Treasury reveals its advice to government in early days of the fuel crisis

The Treasury advised there was "value in waiting" before giving New Zealanders fuel relief through the in-work tax credit.

It also advised against cuts to fuel excise duty or road user charges, advice the government ended up following.

A suite of documents was released by the Treasury on Wednesday, revealing the advice it gave ministers in the early days of the fuel crisis.

The advice covers the period up to 21 April. During that period, the government announced its support measures for working families, a partnership to secure more diesel, and the National Fuel Plan.

The Treasury said a "further tranche" of advice produced after 21 April would be released at a later date, meaning the advice it gave in the final run-up to the Budget will come later.

'Value in waiting' to deliver relief

In March, the finance minister announced around 143,000 people would get an extra $50 a week through an increase to the in-work tax credit (IWTC), to help ease cost of living pressures.

The relief is expected to last for 12 months, or once 91 octane fuel prices dip below $3 a litre for four consecutive weeks.

Initially, the Treasury only looked at the option of a 12-month package.

Officials said the policy had "attractive features", as it could be implemented quickly and easily, by inserting it into tax legislation that was going through the House at the time.

But doing so also committed the government to a "large fiscal cost at a time when there is considerable uncertainty about the magnitude and length of the Middle East conflict, and its impacts on New Zealanders".

The Treasury said waiting after 1 April would give the government more flexibility around how long it wanted the support to be available for.

"There would be value in waiting to see how the situation develops," officials said.

But the Treasury acknowledged waiting would also have downsides, in potentially not providing support to those that needed it, and requiring separate legislation.

The advice said it was difficult to identify trigger points for proceeding with the IWTC increase, and it would require a difficult judgement call from ministers.

"But the kinds of factors that you would consider include the projected cost of living or economic impacts, including the price of fuel, general price increases and increases in unemployment."

The one-year increase to the IWTC was estimated to cost $373 million. It would cost less if the four consecutive weeks of fuel under $3 happened before then.

Excise duty cuts 'limited' and 'poorly-targeted'

The Treasury also advised against cuts to fuel excise duty (FED) or road user charges (RUC).

In March, the Australian government halved the fuel excise on petrol and diesel. This move was initially supposed to be for three months, but has since been extended for an additional month.

The former Labour government enacted a similar move here, in response to Russia's invasion of Ukraine in 2022.

The coalition looked at whether to reduce fuel excise duty and road user charges, but the Treasury advised it would provide limited and poorly-targeted relief.

"As supply is inelastic in the short term due to supply chain bottlenecks, it will be difficult to ensure that reductions are fully passed to consumers," officials said.

"A universal reduction in FED/RUC will benefit consumers and businesses that consume the most fuel, rather than targeting those who have the greatest cost-of-living pressures."

It would have also dampened the effect of price increases, which signal scarcity and help consumers to manage their fuel consumption.

"The price of fuel is an important signal for managing and prioritising fuel use. Universally reducing the price of fuel could risk undermining mitigation measures put in place to ration fuel."

This is in keeping with the government's public statements, with Christopher Luxon resisting calls to cut FED or RUC.

"Our advice is pretty clear. It's poorly targeted. It actually benefits high income households and it actually encourages fuel use when it's constrained," he said on 30 March.

Diesel $8 under worst-case scenario

The Treasury produced advice on three different macroeconomic scenarios in the event of diesel supply disruption.

Its baseline scenario assumed there would be a short global oil price shock, with prices easing beyond April.

The second scenario looked at a prolonged global oil price shock with some fuel disruption. This scenario assumed shipments would continue to arrive through to May, but more prolonged disruption in the Middle East would result in fuel importers adjusting their forward orders and fuel stocks materially reducing.

The worst-case scenario, a prolonged global oil price shock with extreme fuel shipment disruption, imagined New Zealand was receiving only 50 percent of its pre-conflict diesel shipments for three successive months.

In this scenario, which the Treasury said would be "extreme and severe", diesel would spike at $8 a litre, and real GDP would fall by around 5 percent below the baseline scenario.

Its figures showed this scenario was "roughly half of the impact of the initial Covid-19 lockdown but larger than that associated with later Covid-19 restrictions".

