Fuel tax cuts could mean interest rate pain
Australians could face worse cost-of-living pressures in the coming months despite temporary relief through a cut in fuel taxes.
Starting Wednesday, gasoline and diesel costs nationwide will drop by 26.3 cents per liter as the federal government moves to stem the worst effects of the war in the Middle East.
This works out to $10.50 for a small 40-litre tank, or $21 for Australia’s best-selling new car, the Ford Ranger, with an 80-litre tank.
Independent economist Saul Eslake said the move would be welcome relief for drivers struggling with high fuel prices but would likely lead to higher interest rates in the long run.
Mr Eslake said the tax cut would leave drivers with more money in their pockets, which they would likely spend in other parts of the economy, which would increase inflation.
“Under these circumstances, what the government gives, the Central Bank can take back,” he told AAP.
Finance Minister Jim Chalmers said the policy would likely reduce headline inflation by half a percentage point, but the Reserve Bank prefers to rely on headline inflation, which often ignores fuel prices due to their volatile nature.
Mr Eslake said the fuel tax could worsen the current shortage by increasing demand for cheaper petrol and diesel.
“You would think that part of any sensible response to the supply threat would be to try to reduce demand wherever possible. (This) would do the exact opposite,” he said.
Our economist friend Chris Richardson said that while he understood the cheap oil policy, the economics of the policy were weak.
“The newly distributed aid will create joy. However, there will be a pain in their tails. They will keep inflation high here for a longer time,” he said.
Spirit of Tasmania ferry is one of the latest operators to pass on higher costs to customers by imposing a 15 per cent fuel surcharge on all services between Geelong and Devonport.
TT-Line president Ken Kanofski said in a statement that the company is facing an 80 percent increase in fuel prices and is expected to reach profitability of more than $50 million.
When asked about Australia’s policy of cutting fuel taxes, New Zealand Prime Minister Christopher Luxon reacted strongly to the idea.
“Our advice is pretty clear: it’s poorly targeted, it actually benefits higher-income households and it encourages the use of fuel when it’s limited,” he told reporters in Wellington.
Alongside the fuel excise tax cut, the government will also halt the road user charge on heavy vehicles, relieving some financial pressure on already strained supply chains.
The two policies are expected to cost taxpayers $2.55 billion between April and June.
NRMA spokesman Peter Khoury said despite the disruption, oil prices will continue to rise as long as the war continues.
“We have broken the record several times, we are breaking it every day, so lowering the consumption tax will not take long for prices to rise again and that will be a challenging process,” he said.
State leaders plan to forego windfall GST revenue from higher oil prices and were due to discuss the idea at a meeting on Monday evening.
Australia’s Associated Press is the beating heart of Australian news. AAP is Australia’s only independent national news channel and has been providing accurate, reliable and fast-paced news content to the media industry, government and corporate sector for 85 years. We inform Australia.
