Calls to cut Australia’s fuel excise grew louder on Monday as petrol prices hit fresh record highs, with the federal government now under pressure from its own MPs to ease bowser pain for households.

Nationals MPs and several Liberal state premiers want the federal cabinet to think about fuel tax relief in the budget this month.

But Prime Minister Scott Morrison is continuing to resist pressure to cut the fuel excise, saying it wouldn’t stop bowser prices from skyrocketing.

It comes as average petrol prices in Melbourne, Sydney and Brisbane reached $2.10 a litre on Monday, capping off months of rises that started before the war in Ukraine and have worsened since.

CommSec senior economist Ryan Felsman now believes bowser prices could top $2.50 a litre in “coming weeks” if the war in Ukraine continues to cast a cloud over global oil supplies.

Despite this, experts told TND a cut in fuel taxes wouldn’t be the best way to ease cost-of-living pressures for households as inflation picks up much faster than wages growth.

Grattan Institute transport program director Marion Terrill said it amounts to a “band-aid” fix that undermines efforts to reduce carbon emissions.

She said delivering budget relief for households would be better pursued through other policies targeted at lower-income workers, such as income tax offsets, as the fuel excise helps minimise pollution by discouraging excess driving.

“The fuel excise does perform a useful job – we don’t have an economy-wide carbon tax and it does put a dampener on driving at the margins,” Ms Terrill told The New Daily.

“It’s true that [cutting the excise] would help some lower-income people, though it’s quite a blunt instrument for helping people with cost-of-living pressures.”

That said, other economists do support reforms to the fuel tax regime, including scrapping billions of dollars in tax breaks to mining companies.

‘Extreme’ petrol prices raise tax debate

Three weeks ago, such a discussion about fuel tax reform was off the table; neither major political party wanted to talk about the tax, even when asked by The New Daily.

But that has since changed.

With just a week until the federal budget, Mr Morrison is now facing calls from within his own party to consider cutting fuel tax as petrol prices continue shooting upwards.

Queensland Liberal National senator Susan McDonald and Victorian Nationals MP Anne Webster are both pushing the issue, adding to calls from premiers in New South Wales, South Australia and Tasmania.

Independent Senator Rex Patrick says the entire excise may need to be suspended for 12 months in the face of these “extreme” petrol prices.

And our closest neighbour has already taken action.

New Zealand cut its fuel taxes by 25 cents a litre on Monday over concerns motorists across the Tasman were being squeezed for petrol.

But despite the pressure Mr Morrison continues to downplay fuel tax relief – although he has left the door open to a last-minute change of heart.

The pros: Cutting taxes would lower prices

The government says lower fuel taxes wouldn’t spare motorists from global oil price volatility.

But while that much is true, a cut in fuel excise would undoubtedly deliver local bowser relief.

The average motorist is paying about $775 in fuel taxes a year, so halving the tax would save households that drive hundreds of dollars, while costing the federal budget $8 billion.

It would be part of a federal policy response to crushing cost-of-living pressures made worse by the war in Ukraine, according to independent economist Saul Eslake.

Mr Eslake said the government can’t prevent international shocks from hitting households, but it can act to prevent poorer people from facing the worst of the effects through fuel tax reduction.

“If fiscal policy does nothing, then the reduction in national income will be felt most by those for whom energy and food costs absorb the largest part of their disposable income – which is, almost certainly, people in the bottom half of the income distribution,” Mr Eslake said.

“People on lower incomes are, in general, less able to ‘protect’ their standard of living from the effects of inflation than people on higher incomes.”

The cons: The ‘band-aid’ fix would have unintended consequences

The main argument Mr Morrison and others have made in defence of the fuel excise is that it must be levied to pay for road maintenance and infrastructure projects.

But this is misleading, because the $12 billion-a-year tax isn’t actually directed to road funding and instead flows into general government revenue (accounting for about 5 per cent of government tax earnings).

In other words, it’s primarily a revenue-raising tax – one that’s favoured by economists because it’s broad enough to capture most people and is impossible to escape by hiding assets overseas, as can be done with wealth taxes.

It also imposes a cost on motorists who wear down roads and pollute air with exhaust fumes.

The downside is that fuel excise is regressive – poorer people pay a greater proportion of their income in fuel taxes than rich people do.

But while cutting fuel tax would ease pressure on household budgets, Ms Terrill said there are huge risks.

That’s because the fuel excise is more than just a revenue-raising tax; it’s also a de-facto carbon tax that, in the absence of an economy-wide price on emissions, is helping Australia achieve net zero.

In fact, the Australia Institute estimates that after John Howard paused excise indexation in 2001, an additional 16 million tonnes of carbon was pumped into the atmosphere than would otherwise have been emitted.

And it took more than a decade for indexation to be reintroduced, which Ms Terrill said demonstrates the difficulty of reversing populist tax cuts.

“If the fuel excise was replaced by an economy-wide carbon tax that would be better,” she said.

“We wouldn’t need this particular instrument to do the job that it does.”

Government has other options

Crucially, there are other ways to support lower-income households navigating higher petrol prices, Ms Terrill said.

The government could use Australia’s tax and transfer system to deliver budget relief in ways that don’t adjust fuel excise, including through income tax offsets.

Mr Eslake agreed, saying an alternative could be to increase pension payments and other government benefits.

“Perhaps [they could] also offer some tax reductions to lower-paid workers. Ideally, without such reductions also being passed on to those higher up the income scale,” he said.

The case for government support has been made stronger by another trend being driven by the Ukraine war: A huge commodities windfall thanks to elevated coal and gas prices.

UBS data published on Monday found the federal budget bottom line could be up to $18 billion better off than it was in December, with further gains yet to be booked.

UBS analysts are assuming the budget will include an extension of the low-and-middle-income tax offset (LMITO), which has yet to be confirmed by the government.

“We also see additional fiscal stimulus up to $25 billion in 2022 (across COVID/floods cash, & extending LMITO, etc),” UBS economists said on Monday.

Mr Eslake said whatever policies the government chooses should be introduced without hurting the budget bottom line.

For example, it could pay for new spending with additional taxes on coal and gas production, or by deferring the scheduled third tranche of income tax cuts, which will mostly benefit higher-income earners.

“It should be ‘paid for’, rather than just allowing the budget deficit to be bigger than it otherwise would have been,” he said.

Ms Terrill said the government should also consider fuel tax reforms that cut back on billions of dollars in tax breaks for large mining firms.