Officials said this would be a "rare and extreme" shock, with prices spiking higher to ensure supply and demand were balanced, but also anticipated a "rapid bounce back" as supplies returned to normal.

The Treasury cautioned its scenarios were illustrative, and reflected a range of assumptions that were subject to significant uncertainty.

'Avoid Step 3 if possible'

Responding to the draft fuel plan, the Treasury said the government should keep the specific details of Steps 3 and 4 quiet until they were more developed, and focus communications around Steps 1 and 2.

It also said Step 2 should include options for "harder encouragement for demand restraint" to avoid the likelihood of entering Step 3.

"The goal should be to avoid Step 3 if possible, because it: would have significant economic costs through inefficiencies in the allocation of resources across the economy; is likely to create significant pressure for financial support to households and businesses; and is likely to be highly administratively complex."

The steps, which the government ended up calling 'phases', outline the triggers necessary to enter them, and the measures the government would take to maintain fuel stocks.

In the end, the government did not include harder encouragement in Phase 2, preferring a "precautionary" approach by telling the public to consider combining trips and following Energy Efficiency & Conservation Authority advice to help save fuel day-to-day.

"The proposed fuel stock indicators should be supplemented with indicators on essential service disruption and trends in demand (since these will matter for judgments on whether to escalate or de-escalate). The trigger thresholds need to be calibrated to avoid pre-mature consideration of entering Step 3," officials said.

So far, the government has never needed to move beyond Phase 1.

Government sought advice on air connectivity

The documents reveal Nicola Willis also sought advice on the Maintaining International Air Connectivity scheme, which established during the Covid-19 pandemic to protect New Zealand's links with the rest of the world, and keep trade going.

The scheme subsidised 10 airlines to maintain essential air freight capacity at a time when border closures made flying uneconomic.

It ended in 2023. By then, $890m had been paid out.

The Treasury said designing a similar scheme to deal with the fuel crisis was "less likely to be effective", as the key issue was not the high or volatile price of fuel, but if fuel supply was sufficiently constrained that rationing was required.

"Disruption as a result of the current conflict would be more of a supply-side shock, if fuel is rationed. In this situation, the focus will be on establishing clear objectives and identifying fewer key routes to fly."

Officials said in that case, the focus would be on domestic routes.

"We assume, even with elevated ticket prices, there will remain a reasonable level of passenger demand; revenue from this would support operator balance sheets and the overall viability of routes."

Fuel security arrangement could cost up to $167m

On 28 April, the prime minister announced the government was partnering with Z Energy to secure extra diesel, to be stored at Marsden Point.

While Z Energy procures, owns, and manages the fuel, the Crown controls its release to the market.

The Treasury was supportive of the plan to discuss securing additional fuel supply with fuel importers, but noted it should be above their minimum stockholding obligations.

"We recommend you focus on the current options to secure additional supply as a first step. Fuel supply chains are currently functioning normally, and the onus must remain on fuel importers to meet New Zealand's fuel demand. Any signalling of [business-as-usual] support may distort incentives for fuel importers."

While the costs of the government's arrangement with Z Energy have not been disclosed for commercial sensitivity, the deal has ensured the Crown's exposure to any long-term falls in fuel prices would be limited.

On 21 April, Treasury officials put the average fiscal outcome of the fuel security arrangement as a loss of $45.4m, with the largest fiscal cost modelled at $167m.

'No immediate case' for farmer support

Early on in the fuel crisis, farmers reported they were running dry on fuel, with rural distributors facing limits.

But in a paper looking at supply chain vulnerability, the Treasury cautioned against any intervention in agriculture and other key exporting sectors.

"We see no immediate case for this intervention in these sectors on economic security grounds. These industries are supported by established industry bodies that are well-equipped to manage supply chain disruptions."

The advice said market-led adjustments to the supply shock were underway, but suggested further intervention to stabilise supply chains, address economic security risks, and strengthen longer-term resilience.

It higlighted fuel, health, and building supplies as three key areas that were at risk.

However, it cautioned against "rushed interventions", preferring less distortionary tools like broad-based regulatory reform (such as the building and construction reforms to allow for product substitution), more information sharing, and international arrangements like the Agreement on Trade in Essential Supplies with Singapore.