Outlines the potential impact of the fuel excise on the environment and on lower income Australians.

Summary

Treasury anticipates that the reindexation of the fuel excise will collect $2.2 billion over the forward estimates. From 2001 when the excise was deindexed from inflation by the Howard Government to today, the budget has lost more than $46 billion in tax revenue. If the excise is not reindexed by 2025, more than $160 billion will be lost.

To put this figure into context, the full suite of Gonski education reform recommendations were estimated to cost the budget $5 billion per year. For the year ending June 2014, the cost to the budget in foregone revenue from the frozen indexation of the fuel excise was $6.3 billion, a figure that increases in value every year.

By not indexing the fuel excise to inflation, petrol is cheaper today than it would otherwise be. This, by extension, means that driving is cheaper - people drive more and invest less in fuel-efficient vehicles.

Since the excise was de-indexed, the falling cost of driving has resulted in 22.6 billion more kilometres of driving. If the excise is not re-indexed by 2025, more than 54 billion additional kilometres will have been driven, resulting in an additional 16.1 million tonnes of carbon dioxide and impacts on urban air quality and human health.

The fuel excise is regressive - the poor households spend a greater proportion of their income on fuel (3.1 per cent) than wealthy households do (1.7 per cent). Although regressive, the vast bulk of the excise is paid by higher income earners. If the index freeze is maintained until 2025, it will save the highest income earners $48 billion but save only $15 billion for the lowest income earners. The index freeze reduces government revenue which could easily be diverted to offset its regressive nature.

Some opposition to the change is based on its link to road funding. However, the change will account for only three per cent of proposed infrastructure funding and road projects are likely to proceed with or without the change. The excise has a minor impact on road funding, but is a significant contributor to overall government revenue.