Excise, Interest Rates, Economic Growth
Transcript No. 2001/003
ABC AM Interview with Mark Simkin
Thursday 1 February 2001
SUBJECTS: Excise, Interest Rates, Economic Growth
That old post-budget headline, Beer and Ciggies up, might well have been dusted off this morning. The Governments twice yearly excise increase kicked in at midnight with the additional sting of the inflationary effects of the GST. A packet of cigarettes rose by as much as 40 cents and a middy of beer by 5 cents. But its petrol that will cause the biggest stir. The cost of unleaded has gone up by more than 1 cents a litre. The biggest petrol tax increase in the 18 year history of the indexation scheme. Motoring groups are accusing the government of blatant profiteering but the Treasurer has sought to head off the backlash by lifting the diesel subsidy for farmers and commercial truck drivers by around 1 cent. Were being joined now in our Canberra studio by the Treasurer Peter Costello. To speak to him, our economics correspondent, Mark Simkin.
Peter Costello, youve sought to head-off a petrol pump backlash by protecting diesel users from todays excise increase, but thats no comfort to the vast majority of road users is it?
Well, lets just go through the policy in relation to heavy transport. Before the Government implemented tax reform, people who, truckers, people who were using heavy transport were paying about 24 cents a litre more than theyre paying today. We cut the tax by about 24 cents a litre and what weve said is, that the grant should be maintained in real terms. That is, as inflation increases, the grant that cut their costs should be maintained in real terms, and that was made clear as part of an announcement last night thats been factored into the Budget already.
In relation to, in relation to consumers, the excise is also maintained in real terms. That is, as inflation goes up, it keeps pace with inflation. Now Mark, the, as your introduction said, at every Budget, prior to 1983, the Government used to lift the excise and when Labor came to office in 1983 they said: "Well, rather than do it at Budget time, it would be just done automatically every six months." And whilst Kim Beazley was a Minister in the Labor Party Government it happened on 23 occasions. And its under his legislation that it happened again last night.
As you say, Treasurer, the whole notion of the excise and the indexation of it, is to keep up with inflation, but isnt that the problem with this particular excise rise? Its been distorted by the introduction of the GST which is, in your own words, created a spike in the inflation level.
Well we think that, its hard to tell, but we think that the one-off effect of the GST could be about 2.7 per cent. Now to put that in context, even the GST so-called spike, means including that we have historically low inflation. During the period of the 1980s the indexation was 8 per cent. So even if you include a one-off 2 per cent, the indexation at the moment is still considerably lower than during the period of the 80s. Right through the 80s when inflation was running at 8 per cent per annum the full indexation took place, youve now got a 2.7 per cent one-off and people say, "Well theres something different about it." The only thing thats different about it, is that its still significantly lower in percentage terms than at any point through the 80s.
In percentage terms but not necessarily in real terms. What were seeing now is that more than half the petrol price you pay at a pump is tax. But in the last year, up until today, the total tax increase of excise plus GST is around 4 cents a litre.
Now thats not right Mark. Actually what youve found is that the tax take as a percentage of price has actually been declining. And the reason is that the price of petrol has gone up as far as it went up in September, October, November and December of last year, not because of tax, but because of world oil prices. And as the world oil price pushed the price of petrol up, actually the percentage of that price which was tax, actually declined. Now all through the period when people were worried about high oil prices - and I am too - when prices were getting up at 99, a dollar in metropolitan cities through October, November. It wasnt because of the 1st of February excise indexation. That hadnt occurred. It was because the oil price was increasing. And what is determining the overall petrol price, as anybody who knows anything about this industry will tell you, is the world oil price. You will see in some bowsers today that the petrol price actually came down, notwithstanding the excise. Why? Because the predominant determinant, is the world oil price. Im afraid its not the excise. Now, some motoring groups and the Opposition, always quick to determine a populist issue when they see one, will like to try and run the world oil price which is the determinant of petrol prices into the excise argument, but the determining fact has been the world oil price.
Obviously that is the case but the fact remains, doesnt it, that if it wasnt for todays excise and CPI increase, petrol prices would be around 2 cents lower than they are?
