Slashing fuel tax proved mainly ineffective in boosting economy

New economic modelling from Victoria University shows a six-month policy experiment to ease cost-of-living pressures by halving Australia’s fuel excise rate delivered only marginal benefits to the economy.   

The study from VU’s Centre of Policy Studies (CoPS) quantified how a 53%  price-hike in global oil prices linked to disrupted supplies from the Russia–Ukraine war adversely affected Australia’s economy.

Using one of VU’s computable general equilibrium (CGE) models of the Australian economy, it found the impact:

• increased the unemployment rate by 0.41%
• decreased household consumption by 0.5%
• reduced overall economic growth by 0.24%. 

The researchers then examined how the government’s intervention to temporarily cut fuel excise taxes from 44 cents to 22 cents – which ended on 28 September – mitigated this macroeconomic damage.

It found only a modest employment boost of 0.13% (easing the unemployment rate increase to 0.28%) and similar small improvements in household consumption and overall economic growth.

“When taking into account the need to finance this policy intervention through the federal budget, its impact on Australia’s economy was minimal,” said CoPS researcher Dr Xianglong (Locky) Liu.

“It did little more on a macroeconomic scale than help people feel a bit better when filling up at the pump.”

The researchers noted that although Australia is a net energy exporter – mainly of liquid natural gas (LNG) and coal – it relies heavily on oil imports and is thus vulnerable to volatile international oil markets.

Importantly, it does not benefit fully from the higher global prices of its energy exports, as these sectors are mainly foreign-owned and higher profits largely flow to overseas investors.

Levy on energy profits better

As a better alternative to the short-term tax cut, the team looked to a 25% levy introduced in May 2022 on oil and gas industry profits in the UK.

The study found this to be a better mechanism to address the downturn in household income and consumption when compared to our government’s fuel excise cut. It identified that this type of levy would mitigate just over two-thirds of the potential damage on private consumption caused by high oil prices.

“While a 50% fuel excise cut had little impact on household incomes and consumption, a 25% UK-style energy profits levy on Australia’s largely foreign-owned LNG producers might be more effective in improving the budget.

“This kind of levy should be considered as a valuable addition to the taxation toolbox for Australian policymakers when they assess how to best help households cope with financial hardship caused by energy price inflation.”

The study, Oil Supply Shocks and Tax Policy Responses in Australia: Insights from a Dynamic CGE Framework, was researched and authored by Dr Xianglong Liu, Dr Jason Nassios and Professor James Giesecke.