In recent times, abolition of the Queensland
fuel subsidy has been touted as a
solution to two important issues confronting
Queensland policy-makers. One issue is
how to fund programmes to correct perceived
deficiencies in services and infrastructure.
The other is how to tackle the serious
and worsening problem of traffic congestion
in south-east Queensland.
State Budget submissions from the Queensland
Council of Unions and Queensland Council
of Social Services proposed reallocation
of all of the $450 million of fuel subsidy
monies to government services and infrastructure.
Paul Syvret ("Smart State running
on empty", The
Courier-Mail, Thursday, 3 April
2003, p. 17) suggested that cutting back
on "expensive luxuries" was
politically more acceptable than increasing
taxes to fund infrastructure and services
"crying out for more funding".
The only "expensive luxury"
he discussed was the fuel subsidy. He
supported his position with the allegation
that the fuel subsidy "is effectively
being poured into the oil refineries'
Subsequently, Greg Hallam, Executive
Government Association of Queensland
(LGAQ), supported Paul Syvret's views
in a Letter to the Editor of The Courier-Mail (Saturday, 5
April 2003, p. 26). He also claimed that
reallocating fuel subsidy monies to road
and other transport infrastructure would
allow business and motorists to "bypass"
costs of congestion and associated pollution
expected to total $12 billion per year
within a decade.
On 11 April 2003, Professor Layton, Head
of QUT's School of Economics and Finance, told LGAQ's Road
and Transport Forum and the media
that the fuel subsidy was not passed-on
fully and also encouraged vehicle use.
He advocated redirecting the money to
roads and public transport to deal with
terrible traffic congestion and appalling
roads (4BC Radio, 11 April 2003).
City Council's Community Policy Chairperson, Cr David Hinchcliffe, has also advocated
dumping the fuel subsidy. He wants to
use the money to increase existing public
transport subsidies. He claims this will
reduce traffic congestion and emissions
from car-use. (ABC Radio 612, Monday,
7 April 2003).
So, with one "inspired" policy
decision - abolishing the fuel subsidy
- we can be well on our way to solving
the Queensland government's fiscal dilemma
and south-east Queensland's vehicle congestion
and emission problems. Is this too good
to be true? It certainly is.
It is incorrect to assert that the fuel
subsidy has been captured by oil companies.
Detailed comparative analyses of fuel
prices in Queensland and other states
by the RACQ and ACCC
have demonstrated that the subsidy generally
flows fully to Queensland fuel users.
Contrary claims were based on dubious
arithmetic and misinterpretation of ACCC's
It is naive to argue that it would be
politically easier to abolish the fuel
subsidy than to raise taxes. Abolishing
the subsidy is equivalent to extra tax
of 9.2 cents per litre on fuel. It will
be borne by fuel-users and be extraordinarily
Who will lose if the fuel subsidy is
abolished? The poorer sections of the
community and export and import-competing
industries will suffer most, because they
are least able to recoup higher fuel costs
and resulting increases in other prices.
Also, the poor tend to have longer drives
to work, own older, less fuel-efficient
vehicles, and spend a higher proportion
of their incomes on fuel.
The winners will depend on how and where
the Government reallocates the money.
Obviously, several special interest groups
will be competing vigorously for the spoils.
Will there be economic efficiency gains
from elimination of the fuel subsidy?
It is unlikely, because the fuel subsidy
partly offsets the economic distortions
caused by the 38.143 cents per litre fuel
tax imposed by the Commonwealth. Economists
explain that, in an economy subject to
many distortions, reform should be comprehensive, not piecemeal. Any change to the fuel
subsidy should be considered in conjunction
with comprehensive reform of fuel and
other taxation, not in isolation.
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