What will the fuel excise cut save you? Not as much as the Treasurer says

As an appeal to middle Australia, to the voters politicians routinely describe as working families or battlers, the Morrison government’s centrepiece budget move^[1] to halve the fuel excise for six months has obvious attractions.

“A family with two cars who fill up once a week could save around $30 a week or around $700 over the next six months,” declared Treasurer Josh Frydenberg on budget night^[2], a point he’s repeated many times since^[3].

But our calculations show most households, particularly those on lower incomes, won’t gain anything near the amount touted by Frydenberg.

At a cost of about $3 billion, cutting 22 cents in tax from every litre of petrol for six months will disproportionately help wealthy households. The economic gain is doubtful. Depending on what happens with the global oil prices, it may even contribute to inflationary pressures.

Who benefits most?

We’ve calculated the effects of the fuel excise cut on household budgets using a computer model^[4] developed by the National Centre For Social And Economic Modelling^[5].

Our results show the six-month cut to the fuel excise will save the average household in inner-urban areas of Sydney and Melbourne about $132. The average households in outer suburbs will save about $242. Those in the outer suburbs of smaller cities will save less as they need to drive shorter distances. The average household in rural and remote areas will save $194.

Author provided/The Conversation, CC BY-ND^[6] These amounts reflect average outcomes across all households, including those with just one vehicle, or no vehicle. It’s possible some two-car households will save the $700 cited by Frydenberg, but not many. That would require a household spending well over $10,000 a year on petrol, buying about 150 litres a week. The budget papers themselves say the cut will “deliver an average benefit of around $300 to households with at least one vehicle”. Why economists oppose the cut In The Conversation’s pre-budget survey of 46 leading economists selected by the Economic Society of Australia, not one thought cutting the fuel excise a good idea. About a third rated it among the worst possible policies. Read more: Cut emissions, not petrol tax; fund childcare, not beer. What economists want from next week's budget^[7] Their reasons are the uncertain economic benefit and inconsistency with important long-term policy goals to reduce dependence on oil-based imports, lower greenhouse gas emissions and cut government debt. Frydenberg has promoted^[8] the cut as anti-inflationary, reducing consumer prices by 0.25 percentage points in the June quarter. But prices will simply rise by the same amount in the December quarter. Global fuel prices may fall long before the end of six months. Last week benchmark oil prices fell 13%^[9] on news the US will release more from its strategic reserves^[10] as well as a truce in the long-running civil war in Yemen.

References

1. ^{^} budget move (theconversation.com)
2. ^{^} on budget night (joshfrydenberg.com.au)
3. ^{^} many times since (www.abc.net.au)
4. ^{^} computer model (www.sciencedirect.com)
5. ^{^} National Centre For Social And Economic Modelling (www.governanceinstitute.edu.au)
6. ^{^} CC BY-ND (creativecommons.org)
7. ^{^} Cut emissions, not petrol tax; fund childcare, not beer. What economists want from next week's budget (theconversation.com)
8. ^{^} promoted (www.theguardian.com)
9. ^{^} benchmark oil prices fell 13% (www.aljazeera.com)
10. ^{^} its strategic reserves (theconversation.com)
11. ^{^} the Reserve Bank to increase interest rates (www.afr.com)
12. ^{^} more than $40 billion (australiainstitute.org.au)
13. ^{^} 50% more kilometres (www.sciencedirect.com)
14. ^{^} 5 maps that show why free public transport benefits the affluent most (theconversation.com)