Abolishing Qld's fuel subsidy: a cure for traffic congestion and other ills?

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' coffers".

Subsequently, Greg Hallam, Executive Director, Local 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).

Brisbane 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 analysis.

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 unpopular.

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.

In the unlikely event of reallocation of the money to road and other transport infrastructure, would it eliminate congestion and associated emissions? It most certainly will not.

As the Bureau of Transport and Regional Economics has explained, elimination of traffic congestion is not a sensible policy objective, because the social costs would exceed the social benefits. The appropriate objective is to reduce congestion to the optimal level. Reducing congestion any further adds more to social costs than to social benefits.

The optimal level of congestion cannot be attained just by increasing transport expenditure. Adding to road capacity induces demand for road space, as well as increasing supply. Therefore, effective demand management is necessary to ensure existing and new road space is not overused.

The most effective demand management tool is comprehensive, variable, congestion pricing. However, the Queensland government and Brisbane City Council have chosen not to use this measure so far.

Yet, demand management tools used in south-east Queensland to induce drivers to switch from single-occupant cars to other transport modes have been relatively ineffective. These disappointing measures include subsidies of around $600 million per year for public transport. Yet, Cr Hinchcliffe wants to add $450 million of fuel subsidy money to existing hand-outs to public transport, and Greg Hallam and Allan Layton want to spend some of the money in the same way.

Why has the fuel subsidy been singled out for attention when the Queensland government provides substantial subsidies to a wide range of activities, including rural water supply, new industries establishing in the state, and public transport?

There appear to be three reasons. First, the fuel subsidy scheme is much more transparent. Second, it has received much more attention because of fuel price cycles. Third, key politicians and transport advisers appear to have a strong ideological attachment to public transport and an aversion to cars other than their own.

One question remains to be answered. Why has the Commonwealth been allowed to escape criticism regarding underprovision of infrastructure and services, and the problem of traffic congestion?

While state and local governments have nominal responsibility for provision of most infrastructure and services, the Commonwealth controls the main sources of tax revenue. Hence, state and local governments depend on grants that are inadequate to meet their responsibilities.

The Commonwealth refuses to give back more than 16 per cent of fuel tax revenue for road infrastructure, and will not cut the fuel tax rate to make room for congestion pricing by state or local governments. So while special interest groups try to bludgeon the Queensland government into reallocating fuel subsidy monies in accordance with their particular interests, the Commonwealth laughs all the way to the bank.