Lights green but should be yellow - Business - Business - smh.com.au


IF PETROL prices are so abominable, answer me this. Why is the traffic still so bad?
Late last month a Sydney tabloid informed us "tortured" motorists were being "driven mad" by traffic gridlock. But a few days later the headlines screamed "Easter fuel outrage" as pump prices rose to $1.40 a litre.
Hang on a minute - we can't have it both ways. The fact that gridlock persists despite rising pump prices suggests petrol is still cheap.
The report of the Federal Treasurer, Peter Costello, comparing Australia's taxes with those of other countries rammed home that point earlier this month.
It showed Australian petrol is inexpensive by international standards and that fuel tax is extremely low.
Petrol prices might be more expensive than we are used to but they are super-low compared with most advanced countries. Fuel is even cheaper here than in many countries with much lower incomes.
In Turkey fuel taxes are almost $2.50 a litre in our money and pump prices about $4.50 a litre. In India, a litre of petrol costs a little more than in Australia even though the average income per person is about a 10th of ours.
Costello's report proved Australia is under-taxing petrol. It also strengthened the already compelling economic case for fuel excise to be higher.
The true economic and environmental costs of car use are not being priced properly - in effect, motorists across the country enjoy a subsidy for using the road. They get what economists call an inappropriate price signal - that is, the user is not paying the true cost of the activity.
While this is a national issue, Sydney is paying disproportionately for Australia's low fuel tax regime with traffic gridlock. Higher fuel taxes may be the only hope of freeing up the roads and upgrading the city's public transport system.
Economic modelling done for the Herald by the Centre for International Economics showed transport problems are already costing the city $18 billion a year, and this is set to rise to $24 billion within 15 years. Higher fuel taxes would not only raise a lot of revenue to help improve transport infrastructure, it would boost Sydney's economic output, the centre found.
"Raising revenue via fuel tax allows more distortionary taxes elsewhere in the economy to be reduced," it said. "Replacing distortionary taxes with a less distorting fuel tax improves economic efficiency, and hence leads to a gross regional product gain. Quite simply, fuel represents the ideal product to levy a tax on."

In short, we would all be better off with higher petrol taxes.
Australia's 38c a litre petrol excise is less than half the OECD average of 84c, and the fourth lowest among the 30 OECD nations. Australia has the fifth lowest diesel excise. Even when GST is taken into account, Australia has the third lowest unleaded petrol prices and fourth lowest diesel prices.
The Federal Government will receive about $14 billion in fuel excise this financial year - $7.4 billion from petrol and $6.4 billion from diesel. The figures in the tax comparison report indicate that if the Government levied the OECD average tax on petrol and diesel, revenue from fuel excise would jump to about $26 billion. The UK's excise of a little over $1 for petrol and about $1.10 for diesel could net the Federal Government around $38 billion.
Get the message?
A higher fuel excise would create a big pot of money for tax reform and infrastructure improvement. It could fund a handy tax trade-off: in return for the extra billions raised from a higher fuel levy, income tax rates could be reduced, work incentives improved and less efficient taxes eliminated.
A lift in excise would deliver environmental gains, especially lower greenhouse gas emissions. It would have health benefits by encouraging walking and cycling, while the number of dangerous and wasteful big passenger vehicles infesting the roads would fall.
Any fuel tax increase would have to come with a guarantee of improved public transport so people had realistic alternatives to cars. Because only the Federal Government can tax fuel, lifting the excise change would require a more functional financial relationship between state and federal governments to ensure infrastructure improvements.
Low-income households, which spend a bigger proportion of their income on fuel than wealthy ones, would also have to compensated and there would have to be sensible fuel rebates and concessions for businesses.
An accidental but revealing national experiment over the past two years has shown the sky would not fall if fuel taxes were raised. The Australian economy has coped remarkably well with a significant increase in petrol prices in that period.
Commonwealth Bank research shows the volume of petrol spending fell 8 per cent last year in the face of record pump prices and spending on other forms of transport such as buses and trains rose slightly.
The bank found some evidence that consumers had started buying cheaper goods but overall households had adjusted quickly to higher pump prices.

The Reserve Bank has also emphasised how higher fuel prices have had a remarkably small impact on most economies, including Australia's.
When the Reserve Bank Governor, Ian Macfarlane, canvassed the effect of high oil prices recently, he said: "the thing that stands out is how comfortably the world economy has handled developments".
One of the reasons petrol is so cheap in Australia is the Howard Government's decision in 2001 to cut excise and end its indexation to inflation. This means fuel excise is falling as a proportion of the economy, despite its merits as a tax. That decision alone is costing the budget about $1.2 billion a year in forgone revenue.
But some want excise reduced ever further.
This week Family First Senator Steve Fielding accused the Government of being "drunk on petrol tax" and demanded an excise cut of 10c a litre at a cost to the budget of $3.8 billion.
Fielding seems to think every Australian family should have the right to drive a very big car a very long way every day, regardless of the economic, social and environmental cost. Under his proposal, low-income families would benefit the least because they use much less petrol than the rich.
Analysis for the Australian Greens showed the poorest fifth of households account for only 8 per cent of petrol consumption. They would receive just $336 million of Fielding's $3.8 billion handout. The richest 20 per cent of households would receive more than 30 per cent of the benefits or $1.17 billion - more than three times the benefit accruing to the poorest 20 per cent.
Sydney's congestion-plagued motorists can be thankful that, so far, Costello and the Prime Minister, John Howard, have resisted pressure to cut fuel excise. But the city can only hope our political leaders eventually start mounting the case for it to be raised.
Ross Gittins is on leave.