Thursday, 24 March 2022

Confused (or cynical) policy on fuel taxes and public transport prices

I've been meaning to write about the government's announcement last week of changes in petrol excise tax and public transport fees. From the government's press release:

The Government will cut 25 cents a litre off fuel for three months as part of a cost of living package aimed at giving Kiwi families immediate relief through the current global energy crisis triggered by the war in Ukraine, Prime Minister Jacinda Ardern announced today. 

Fuel excise duties and road user chargers will be reduced by 25 cents each and the price of public transport will be halved as part of a package of measures to reduce transport cost pressures on middle and low income households.

“We cannot control the war in Ukraine nor the continued volatility of fuel prices but we can take steps to reduce the impact on New Zealand families,” Jacinda Ardern said.

That's fair enough. Around the same time as this announcement, the Prime Minister finally acknowledged that New Zealand is facing a cost of living crisis (which in itself is unnecessary hyperbole, since literally everything seems to be a crisis these days - the word crisis is starting to lose all meaning). Inflation is at the highest level in a generation. Pay rises are not keeping up, meaning that real wages are falling. But all of that was the case before Russia invaded Ukraine. And fuel prices are only part of the cost of living story. So why wait until now to address cost of living? Despite the war, cost of living didn't suddenly become an issue last week. Or did it? The cynical view, expressed for example by Jack Tame, is that:

...petrol taxes would never have been cut if Labour had been well ahead in last week's poll. They saw the poll numbers. They freaked out. They dropped almost $400m to try and win back some popularity.

A slightly less cynical take is that, for the reduction in public transport fees at least, the government may have planned to include the change in the Budget (to be announced in May), but felt the need to bring them forward (although, the reason why they would announce it early so gets us back to the recent negative political polls).

Anyway, there are two serious problems with this policy package of reducing excise taxes on fuel, and increasing public transport subsidies. First, it isn't well targeted. My wife and I really appreciated being able to fill our car with petrol for $30 less on our way back from Whanganui last week. But surely the purpose of the petrol excise reduction was not to assist in defraying the cost of inter-city travel for families in the top quintile of earnings? If the government really wants to help low-income families dealing with a higher cost of living, they should increase Working for Families, increase benefit rates, or pay a one-off payment through the benefit or tax system. Then the money goes to those who really need it. And if they don't need it for fuel, they can use it for something else. To be fair, the Prime Minister reminded us that they are doing some of that as well:

“In addition on April 1 a suite of permanent increases to household incomes will see 60 percent of families earning more from Working for Families, as well as increases to superannuation and benefits. On May 1, one million New Zealanders will also start receiving the Winter Energy Payment which will provide $30 a week extra to many.”

However, those are not new changes, having been announced much earlier (see here and here). The government could have made the benefit and WFF increases even larger if they wanted to mitigate further increases in the cost of living. Alternatively, given that the excise tax reduction is temporary, perhaps the government could have given a temporary increase in benefits and WFF (although, it would be much more difficult for those changes to be undone later, with potentially negative political consequences).

The second problem has been well laid out elsewhere (see these posts by Eric Crampton or Matt Nolan). If climate change really is this generation's nuclear-free moment, why on earth would the government undo some of the good work that the Emissions Trading Scheme is doing, by making carbon-emitting vehicles cheaper to run? Yes, the lower public transport fees may induce some commuters to switch to public transport, but lower fuel prices totally work counter to that, decreasing the incentives for commuters to switch to public transport.

All up, it's hard to see those policy changes as anything but a cynical vote grab. They aren't targeted at reducing costs or increasing incomes for those who truly need it. They're undoing an otherwise positive effect of high fuel prices on carbon emissions. And they're unlikely to have a positive effect (and may even be counter-productive) in terms of public transport patronage. Possibly, the government is hoping that the voting public has the same low level of economic literacy that they do. Things may not be that bad, yet. On the plus side, the government now seems to recognise that an excise is a tax.

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