Ther Federal Government announces this afternoon that it will be reducing the fuel excise by 50% for a period of three months as a cost-of-living measure to address higher fuel prices.
While is get the desire to ‘do something’ in a crisis and cutting fuel excise makes a nice headline, it’s probably not the most effective move they could have made.
The issues with the approach are numerous:
⛽ Dampened prices signals: In a supply side crisis, higher prices play an important role by reducing demand and helping balance demand to supply. Lowering the price with a tax cut is likely to increase demand, exacerbating the current shortages.
⛽ Incomplete passthrough: As we saw with the last excise cut, the pass through of an excise cut to consumers is never clean and much of the cut gets consumed as additional margin through the supply chain.
⛽ Its regressive: The biggest winners are high-consumption users, which aren't always the vulnerable households that most need cost-of-living relief.
⛽ It makes the RBA’s job harder: A cut to excise masks inflation in the near term and then causes excess inflation when it expires (just as we saw with the recent electricity subsidies).
A better approach to cost-of-living support is direct transfers. It’s more efficient, can be better targeted to those most in need, and doesn’t distort price signals which are vital to matching supply and demand.