Budget: Inflation, interest rates to cancel fuel excise cut

A 20-cent cut to the fuel excise would save households $300 over six months, but analysts warn the benefits for families will be eaten up in an overheating economy.

A cut to the fuel excise tax would assist lower income households the most. Picture: Tony Gough

A 20-cent cut to the fuel excise would save Australian households $300 over six months, but analysts warned the benefits for families from the $2.5bn cost-of-living measure would be eaten up by higher inflation and interest rates amid an overheating economy.

Josh Frydenberg has flagged Tuesday night’s budget will be aimed at alleviating cost-of-living pressures, with the Morrison government set to follow the lead of New Zealand and lower taxes on petrol, which has hit record highs.

Deloitte Access Economics partner Chris Richardson said voters were likely to cheer lower petrol prices – which have pushed above $2.20 a litre – but that there would be “hidden costs” that could leave households worse off.

Mr Richardson said cutting the 44.2 cents per litre fuel excise “works politically, but economically it doesn’t”.

The additional government money – which is also expected to include payments in the order of $250 for lower-income households – would trigger more spending at a time of constrained capacity. This would put further pressure on inflation and accelerate the Reserve Bank’s rate hike schedule, Mr Richardson said.

“The size of the cash splash is going to be bigger than I figured,” he said. “Every extra dollar going into the economy – whether it’s labelled a one-off cash payment or indeed an extra bit of infrastructure that gets built faster – that will add to demand. We are tipping money on top of an economy that’s the strongest we’ve had in decades.”

Households will “lose purchasing power as (consumer) prices go up, and get hit in the mortgage back pocket” as interest rates rise, Mr Richardson said.

At $2.20 a litre, a family who fills up a medium-sized SUV such as a Nissan X-trail pays $130 a week in petrol, according to the Australian Automobile Association’s online calculator.

Of that, a little over $25 goes to fuel excise. A six-month 20-cent reduction in the fuel tax would reduce the total excise bill from $655 to $360 – a saving of $296.

ANU Centre for Social Research and Methods associate professor Ben Phillips said high-income households spend more on fuel in dollar terms, “but less in proportion to income, so technically a reduction in fuel excise is likely to be progressive”.

According to the most recent available data from the 2015-16 household expenditure survey, households in the bottom 25 per cent of earners dedicate 6.1 per cent of their budget to fuel. This steadily reduces through the income quintiles, leaving fuel expenses consisting of only 1.6 per cent of spending by households in the top 20 per cent.

Cutting the fuel excise may be a progressive measure, but Professor Phillips said “while such reductions are likely to be welcomed by drivers and will provide some modest relief to some low-income families, the logic of the policy is weak beyond the obvious political strategy”.

While “there is a lot of concern around cost-of-living pressures”, throwing money to households in a “reasonably strong economy” was not ideal, as it would add to inflationary pressures, he said.

However, CBA head of Australian economics Gareth Aird said a cut of about 10 per cent in the cost of fuel would mechanically reduce inflation by about 0.4 percentage points. Mr Aird said he doubted the inflationary impact of additional spending elsewhere in the economy would overwhelm that direct reduction in fuel costs.

Consumer price growth is anticipated to rise towards 5 per cent in coming months.