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Fuel excise indexation: is the key issue low incomes?

By Alan Davies - posted Tuesday, 19 August 2014

Joe Hockey's gaffe last week on the Government's plan to restore fuel excise indexation highlights the need to address the low incomes of many Australians rather than oppose a sound policy initiative.

The real damage from the Treasurer's blunder on petrol prices last week was the serious setback it gave to the case for restoring indexation of the fuel excise.

Any sensible discussion around maintaining the real value of the excise is now distorted by the meme that it's a mean-spirited hike in the price of petrol; it's callously targeted at the poor; and its motivated by the sort of hard-line pro market ideology associated with the likes of Thatcher and Reagan.


Notwithstanding other problems with the budget, restoration of indexation (it was removed by John Howard in 2001) is sound policy. I discussed those reasons two months ago (Shouldn't the Greens and Labor be supporting fuel excise indexation?) so I won't elaborate on them at length now.

Suffice to say that indexation would help encourage travellers to drive less and to use more fuel-efficient efficient vehicles. It would help lessen traffic congestion in our cities, reduce pollution from vehicles, and make sustainable modes like public transport more competitive.

It's the sort of outcome a carbon tax is intended to achieve. And a key point lost in the brouhaha is that it wouldn't increase the real price of petrol.

The purpose of indexation is to maintain the value of the excise in real terms, just as currently happens when Governments routinely increase charges like public transport fares or car registration fees in line with inflation.

At worst, indexation would eliminate what in reality is a gradual reduction (at the rate of CPI) in the tax on petrol. Without it, motorists will get an estimated one cent per litre annual real decrease in the cost of petrol over the next four years i.e. a litre will cost four cents less in real terms by 2018/19.

Of course indexation would proportionately hit those on the lowest incomes hardest. That's true of most taxes and virtually any price increase you can think of. But the appropriate public policy response isn't to continue to under-price petrol with all the negative externalities that entails.


As is so often the case with equity issues, the key problem is low incomes. That's especially true for those heavily reliant on welfare payments; they're expected to get by on cruelly low incomes.

The sensible course is to restore indexation but increase the incomes of those with the least capacity to pay by at least as much as the increase in costs they face. (1)

But that'll be a lot harder if sources of revenue are denied to Governments. Indexation of fuel excise is a way of generating revenue; the Government estimates indexation would raise an additional $2.2 billion over four years.

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This article was first published on The Urbanist.

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About the Author

Dr Alan Davies is a principal of Melbourne-based economic and planning consultancy, Pollard Davies Pty Ltd ( and is the editor of the The Urbanist blog.

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