Excise, Interest Rates, Economic Growth

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Excise, Interest Rates, Economic Growth

Transcript No. 2001/003





ABC AM Interview with Mark Simkin


Thursday 1 February 2001

8 a.m

SUBJECTS: Excise, Interest Rates, Economic Growth


That old post-budget headline, ‘Beer and Ciggies up’, might well have been

dusted off this morning. The Government’s 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 it’s

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. We’re being joined now in our Canberra

studio by the Treasurer Peter Costello. To speak to him, our economics correspondent, Mark



Peter Costello, you’ve sought to head-off a petrol pump backlash by protecting

diesel users from today’s excise increase, but that’s no comfort to the vast

majority of road users is it?


Well, let’s 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 they’re paying today. We cut

the tax by about 24 cents a litre and what we’ve 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 that’s 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 it’s

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 isn’t that the problem with this particular excise rise?

It’s 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, it’s 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

1980’s 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

‘80’s. Right through the ‘80’s when inflation was running at 8 per

cent per annum the full indexation took place, you’ve now got a 2.7 per cent one-off

and people say, “Well there’s something different about it.” The only thing

that’s different about it, is that it’s still significantly lower in percentage

terms than at any point through the 80’s.


In percentage terms but not necessarily in real terms. What we’re 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 that’s not right Mark. Actually what you’ve 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 wasn’t because of the 1st of February excise

indexation. That hadn’t 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. I’m afraid it’s 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



Obviously that is the case but the fact remains, doesn’t it, that if it

wasn’t for today’s excise and CPI increase, petrol prices would be around 2

cents lower than they are?


Well, what’s 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 I’ll 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

it’s closer to 40 cents a litre.


Well, when I became Treasurer it was in fact 44 and now it’s closer, it’s in

the high 30’s. So we cut it as part, we cut the excise as part of the introduction of




The overall tax take has increased?



Well when I became Treasurer, for transport it was 44 and now it’s closer to 20.

Now it’s 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. I’m not talking about 1 or 1 , I’m

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 wouldn’t be

doing this. Let me tell you what Mr Beazley’s got to be asked today. If he does get

elected, will he reverse it? That’s a question for him. If he’s so against it,

let him give a commitment today to reverse today’s indexation, and then let him say

the amount he will be putting up income taxes, to pay for it. This idea that he’s

against it while he’s in opposition, but he’s 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 guy’s got to get serious on his

policy. If he is really against it let him say today he would reverse it. It’s 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

we’ve 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 what’s happening around the world, I

expect that it will make its own judgement. I don’t 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




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 we’ve come through the

December quarter, we don’t have our December quarter out, as yet. One of the

advantages actually in Australia, which the Americans didn’t have by the way, was the

exchange rate. That actually has meant that whereas Australian exports are booming, I

think they’re up about 21 per cent over the year, the United States had the

difficulty on their export front. So Australia’s growth prospects in this year

principally rely on the export front. Our exports are doing well, they’re 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 we’ve had the

opportunity to switch.


Peter Costello, thanks for joining us.


Thank you.


And the Treasurer speaking to us from our Melbourne studios this morning.