Petrol price shock is a sign of difficult times ahead

Households must prepare for rising costs as the impact of the war in Ukraine forces its way into the global economy. Where things go from here is unpredictable but conditions no doubt will test family budgets and shape the nature of politics into the election and beyond. Higher oil prices mean there will be no respite from the economic stresses forced upon us by the pandemic. The financial cost of the Ukrainian crisis has become apparent in higher energy costs, feeding already rising inflation, which means interest rates are likely to be higher sooner than otherwise expected. As a consequence, global economic growth will take another hit.

The immediate concern for motorists everywhere is surging prices at the bowser where a litre of fuel can now cost more than $2.20. Higher petrol prices are a deeply worrying concern for households trying to manage a budget. Unlike other cost increases, they are felt immediately, personally and on a regular basis. Higher fuel prices also mean higher costs across the board as it becomes more expensive to make things and transport them to market. Any hopes that price pressures would moderate as shipping and supply constraints caused by the pandemic eased are being challenged by the reality of war in Europe. Inflation in the US hit a 40-year high in February due to soaring oil and food prices. Consumer prices rose 7.9 per cent over the year to February, including a 6.6 per cent increase in the petrol price in a single month. The Federal Reserve is likely to start lifting official interest rates from next week. Josh Frydenberg faces a more difficult task framing the pre-election budget, with calls already being made for changes to excise levied on petrol and diesel.

John Howard faced a similar problem in 2001 when petrol neared $1 a litre ahead of the federal election that year. He scrapped indexation of the fuel excise, a move championed by then Nationals leader John Anderson but initially resisted by Mr Howard and his treasurer Peter Costello. Mr Howard later admitted he was wrong politically not to act sooner. Full indexation was restored by Joe Hockey in 2014 as part of the Abbott government’s attempt at fiscal repair in a budget that cost both Mr Abbott and Mr Hockey dearly. The issue of petrol prices and fuel excise remains highly politically charged, playing into Labor’s campaign theme of the rising cost of living under the Morrison government.

Opposition Treasury spokesman Jim Chalmers said it was “dishonest” of Scott Morrison and Mr Frydenberg to pretend the costs of essentials such as petrol weren’t “already skyrocketing” before Russia invaded Ukraine. After first ruling out freezing excise, Mr Frydenberg was noncommittal in public comments this week. He said money from fuel excise was used to build regional roads and major urban transport projects, and helping to pay for the government’s $110bn infrastructure pipeline. Playing with fuel excise in response to global events beyond the government’s control is bad policy. Being seen not to care about voter concerns over high petrol prices is bad politics.

With the election weeks away, a proper debate about priority spending and fiscal policy by both sides of politics is exactly what is needed. There is bipartisan support for higher defence spending in recognition of increased regional tensions. Labor has made big spending on projects to decarbonise the economy a priority area. Anthony Albanese has also flagged more generous childcare arrangements to boost workplace participation. Mr Frydenberg is expected to outline the government’s plans in the budget. But there is a paucity of detail from both sides about how they will deal with a higher-inflation environment. This includes managing the higher level of debt accumulated by government as a result of the pandemic. Rising interest rates internationally will make the challenge of debt repayment more difficult, for businesses, individuals and government.

With the financial cycle turning away from an extended period of cheap money, actions taken by government now will determine how the impact of the changed economic conditions globally will be felt by everyone. Just as households will be forced to think more carefully about how budgets are managed and money is spent, so too will government. It is time to challenge the insidious culture that has taken hold during the pandemic that contends that government can provide everything for everybody all of the time.