While the debate over plain packaging still has some way to go, I thought I’d open up a second front in the debate.
This morning the Herald Sun is reporting the results of a petrol price survey:
ONE in three Australian drivers admit there are days they can’t afford to buy petrol.
That’s one of the findings of a new study from customer research company Canstar Blue, which also found that 35 per cent of drivers will only fill up at the bowser if they have a discount voucher.
The research shows the financial strain that Aussie drivers are under — all at a time when the federal government plans to raise fuel taxes.
There is a lot more to this story than meets the eye.
First, for price conscious consumers the ACCC has moved to limit the value of the discount vouchers. We have covered this story quite extensively at the Cat since last December.
Second, the Abbott government plans to reintroduce petrol excise indexation. This policy was discontinued in 2001 due to voter anger following the introduction of the GST. More or less this compensated for the fact that GST and petrol excise interacted to generate a tax on a tax. Just after the budget announcement I did a quick back of the envelope calculation and worked out that if the excise freeze hadn’t occurred that petrol prices would be about 20c a litre more expensive than they are now. Assuming a petrol tank that can take 65 litres that’s about $13 more per tank. I don’t know tanks people use per week, but its easy to work out the impact on family budget over time.
To be clear – the Abbott government is not talking about a 20c per litre increase. They are simply going to continue fuel excise indexation. For a lot of people that seems sensible – the government will be maintaining the real value of the tax that it collects. Okay. What is the catch?
Third, the government will be indexing fuel excise to CPI. Changes in CPI is a generally accepted measure of inflation. This is where the war on tobacco comes in. Readers may recall that last year I wrote a short paper on the inflationary impact of tobacco excise. Follow the logic of what is happening.
Since 1983 tobacco excise has been indexed to the CPI and automatically increased twice every year in February and August. There is, however, a feedback loop. Tobacco makes up a component of the CPI calculation. Over the same period government has followed a policy of driving up consumer prices for tobacco products. The net effect of this has been to maintain the somewhat large weight tobacco has in the CPI calculation despite the large decrease in the incidence of tobacco consumption.
So we have a loop – tobacco prices increases feed into CPI, increases in CPI feed back into tobacco prices and so on. Increased CPI prices will now feed into increased fuel excise that will feed into higher petrol prices. Those increased prices cascade through the economy. All that feeds back into the CPI and the whole cycle starts again.
But wait – there is more. In the 2013–14 budget the government announced that from 2014 tobacco excise will be indexed to average weekly ordinary time earnings (AWOTE) beginning in March 2014. So tobacco excise will be growing at a faster rate than CPI and then feeding that higher price increase into CPI that will then feed into even higher petrol prices.
Not bad enough yet? Over and above the acceleration of fuel excise indexation the previous government announced a 50% increase in tobacco excise phased in over 2013 – 2016.
On 1 August 2013, the former government announced an intention to introduce a 12.5% increase to the excise rate on tobacco each year over the next four years.
This staged approach to increasing the excise rate on tobacco will begin on 1 December 2013 with further increases on 1 September 2014, 1 September 2015 and 1 September 2016.
The rate increases occurring from 2014 to 2016 will be calculated as 12.5% plus the average weekly ordinary times earnings (AWOTE) rate – an additional measure announced in the 2013–14 budget.
End result, we have an even bigger loop. Bigger tobacco price increases will feed into the CPI calculation that will feed into the fuel excise price increases that will cascade into the economy, and so on.
Nice (not so) little rort that the government has going there.