Fuel Excise Cut and Its Implications
The federal government’s temporary cut to the fuel excise is set to expire at the end of June, which means the cost of filling up a 65-litre petrol vehicle could rise by approximately A$19 from July 1. This potential increase has sparked discussions about whether the cut should be extended.
Prime Minister Anthony Albanese has not ruled out the possibility of extending the temporary cut for either petrol or diesel. The initial reduction was introduced to help offset the surge in fuel costs that followed the start of the Iran war in late February. However, while the cut provides some relief from inflation for drivers, it is considered a blunt approach to achieving fairness. The three-month cut has cost the government around $2.55 billion in lost revenue.
Cost-of-Living Relief and the Current Fuel Excise
Before the reduction, the fuel excise was set at 52.6 cents per litre for petrol and diesel in passenger vehicles, and 32 cents per litre for heavy vehicle road users. Fuel used for off-road purposes, such as agriculture and mining, was exempt from the tax. In the 2024–25 financial year, the fuel excise generated $24.6 billion in revenue. Although the tax is not directly allocated to fund road maintenance and other services, it serves as a user charge for drivers, reflecting the societal costs associated with government-funded roads and infrastructure.
When the government announced the halving of the fuel excise, it aimed to alleviate the financial stress caused by the spike in oil prices. The price of petrol was reduced by 26.3 cents per litre, and the heavy vehicle road user charge was suspended. However, this reduction has led to several issues that could be mitigated by reverting to the original rates from July 1.
Economic and Social Impacts
The loss of government revenue due to the fuel excise cut contributes to a larger federal budget deficit. At the same time, it boosts consumer spending, which works against the Reserve Bank of Australia’s efforts to dampen demand and control inflation through a series of interest rate hikes this year.
While industries most affected by higher petrol costs, such as road transport and construction, have welcomed the fuel tax relief and want to see it extended, there are broader economic implications. Rising fuel prices can increase the cost of travel, groceries (particularly fruits and vegetables), and new home construction, all of which pose an inflation risk that the Reserve Bank has been closely monitoring.
From a fairness perspective, there are better policy options to assist lower-income households dealing with high fuel prices. More direct and effective measures could include increasing unemployment benefits, disability and aged benefits, or reducing the lowest income tax rates. These approaches would target those most in need more effectively than a blanket cut to the excise rate, which benefits both wealthy and low-income drivers alike.
Subsidy for Fossil Fuels and Environmental Impact
Cutting the excise on petroleum products has several negative effects on resource allocation in the economy. It effectively acts as a subsidy for polluting vehicles that run on fossil fuels, contributing to greenhouse gas emissions and climate change. This subsidy reduces the incentive for drivers to switch to electric vehicles.
Additionally, making fuel cheaper encourages increased road usage by households and businesses, potentially discouraging the use of public transportation. This dynamic can lead to greater congestion and environmental degradation.
A Chance for Radical Reform
While the government may lack the political will to implement radical reforms, there is an opportunity to consider alternative approaches. Sales of electric vehicles (EVs) have surged this year as consumers transition from petrol vehicles, with EV and hybrid sales reaching 46% of all vehicles sold in May.
Despite their popularity, these vehicles still use government-provided roads and services but do not pay the fuel excise. A road user charge that applies equally to petrol and electric vehicles could replace the fuel excise and apply to all drivers. This concept, which has been debated since the 1970s, is used in other advanced economies to manage congestion and influence travel behavior.
There could be different categories for vehicles based on weight, as SUVs and heavy vehicles cause more damage to roads. A nationwide road pricing policy could also reduce reliance on the current patchwork of declining fuel excise revenues, road tolls, and vehicle registration fees.
