Cost of living: Fuel tax reduction - official advice warns Government’s policy too broad and expensive

A report by officials on the Government’s now year-long programme of reduced fuel tax and road user charges has found that a more targeted, lower-cost option would have been preferable to help New Zealanders most squeezed by spiking fuel costs.

The advice was produced by the Ministry of Transport in late 2022 some eight months after the Government first introduced the temporary plan to alleviate high fuel prices (it has now been extended four times).

The assessment was not generated before the policy was decided, the usual course taken, because of the extreme haste in which the Government hatched its cost-of-living relief measures in early 2022; officials had a bare 24 hours to provide advice on the fuel tax reduction plan.

In their retrospective assessment, officials found that Government support supplied through the welfare or transfers system (outside the transport portfolio) would have been best suited to addressing the identified problem: the hardship created for low-income households by sudden fuel price increases.

The system for delivering the Winter Energy Grant was identified as a good vehicle for delivering relatively fast cost relief to these households.

In late November, the report was provided to the Cabinet’s Economic Development Committee which included Chris Hipkins, now Prime Minister, as well as Transport Minister Michael Wood and committee chair Finance Minister, Grant Robertson.

The advice helped to inform the Government decision - taken in December 2022 - to phase out the fuel subsidy in early 2023. That decision, however, was reversed by then newly minted Prime Minister Chris Hipkins at the end of January, despite falling petrol prices and the steeply mounting cost of the programme.

The programme will cost some $2b through June 2023, the point at which it is currently scheduled to expire. Controversially, more than $1.3b of the money has come from underspends from programmes originally funded through the Government’s Covid-19 Recovery and Response Fund (CRRF).

The Government redirected the first $350m it needed for the fuel tax reductions from the fund before it was closed in April, 2022 (when the Government decided the Covid response could be paid for within the standard Budget process). The balance was redirected from the CRRF after its closure.

The bulk of the cost of the fuel tax cuts is foregone revenue, but that money has a specific purpose: it is hypothecated to the National Land Transport Fund.

To the degree that the tax reductions are starving the fund, the Government has agreed to make up the difference.

Prime Minister Chris Hipkin’s office directed the Herald’s questions about the official advice to Minister Wood.

Asked why the scheme has not been targeted as officials recommended, Wood said “the Government is focused on supporting all New Zealanders through the global cost of living pressure they are facing…extending these measures was something we could do quickly and would also reach the many New Zealanders on low to middle incomes who need the support the most.”

Transport Minister Michael Wood. Photo / Mark Mitchell

Wood said the 25 cent per litre petrol tax reduction (and drop in RUC) saved drivers between $11.50 and $17.25 per fill-up, and that in combination with the half-price public transport it made, “a significant difference to many people day to day…”

Wood also stressed that while the policy won’t solve high inflation, it constitutes a first step in dealing with some of the persistent cost pressures.

Since Hipkins replaced Jacinda Ardern as Prime Minister in late January he has emphasised increasing help to New Zealanders who are struggling with high inflation, though the catch is that high government spending itself helps to fuel inflation.

In the report, Officials weighed three policy options against one another: do nothing/the status quo (the counterfactual); the temporary reduction to road tax and other levies which was pursued (Ministers’ preference); and targeted support through the welfare system (Ministry’s preference).

In the decision-making matrix used, the Ministers’ option achieved a zero score, meaning the benefits were cancelled by the drawbacks; the counterfactual/do nothing option also achieved a score of zero.

Support through the welfare or transfer system came out as the option which fit “most of the criteria and likely best addresses the problem.” It scored one.

Officials noted that if the Winter Energy Grant eligibility criteria were used, the start date could have been brought forward and or the rate increased, and relief could have been provided “relatively rapidly”. This targeting would likely have significantly lowered the cost of providing fuel price relief.

Despite officials’ preference for cheaper, more targeted measures, the scattershot policy is well liked by New Zealanders. In November, a Taxpayers’ Union-Curia Poll found 71 per cent of respondents wanted the measures extended until inflation (currently running at over 7 per cent) returns to under 3 per cent.

The National Party’s finance spokesperson Nicola Willis declined to say whether her party would scrap the reductions should it have the opportunity.

“National would have preferred the Government to have delivered New Zealanders permanent income tax reductions by adjusting tax brackets for inflation, putting hundreds more dollars into the pockets of working people,” she said.

“We are concerned about the completely unorthodox funding approach to this policy and the on-again, off-again nature of it. In the long run it’s unsustainable…”

She said her party will deliver a full tax and transport policy together with a fiscal plan ahead of the election.

Transport officials identified that the problem to be addressed by the policy was that the “significant and sudden price increases [of transport fuel] can pose a greater burden on low-income households and potentially have broader adverse effects (on jobs, businesses and GDP). For households with tight budgets, fuel prices rising faster than income can cause financial stress. Higher-income households are generally less impacted in the short term and can manage or make adjustments…”

The report noted that, according to Stats NZ, the country’s poorest households (quintile 1) spend around 44 per cent of their transport budget on fuel. This contrasts with the wealthiest households (quintile 5) which spend about 26 per cent of their transport budget on fuel.

“In general, as households become wealthier, the per cent of income allocated to fuel decreases,” the report said.

The cost of transport is the third main category of expense for households, after housing and food. Stats NZ data shows that 90 to 95 per cent of New Zealand household transport budgets are allocated to travel by private vehicle.

The package of fuel levy reductions also includes a subsidy to halve the price of public transport.

Officials advised that it was unclear “whether or to what extent” increased ridership in public transport in 2022 (which was picking up as the country moved beyond Covid-19 emergency measures) was due to the implementation of half-price fares and whether the half-fares had resulted in any reduced travel by private motor vehicle.