18 Aug 2022

Government was warned against further fuel tax cut extensions

10:39 am on 18 August 2022

Treasury advisors warned the government against extending Fuel Excise Tax and Road User Charge reductions beyond August, saying it would lead to an expectation they would continue.

A motorist uses a pump as they re-fuel their car with unleaded petrol at a filling station in central London

Photo: AFP or licensors

They also suggested expanding eligibility of the cost-of-living payment would be preferable, despite Treasury and Inland Revenue having advised the government the payment itself had significant risks and would be too broad-based to support those struggling the most.

The government in July announced a 25 cent cut in fuel excise duty (FED), road user charges (RUC) and half-price public transport would be extended into 2023 to help with the cost of living.

However, documents released to RNZ under the Official Information Act show Treasury analysts wanted no extension to fuel excise and road user charge reductions.

"Our first best advice is that the FED/RUC reductions should end as planned in August/September once the [cost-of-living] payment begins, as per what was communicated on Budget day," an email said.

The cost of living payments began being issued from 1 August.

Continuing with the reductions would set a precedent or expectation that "sits in tension" with the government's climate goals, including reducing vehicle kilometres travelled by 20 percent.

Doing so without a plan to end the reductions may make it more difficult to pursue medium-to-long term transport objectives, and would also pose a "direct fiscal risk" - particularly given the effects on revenue for the National Land Transport Fund were unknown.

"We note that the actual impact of FED/RUC reductions (in terms of lost revenue to the NLTF) is still uncertain, and there is a possibility that additional revenue replacement funding may be required once the actual cost is known."

The advisors said providing cost-of-living support would be better achieved through other means.

"We recommend that this support should be targeted, deliver value for money, and align with broader government objectives."

They said such support could include expanded eligibility for cost-of-living payments or a top-up to the Winter Energy Payment.

While ministers wanted an extension to the FED/RUC reductions, the officials had to argue for an equivalent extension to half-price public transport.

"We note that a parallel extension to PT fare reduction is not proposed," they said.

"If ministers are intending to set funding aside, PT fare reductions may be a more valuable use of funds than further FED/RUC reductions, as PT fare reductions help to provide genuine choices/alternatives in the face of high fuel prices, and in a way that aligns more closely with the government's mode-shift and emissions goals."

Economists told RNZ after the government's decision to extend the cheaper fuel tax it would not be targeted to those who most needed it, but also noted the move - along with reduced public transport fares - would reduce headline inflation by an estimated 0.5 percentage points in the June quarter.

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