Stop fuel excise relief, cut costs to poor, says OECD

The expiry of the fuel excise discount next week has been backed by the OECD, which calls on governments to switch to tightly targeted support for low-income families.

An OECD report on tax policy reforms says price-based measures such as the halving of fuel excise by the Morrison government in March were costly, blunted price signals and benefited producers.

The expiry of the fuel excise discount next week has been backed by the OECD, which calls on governments to switch to tightly targeted support for low-income families to deal with the global surge in energy and fuel costs.

An OECD report on tax policy reforms, released on Wednesday, states that price-based measures such as the halving of fuel excise by the Morrison government in March were costly, blunted price signals and benefited producers.

The Paris-based body estimates that from October last year to the end of this year, the total ­fiscal cost of cushioning the impact of rising energy prices will be $US246bn ($369bn), almost 70 per cent of which will be in the form of support for fossil fuels.

“Energy tax cuts do not affect energy suppliers who still sell their products at market prices and avoid revenue losses,” the report reads. “However, fiscal revenues immediately decrease, and the budgetary cost can be high over time.”

Australia’s six-month excise discount cost an estimated $3bn.

With the strain on household finances from rising inflation and interest rates, there are growing calls for further cost-of-living relief in the October 25 budget.

According to a new survey by the Melbourne Institute, in recent months 56 per cent of Australians bought cheaper food options, 37 per cent cut home energy use, and 33 per cent drove less or found less expensive modes of transport.

But Jim Chalmers has rejected as unaffordable new social assistance measures, arguing the Albanese government will deliver cheaper childcare and medicines.

“Cheaper childcare is cost-of-living relief with an economic dividend,” the Treasurer said on Wednesday.

“If we’re serious about getting wages moving in this country, we’ve got to make it easier for people to earn more and work more if they want to.”

The OECD said excise taxes were cut in 73 of the 89 jurisdictions covered by its database, mainly for petroleum products.

“Governments will need to shift from policies that directly seek to limit price increases to those that cushion their impact through targeted income support,” the report reads.

“This approach will ensure that the support provided is fair and effective, while limiting its effects on government budgets and maintaining price signals to encourage the transition to carbon neutrality.

“However, even the most sophisticated fiscal systems may not be fully geared to the task, calling for action to improve their capacity to target specific groups.

“Broad access to alternative energy sources is a prerequisite for an effective and publicly acceptable longer-term strategy to shift away from fossil fuels.”

In a new study, the Parliamentary Budget Office states while most nations tax fuel, Australia has a relatively low fuel tax compared with other OECD nations.

Most of the $18bn a year in fuel tax is paid by households, given eligible firms receive a tax credit for fuel used as a business input

Dr Chalmers said fuel prices had dropped by 50c a litre from their July peak and warned retailers not to hike prices when the discount ends next Wednesday, noting there were 700 million ­litres of fuel in storage.

The reinstatement of the full excise will add 25.3c in petrol taxes, after automatic indexation in August, and is expected to add 0.25 percentage points to the consumer price index in the December quarter.

Reserve Bank governor Philip Lowe said the excise increase would not affect the annual inflation rate next year or in 2024, and thus the path of interest rates.

“I can certainly understand why the government is committed to reinstituting the previous rate of tax, because we do face medium-term fiscal issues,” Dr Lowe told parliament on Friday.

“We need to address that.”