2 Feb 2023

Fuel subsidy extension about being 'nimble' - Robertson

2:49 pm on 2 February 2023
Deputy Prime Minister Grant Robertson

Photo: RNZ / Angus Dreaver

Continuing fuel subsidies despite official and expert advice urging otherwise is focused on helping New Zealanders in the here and now, the Finance Minister Grant Robertson says.

He argues the measure is something that can be done immediately while the government continues longer-term work on how to sustainably fund transport infrastructure.

Robertson stood alongside Prime Minister Chris Hipkins yesterday as they announced the plans to continue their transport subsidies introduced in March last year: half-price public transport, reductions on Road User Charges, and a 25-cent cut to fuel excise.

That 'excise' is a tax charged on fuel imported into New Zealand. AA estimates taxes make up about half the price of fuelling up with petrol at the pump, with most of that going into the National Land Transport Fund for spending on roads, public transport and other transport infrastructure.

Infometrics director and principal economist Brad Olsen has argued the excise component of the move is "extremely dumb economic policy", and the government is essentially trying to buy votes.

Speaking to Morning Report, he explained majority of the subsidy would go towards high-income earners rather than those who are struggling the most.

"This is a policy that is completely untargeted, and what it does is it provides three times as much support to those on the highest incomes who don't need that support as much as those on the lowest incomes," Olsen said.

Infometrics senior economist Brad Olsen.

Infometrics director Brad Olsen. Photo: Supplied / James Gilberd Photospace

"When we look at how much fuel different types of households buy, we know those on the highest incomes spend three times as much.

"The lowest income households, the amount of fuel they will be using each week is likely to be for essential purposes. They need to go to work, they need to drive their kids to school ... that says that the other two thirds of fuel that the highest incomes use is unlikely to be quite as necessary yet - the taxpayer now is subsidising."

He said it boiled down to a tax cut for the rich.

"From an economics point of view, why are we subsidising the highest level of earners when it comes to any sort of consumption? It's the sort of thing we wouldn't do this in any other time.

"It is a tax cut for the rich, it's literally a tax that is not being paid by the rich, there's no other way about it."

Speaking to the programme later, Robertson said he didn't accept that and pointed out the flipside of the argument - that although it would be supporting those on higher incomes it would be supporting lower-income families too.

"What Brad's done there as far as I can tell is look at the usage of a car and a vehicle and made some assumptions about the amount of money that people on high incomes spend on petrol. We can analyse that, different people have different circumstances.

"The point that I'm making is that for those on low incomes this is a very significant part of their budget, it's a fixed part of their budget, and it's something that will benefit them and their families significantly."

The extension yesterday was the fourth of its kind. Announcing the third extension in December, Robertson had warned the discount was not indefinitely sustainable, pointing out the high cost.

His justification for such a quick change of tune yesterday was the change in prime minister after Jacinda Ardern's resignation just a couple of weeks ago, and he told Morning Report he did not think it would damage his credibility as finance minister.

"I don't think so at all, I think this is about being nimble and responsive and right through the Covid pandemic that's what we showed that we could do.

"I'll stand on my record as finance minister ... yesterday we saw again one of our lowest unemployment rates we've ever had with 3.4 percent, we've got one of the lowest levels of public debt in the world, we have seen sustained economic growth and we do have a plan to grow wages - which we also saw yesterday."

He confirmed Treasury's latest advice was consistent with earlier warnings against continuing the extension: it would become harder and harder to wind back the longer it went on and - supporting Olsen's point - was too broad-based to support those struggling the most.

Olsen said the question that needed asking was who needed the support the most. He also pointed out the money not going into the National Land Transport Fund would now have to be found elsewhere.

"There's a whole bunch of money - $2.1 billion - not going into it, the government's now has to top that up from general taxation."

Robertson acknowledged that if such a change were to become permanent, the government would need to work on how to fund transport sustainably. He said the latest three-month extension would allow the government to consider that in the Budget in May.

"Chris Hipkins has been really clear that he wants the focus to be on the cost of living. We saw inflation peak but not come off a lot at the beginning of the year.

"We've extended it out to the 30th of June, that means we can have a conversation as part of the budget process as to what we want to do to continue to support New Zealanders with the cost of living. So it allows us to give that relief to New Zealanders whilst we plan for a longer term way."

"If this were to become a permanent policy we would need to make some pretty significant changes to the way that we're funding transport and that would be significant for us.

He said such a plan was being worked on.

"What we have to do is take a step back and say 'how do we fund transport'.

"That's the piece of work we're working our way through now. There's actually been a long-standing piece of work about how we make land transport funding sustainable in New Zealand."

Short-term relief, then, while a more permanent solution is found. The attraction of the excise cut - pricey though it may be - is on one hand the convenience of being able to achieve it without a lengthy law change process, while also avoiding adding inflation to an already overheated market.

Indeed, the move helps curb inflation somewhat, including the effect on groceries.

"One of the issues in the production of food is the cost of fuel and diesel in particular," Robertson said. "We can actually do something with this now, that will help mitigate food price increases."

Analysis suggests the move would curb overall inflation by 0.5 to 1 percentage points.

Olsen however said this was not the full picture - it was just kicking the can down the road, and importantly would add to inflation in other ways.

"If you're subsidising people to be able to spend the same as what they did before across the board - because it's universal policy - then you will be maintaining higher levels of consumption in the economy," he said.

"Because you're running expansionary fiscal policy and it's borrowed, it means that the total contributed by government - the total spending by government out there - is still the same.

"If you add the government consumption and the private consumption together, with this subsidy your consumption is still larger and therefore more inflationary overall than if you didn't have the subsidy in place."

He said it could be used in a more targeted way to maximise the benefits for those on the coal face.

"If the government took the money that it's using on this policy across the board and redistributed only to those lower income groups, you could either get four times as much support or for four times as long."

Time will tell if such a solution is what the government lands on when its short-term fix does eventually get overridden by Robertson's Budget plan.

Any such solution will also need to align with the government's emissions reductions programme. Robertson appeared confident he could do so.

"I think it is really important that a government has the ability to be able to deal with the here and now, which is people facing costs of living pressure whilst also planning for the long term and that's what we're doing.

"We've got a comprehensive emissions reductions programme that will see us meet those targets and goals that we've set, one element of that emissions reduction programme is what we've called a just transition, a fair way of moving forward.

"Part of that plan is making sure that we support households and families in the transition."

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