Explainer: Everything you need to know about the fuel tax cut ending
Tuesday, 27 June 2023
After 15 months, the petrol excise tax cut will finally come to an end from Saturday.
Since March last year fuel taxes have been cut by 25 cents a litre, while diesel road user charges have had a 36% discount.
What was meant to be just a three-month cut was repeatedly extended by the Government as it looked for ways to ease inflationary pressure on households.
What’s happening and why?
The 25c fuel excise duty tax cut will be reversed from July 1.
Diesel road user charges will also go back to being full price, as will public transport for those over the age of 25.
In March, despite having earlier said an extension was not affordable, Finance Minister Grant Robertson said the Government had found money during an October budgetary process, called the baseline update, to fund the $718 million extension to the subsidies until June 30.
What should motorists expect, and how many gas stations will put up their prices straight away?
When the tax is reintroduced it may take some days for there to be any effect as duty is paid at the point of importation.
The fuel that is already at petrol stations has been taxed already.
But, when the cut was introduced, prices dropped straight away, so we may start to see the new pricing reflected quickly.
How inflationary is it likely to be?
ASB chief economist Nick Tuffley said the return of the fuel tax would mean inflation was higher than otherwise in the short term, but it was just putting fuel prices back to where they would have been anyway.
“It doesn’t affect the underlying picture, other than at the margin it could impact inflation expectations because it is a high-profile frequent purchase. For the September quarter we expect inflation of 1.7% quarter-on-quarter and 5.3% year-on-year, still down from the current March quarter annual pace of 6.7%.”
Gareth Kiernan, chief forecaster at Infometrics, said the effect was likely to be mixed.
“Typically the medium-term effect of a petrol price rise is deflationary, because petrol is a necessity for households, so the price increase means that people have less money to spend on other goods and services, so aggregate demand is reduced.
“The increase in road user charges has more potential to be inflationary, because it will increase freight costs for all goods being transported around the country. The somewhat good news is that, even with the increase in road user charges, the combined cost of diesel and road user charges will still be lower than it was between April and December 2022, when refining margins for diesel in Singapore were highly elevated.
“As a result, it is possible that the inflationary effects of the return to full road user charges could be limited because transport costs are still lower than they were last year.”
If it's only a 25c cut why are prices going up 29c?
The cut has actually been worth more than 25 cents as GST is calculated after other taxes.
That means about 29c is likely to be put back on.
The fuel tax is made up of a bunch of other little taxes and levies. Roughly 48% of the price of a litre of fuel is tax.
The largest chunk goes to the National Land Transport Fund, which is money that is only spent on transport projects and maintenance. This is about 70c a litre, and doesn’t change based on how much fuel costs.
There is also an ACC levy – 6c a litre – and in Auckland the 10c regional fuel tax.
About 18c a litre is the Emissions Trading Scheme (ETS) fee price, which is the way New Zealand prices greenhouse gas emissions, and the exact amount paid varies based on the auction price of a tonne of carbon.
Then GST is added on at the end, at15% of the total cost of whatever is being sold.
How does the price of petrol now compare to when the cut came in?
When the cut took effect, petrol was near $3 a litre in most places as the Russian invasion of Ukraine and rising inflation combined to put pressure on.
Petrol prices are now down to about $2.20 a litre across most places, according to the Gaspy app.
AA principal policy adviser Terry Collins said the impact of the fuel tax ending would not be as bad as first thought. This was probably the best time for it to be put back on, he said.
The average price of diesel and petrol was about $1 less than it was this time last year and internationally the price of oil was below US$80 and demand had dropped.
He didn’t expect fuel to go back up to $3 unless something happened internationally.
Due to the fact oil had dropped in price and demand had dropped, it was likely fuel prices would remain stable once the tax was reintroduced, he said.
How much did the cut cost in lost tax revenue?
The initial cost of the three-month petrol change was $350 million and was covered by reprioritising spending from the Covid-19 response fund, while the public transport subsidy cost between $25m and $40m and would also be met from the Covid-19 response fund.
The extension until the end of June also cost $718 million.
Overall the move had estimated to have cost about $2 billion.
Would this Government or a new one ever reinstate the cut?
Robertson said Labour had no intention to reinstate it.
“This was always a temporary measure to support Kiwis during difficult times and take the hard edges off during a time of high inflation,” he said.
“We have to strike balance as we move forward. It’s not sustainable for us to carry on with the subsidy given other needs for government funding. It is worth noting that the revenue from fuel taxes does go directly towards the funding of new roads, improvements and maintenance, public transport, road safety, walking and cycling.”
National Party Transport spokesperson Simeon Brown said National initially supported the temporary cut to fuel excise as a cost-of-living measure in the absence of tax relief for working families. However, the cuts were not sustainable in the long term.
”We have no plans to reintroduce fuel excise discounts as the revenues are required to fix our roads.”
ACT leader David Seymour said the petrol tax cut was “particularly dumb” and he would not reinstate it.
“Petrol tax is used for fixing roads, so all we’ve got to show for the cut is more potholes.
“ACT would have introduced a durable solution by returning the proceeds of the Emissions Trading Scheme to citizens. That’s a simple and practical way to help families through the cost-of-living crisis without cutting a cent from the roading budget,” he said.