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What can the Government do about petrol prices?

What can the Government do about petrol prices?

It won’t be news to anyone that petrol prices are high – in some cases more than $2 a litre.

TDA has written before about why that is, with the most immediate reason being sanctions on Russia, which have reduced the global supply of oil and pushed up the prices.

Australia can’t change this global problem on its own. But can the Government do anything to ease the pain at the pump?

What’s in a petrol price?

The price of petrol is mostly set by factors outside the Government’s control, like the global price for petrol. However, a percentage of the price is in the Government’s control: taxes. 

For a litre of petrol that costs $2, 20c is the 10% Goods & Service Tax (GST). Another 44.2c is the Fuel Excise Tax, which is a flat tax per litre. In this example, taxes account for a third of the petrol price.

So could we cut the tax?

The short answer: that could work. Cutting the tax would discount the price of petrol. New Zealand has already done this, and there are reports the Federal Government is considering temporarily halving the fuel excise in next week’s budget.

The long answer: there may be unintended consequences. Experts warn it would be hard for the Government to raise the fuel excise back again, and that keeping it low would encourage people to continue using petrol cars.

The political problem

Marion Terrill, Transport Director at the Grattan Institute, tells TDA it is “really hard” for governments to raise taxes once they have cut them, even if the cut is only intended to be temporary. She points out this has happened with Australia’s fuel excise before.

In 2001, Prime Minister John Howard froze the level of fuel excise (it normally increases each year) to compensate people for the introduction of the GST. The freeze wasn’t removed until 2014. “There’s billions of dollars of revenue not raised through that which governments have to raise another way,” Terrill says.

The emission problem

Australia’s fuel excise has existed for decades and was not designed as a tax to discourage people from driving petrol cars. However, Terrill says the fuel excise can effectively be considered as “a carbon price on driving”.

Terrill predicts higher petrol prices will be more common as we transition to a lower-emissions economy.

“That will be somewhat painful for people. The longer we leave it the more difficult it is likely to get,” she says.

Are there greener options?

In Victoria, the Greens have suggested making public transport free for a month to encourage drivers to switch.

However, Terrill’s research on commuters suggests poor access is the major barrier to public transport usage in city suburbs – not cost.

What has the Government said?

Prime Minister Scott Morrison, who has not confirmed whether the fuel excise will be cut, said last week it was important to avoid “knee-jerk reactions” and the Government would think “carefully” about how to provide support.

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