Don Brash: Reserve Bank should be empowered to change fuel tax rates

Former Reserve Bank governor, National and Act Party leader Don Brash is worried about the differing effects interest rate hikes have on people. Photo / Mead Norton

Former Reserve Bank governor Don Brash says the Government should consider empowering the Reserve Bank to tackle inflation by lifting fuel taxes.

Acknowledging the fact interest rate hikes affect people in very different ways, Brash suggests the Reserve Bank be given an additional tool to influence inflation.

He discussed the proposal in a blog post, further to raising the idea the last time New Zealand was battling above-target inflation in 2008.

He argued that because people don’t really alter how much petrol they buy when prices change, increasing fuel taxes would push them to reduce their spending elsewhere (at least in the short-term).

If people spent less, businesses wouldn’t be able to put prices up too much or give staff big pay rises, so inflation would fall.

Conversely, cutting fuel taxes would leave people with more money to spend if the goal was to stimulate the economy to boost inflation.

Brash suggested the Reserve Bank could change fuel tax rates in addition to changing the official cash rate (OCR), which similarly influences economic demand.

The former Act and National Party leader worried the effects of interest rate changes weren’t evenly distributed across society.

“For those who have recently bought a home with a very large mortgage, the effect is very severe. For those who have a debt-free home, and with savings in the bank, the effect is also substantial – but beneficial,” he said.

Brash believed his fuel tax idea would be easy to implement “because excise tax is collected at a very small number of points in the distribution system, and consumers are already very accustomed to the price of fuel changing at frequent intervals”.

“Another benefit… is that varying the excise tax on fuel would have little effect on the exchange rate, whereas changing interest rates tends to have a significant effect on the exchange rate: when interest rates are increased, the exchange rate has a tendency to appreciate, adversely affecting exporters and those competing with imports (and vice versa).”

Brash’s comments follow the Government, between March last year and June this year, reducing tax on fuel to ease the pain of inflation.

His remarks also come as New Zealand First and Te Pāti Māori campaign on removing GST from food – again, to soften the impact of high inflation, rather than to try to reduce it.

Brash recognised his idea wasn’t perfect.

He noted some people were more dependent on petrol than others, but said almost everyone would be affected to some degree.

“Admittedly, with the growing use of electric vehicles there may come a time when varying the excise tax on petrol would have little effect on aggregate demand. But that time is still some way away,” Brash said.

ANZ chief economist Sharon Zollner recognised the existing approach taken towards monetary policy had its problems, but said the effects of fuel tax rate changes would be unevenly distributed too.

For example, fuel tax hikes would hit lower-income earners disproportionately hard as a larger portion of their incomes are spent on petrol than higher-income earners.

What’s more, higher-income earners are currently more likely to have electric vehicles, so might be unaffected by policy changes.

Zollner said it would be “pretty messy” for the Reserve Bank to try to use two tools when setting monetary policy.

Fundamentally, she was wary of unelected officials being given powers normally reserved for elected politicians.

She said the more salient questions we should be asking were not what tools should we use to try to steer the economy, but rather, should we try to do it at all, given the limitations of economic forecasting? Might the costs outweigh the benefits?

Brash, who was at the helm of the Reserve Bank between 1988 and 2002, when it successfully cooled inflation from a high of 18.9 per cent in 1987, didn’t recognise Zollner’s concerns in his blog post.

However, he said: “The only disadvantage of varying the excise tax on fuel is in the basket of goods and services which the Government Statistician uses to measure the inflation rate, so increasing the excise tax to reduce inflation would have the somewhat perverse effect of somewhat increasing measured inflation (and vice versa).”

Zollner identified this as an issue too, noting that petrol prices tended to have an outsized impact on households’ inflation expectations, so removing them from the target inflation measure wouldn’t necessarily solve that problem.

She noted there had also been some debate around whether the Reserve Bank should be empowered to require people to contribute more towards their KiwiSaver accounts during periods of high inflation.

Like high interest and tax rates, the aim would be to curtail spending.

But again, she said this would hit lower-income earners disproportionately hard in the short-term.

Brash recognised there had also been some talk among academics about using the GST rate, instead of the fuel tax rate, to influence inflation.

But he was unsupportive of this, “not least because varying GST on a relatively frequent basis would be a compliance nightmare for many thousands of small businesses”.

Zollner concluded: “It’s pretty hard to think of any tool that would get around the ‘fairness’ problem without any clear drawbacks associated with it.”

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.