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GTAP Resource #6923

"To tax or to spend? Modelling tax policy responses to oil price shocks"
by Liu, Xianglong Locky, Jason Nassios and James Giesecke

Surges in global crude oil prices in 2022, caused by supply disruptions from Russia's invasion of Ukraine and associated sanctions, have increased the cost of living globally. Various policy measures have been adopted by policymakers around the world to mitigate the damage of high energy prices. In this paper, we use a single-country dynamic computable general equilibrium model with high levels of fiscal detail to assess the efficacy of two fiscal policy responses to temporary supply-side oil price shocks, namely a fuel excise cut and a UK-style energy profits levy. In developing our oil price shock scenario, we take account of Australia’s distinctive energy structure. As a net-oil importer, the rise in world oil prices puts downward pressure on the terms of trade and household consumption. The impact at the macro level on real income is damped by a rise in net exports and world liquified natural gas (LNG) prices, a key Australian export. The capacity of this rise in the terms of trade to mitigate the economic damage is however muted, because the LNG sector is capital-intensive and largely foreign-owned. Australians are therefore left to pay higher gas prices as LNG prices rise, with higher LNG sector profits largely accruing to offshore investors. We find a temporary reduction in fuel excise can help damp the overall fall in real GDP and employment, but its positive impact on shock-year household consumption comes at the expense of higher net foreign debt. Rather than strengthening the case for a cut in fuel tax excise rates, we show that higher oil prices weaken the case for excise tax reduction from an allocative efficiency perspective. We conclude by considering an alternative Australian policy response to higher world oil prices: adoption of a UK-style energy profits levy on LNG producers. We find that such a policy would stimulate national income without compromising the budget.

Resource Details (Export Citation) GTAP Keywords
Category: 2023 Conference Paper
Status: Not published
By/In: Presented during the 26th Annual Conference on Global Economic Analysis (Bordeaux, France)
Date: 2023
Version: Working paper
Created: Liu, X. (4/14/2023)
Updated: Liu, X. (4/14/2023)
Visits: 343
- Dynamic modeling
- Domestic policy analysis
- Economic development
- Economic growth
- Oceania

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