are borne by others (such as the population health impacts of smoking and second-hand smoke)
  3. charge road users for government-provided services (although revenue generated is not specifically earmarked for road funding)

What is the reason for the fuel excise in Australia?

Historically, the main reason petrol and diesel excises are levied in Australia is to raise revenue. 

In 2020-21 the Commonwealth Government collected $5.6 billion from petrol and $13.58 billion from diesel (noting a significant amount of diesel revenue raised is rebated for specific off-road uses). For comparison, tobacco generated $13.3 billion and alcohol $6.84 billion during this period. 

Have previous governments changed the fuel excise rate?

The Hawke Government introduced CPI indexation of petrol and diesel excise rates in 1983, and this indexation generally occurs twice a year.

The Howard government temporarily froze the fuel excise indexation in 2001 as the GST was being introduced and the price of fuel went over $1 a litre. The Abbott Government re-introduced fuel excise indexation in 2014 (as part of an unpopular budget where there were significant cuts to a range of services). The current fuel excise is now at $0.442 per litre (see chart below).

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What are the policy considerations of reducing the fuel excise?

  • Timing. It would take months for a pause of the fuel excise to take effect –  potentially not until after the election. Fuel that is currently in circulation in Australia has already paid the import duties required for excise-equivalent goods – waiving the excise for future fuel coming into the market will not change the price at the bowser this week or next.
  • Other taxes are inefficient. Excises are efficient and relatively simple taxes with low dead-weight loss (administration cost to recover the revenue). An alternative tax (such as increasing taxes on high-income individuals) may cost more in administration and auditing to generate the same amount of revenue for the government. 
  • Impact on long-term budget repair. While a change to the fuel excise might be seen as noticeable assistance for cost-of-living pressures, it could potentially impact the ability of government to undertake budget repair efforts in the latter half of the year by sacrificing stable revenue across the forward estimates.
  • Fossil fuel incentives. While an inefficient mechanism, the fuel excise is also a disincentive to use fossil fuels (i.e., shift to alternatives such as electric vehicles). Removing the excise could hamper efforts to meet net-zero carbon emission targets as people delay transitions to lower carbon emission vehicles.

Are there alternatives to changing the fuel excise?

Yes, there are better tools to reach the policy goals, whether that is how we raise revenue to fund roads, or other policy objectives such as:

  1. Supporting the cost of living – this can be addressed through mechanisms that are not tied to petrol use, such as welfare benefits, or a once-off cash injection as seen with disaster payments and other emergency fiscal stimulus (however like the fuel excise, there are inflation risks to such an approach).
  2. Long-lasting improvements to standards of living and wage growth – this can only be achieved through reforms that boost productivity and enhance economic growth.

In an environment of higher inflation and supply side pressures, there will be increasing calls on the budget to address cost-of-living pressures. In CEDA’s Budget Reset Paper, we are arguing that whoever forms government after the next federal election should reset the budget foundations so that the budget is better able to respond to the changing needs of the economy and community.

About the author
IH

Ian Hamilton

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Ian Hamilton is a senior policy adviser at CEDA. He is an economist and public policy adviser who has worked on economic policy in the Prime Minister’s department in Canberra, public health strategy for the Victorian health department during the pandemic, as well as the development of the microfinance industry in Cambodia.