Treasury warns fuel tax hike may be needed next year, new transport budget due in weeks

Michael Wood. Photo / Jason Oxenham

Transport Minister Michael Wood said the first public draft of the Government’s next three-year transport budget would likely be published “approximately in the next month”.

Treasury warned at the Budget that rising costs in the transport sector, and a large loan granted to Waka Kotahi NZ Transport Agency, may force the Government to hike fuel taxes as early as July 1 next year. Such a hike would need to be signalled in the forthcoming budget.

When asked whether such a hike was on the table, Wood said he did not want to foreshadow Cabinet consideration of the transport budget, known formally as the Government Policy Statement on Land Transport, or GPS.

“I won’t get ahead of Cabinet consideration of the GPS and the consultation that we have to run with the community around that - obviously it is important that we appropriately fund our transport sector,” Wood said.

“Everyone knows there is a real need there in terms of maintenance, in terms of resilience, in terms of growth, so we will consider that - but I won’t get ahead of the process,” he said.

Wood had tried to release another version of the GPS, which budgets for the period 2024-2027, earlier this year, but was forced back to the drawing board after outrage at a proposal to allow councils to install cycleways and remove parks while they were maintaining roads - all funded from the road maintenance budget.

Treasury recently reiterated a prior warning to the Government that fuel taxes may need to go up as soon as July 1 next year to continue to fund the transport budget. This would come on top of the 25 cents a litre hike to fuel taxes coming at the end of next month, when the Government’s “temporary” fuel tax relief policy comes to an end.

“There is a risk that Fuel Excise Duty (FED) and/or Road User Charges [RUC] will need to be increased in order to manage pressures on the National Land Transport Fund and enable repayment of a $2 billion loan, which is being provided to support delivery of the 2021-24 National Land Transport Programme,” Treasury warned in the BEFU [Budget Economic and Fiscal Update] forecasts, released with the Budget.

Land transport in New Zealand is primarily paid for by fuel taxes and road user charges, with help on some roads from councils. Occasionally, the Government also steps in. Fuel taxes are charged as a flat levy per litre, rather than as a percentage of the total price of fuel, like GST. This means that fuel taxes must constantly be adjusted upwards to take account of rising inflation.

During the 2020 election, Labour committed in 2020 not to hike fuel taxes this term after raising them 3.5 cents a year from 2018 to 2020. Since then, fuel taxes have been frozen, despite the cost of maintaining the road network skyrocketing as a result of high inflation.

Waka Kotahi is also concerned that with people driving less, and using less fuel thanks to EV uptake, its longer-term revenue position will come under threat.

The Government is working on policy for revenue tools to replace fuel taxes, but these will not be in place in time for the next GPS.

The GPS gives guidance to Waka Kotahi on how it will allocate its roughly $4b annual transport spend. The final decision on spending is made by Waka Kotahi, but it has to keep within the Government’s direction as set out in the GPS.

The GPS will need to take into account any fuel tax changes, and will be published in draft form for consultation first, before a final version is released.

National’s transport spokesman Simeon Brown said National would issue its own GPS if it wins the election, and will publish a transport policy prior to the election.

He said National was not currently contemplating a fuel tax hike.

Brown said Treasury’s warning was evidence the Government had “completely mismanaged the land transport fund”.

He said National would focus the fund “on its core business, which is building and maintaining roads”.

“At this stage we don’t intend to be increasing fuel excise. We will be putting out our policy on transport investment closer to the election,” Brown said.