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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:
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).
What are the policy considerations of reducing the fuel excise?
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:
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.
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