Well, whats happened today is in accordance with the legislation passed in 1983. And in accordance with the practice on 23 occasions under the Labor Party the excise was indexed to the CPI. The CPI indexation of the excise has led to about 1 cents per litre, 1 cents per litre. Today you will find and Ill make this prediction, because it generally happens on a Friday before a weekend, you will find that prices move by 7 or 8 or 9 cents. They generally do on Fridays. That is not a consequence of excise, that is a consequence of profit margins, competition and the underlying determinant which is the world oil price.
When you were Opposition Treasurer, Shadow Treasurer, you were very critical of the Government and the whole excise scheme. In 1994 you accused the then Government of using the petrol excise as a milch cow and said that Australians should know every time they fill their tanks, more than 30 cents a litre is Federal Government tax. Now its closer to 40 cents a litre.
Well, when I became Treasurer it was in fact 44 and now its closer, its in the high 30s. So we cut it as part, we cut the excise as part of the introduction of GST.
The overall tax take has increased?
Well when I became Treasurer, for transport it was 44 and now its closer to 20. Now its closer to 20. So you have got to remember this Mark, and this a thing that Mr Beazley will never tell you. If he had been in office, truckers and transporters would be paying today 24 cents a litre more. Im not talking about 1 or 1 , Im talking about 24. And what we did is, not only did we reduce the excise and cut the tax for transporters with the introduction of GST, but we also cut income taxes. And we cut income taxes so that people had more money to spend as part of an overall tax reform in Australia. Never been done before.
Now, Mr Beazley today says, oh if he were in Government today, oh he wouldnt be doing this. Let me tell you what Mr Beazleys got to be asked today. If he does get elected, will he reverse it? Thats a question for him. If hes so against it, let him give a commitment today to reverse todays indexation, and then let him say the amount he will be putting up income taxes, to pay for it. This idea that hes against it while hes in opposition, but hes going to be in favour of it if he ever gets into government, is just another policy lazy response, you know, from somebody who tries to tell people what they want to hear, and then he rolls over and he says, "well tickle my tummy." You know the guys got to get serious on his policy. If he is really against it let him say today he would reverse it. Its a pretty simple proposition.
Mr Costello, one thing that would compensate for higher petrol prices are lower interest rates. A short time ago the US Federal Reserve cut rates again another of 1 per cent. Is there anything now standing in the way of lower interest rates in Australia?
Well, the news overnight was not only that the Federal Reserve cut interest rates of course, but the US economy has dramatically slowed. And in the December quarter, grew by around about 0.3 per cent, which is a dramatic slowing. From our perspective the greatest challenge for the Australian economy in the recent period was when the Asian financial crisis hit, and all of our region went into recession. This is going to be the second great challenge. The dramatic slowing of the US economy and surging energy prices, which weve seen over recent months. The US has responded by cutting its interest rates now by 100 basis points. We always had lower interest rates than the United States all through the period of last year. Today, we have interest rates that are about 75 basis points higher. We have a US economy which is slowing and in Australia we have very, very low inflation. Now, when those inflation figures came out, I said that they were at the lower band of the Government target. When the Reserve Bank Board considers the inflation situation in Australia and when it considers whats happening around the world, I expect that it will make its own judgement. I dont want to pre-empt its judgement. But you would have to say that with the low inflation result that we saw, inflation is not providing the problem that some people thought it would during the course of latter, last year.
If this is such a great challenge for Australia what are the growth prospects for Australia. It was only late last year in the mid-year Economic Review, the Government ratcheted up its growth forecast for this year to 4 per cent. Is there any chance of us now meeting that forecast?
Well, we had a strong quarter in the September quarter, and weve come through the December quarter, we dont have our December quarter out, as yet. One of the advantages actually in Australia, which the Americans didnt have by the way, was the exchange rate. That actually has meant that whereas Australian exports are booming, I think theyre up about 21 per cent over the year, the United States had the difficulty on their export front. So Australias growth prospects in this year principally rely on the export front. Our exports are doing well, theyre up very, very significantly. On the domestic economy, the domestic economy after huge growth through 97, 98, 99, is slowing. But with your consumption slowing you would want to take some of the slack up in exports and fortunately weve had the opportunity to switch.
Peter Costello, thanks for joining us.
And the Treasurer speaking to us from our Melbourne studios this morning.
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