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Is indexation of fuel excise good policy?

By Alan Davies - posted Friday, 7 November 2014

The federal government says it will restore indexation of the fuel excise despite opposition from Labor and the Greens. Indexation is as sensible today as it was when Bob Hawke introduced it in 1983

The Productivity Commission expects the gap between fuel excise revenue and road use will continue to widen (even with indexation from 2015). Source: Productivity Commission


There's a lot to take issue with in the Abbott government's first budget but I was delighted, after having been away for a few weeks, to find on my return that the government has found a way to implement its proposal to restore indexation of the fuel excise.

I was disappointed though to see that both Labor and the Greens continue to oppose indexation and hence to support what is in effect a continuous lowering of the tax on petrol and diesel. The Government will implement indexation by regulation, although this mechanism will require the endorsement of Parliament within 12 months.

I've written about this before (e.g. Shouldn't the Greens and Labor be supporting indexation of the fuel excise?), but it's worth reviewing the reasons why restoring indexation is good policy.

First, contrary to the claim of Labor and the Greens, it's not a "new tax". As the word suggests, 'indexation' is essentially an administrative tool that merely maintains the real value of an existing tax. It halts the continuing erosion of the 85 year old excise by inflation; that's been going on ever since John Howard abolished indexation in 2001. At that time the excise made up around 40% of the price of a litre; by 2014 it had declined to about 25%. (1)

Second, the Productivity Commission estimates that, since 2000-01, net revenue from fuel excise has fallen by about 30 per cent in real terms, largely due to abolition of indexation. Over the same period, road use (total kilometres travelled) has grown by about 25 per cent, and the unit cost of road construction and maintenance by over 40 per cent.

Third, by halting the current real reduction in the excise, indexation claws back some of the currently unpaid social costs of driving. Over time, it helps give motorists an incentive to make fewer journeys and shorter trips, as well as shift to more fuel-efficient vehicles. It helps encourage mode shift by making alternative modes like public transport, walking and cycling more attractive relative to driving.


Fourth, it generates significant additional revenue for public purposes ($2.2 billion over the next four years) that will be available for this and future governments. The Abbott government is promising that only the extra revenue from indexation will be hypothecated to roads (but not the much larger revenue stream from the base 38.1 cents per litre) but that's misleading.

Greens' leader Christine Milne objects to indexation because of the hypothecation provision. However that was always a non-issue; the Government hasn't committed to using it to fund additional expenditure on roads. Yet on Sunday, Insiders' panellist Phillip Coory reported that Ms Milne continues to reject indexation even though the Government offered to remove the proposed hypothecation provision.

Fifth, the equity effects of indexation are not a deal-breaker. It's true that it will hit lower income travellers the hardest, just as indexation of public transport fares does. That's true of any increase in consumption taxex, or any price increase for that matter.

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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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