It was a normal morning in March 2001. I received a phone call from my former department, Transport, from my replacement. Where, he wanted to know, had I put the 1998 incoming government briefs? He wanted to know urgently. As in, extremely urgently. As in, NOW.

I’d co-ordinated the incoming government briefs for the 1998 election at Transport. I had no idea what had happened to them. I’d deleted the Labor ones from the system, as per protocol, after the Coalition won. I think. Maybe. I’d left paper copies with the secretary’s office. Of course, that was Allan Hawke, and he’d long since moved to Defence. I think I heard Hawke’s successor, Ken Matthews, pacing furiously in the background of the phone call. “Try the cupboards outside the secretary’s office,” I lamely offered.

Consternation. I was suddenly very relieved I’d left Transport.

I knew what the urgency was about. All hell had broken loose over fuel excise. The Howard government, badly trailing Labor in the polls, was being hammered over petrol prices, and was looking desperately for a solution. The immediate cause wasn’t so much petrol prices per se, which were indeed high, or the introduction of the GST, which had been offset by a reduction in excise, but a report by the Australian National Audit Office about the administration of the government’s roads spending. It would turn out to be the costliest ANAO report in history.

In looking at the highways program to check how well it was administered, the ANAO had stumbled upon something virtually forgotten at Transport: there was an old Hawke-era act, the Australian Land Transport Development Act 1988, which specified that a certain proportion of petrol and diesel excise, which was indexed twice a year, was to be paid into a trust fund and spent on roads. The government could lift or lower that proportion, but if they didn’t specify it, a default rate of 4.95 cents per litre applied.

Except, the Commonwealth hadn’t spent 4.95 cents per litre on roads for a very long time.

The problem with the ALTD Act was one of the core problems of “hypothecation”, which is the silly idea that tax revenue from a particular area is earmarked for specific spending. Motoring groups like to pretend that all fuel excise should be hypothecated to road building and that if it isn’t, motorists are somehow being ripped off — although they never specify which schools and hospitals should be shut to offset more roads spending, or which other taxes should be raised to pay for it.

But a big problem with hypothecation is that revenue from the fuel levy would go up and down depending on the economy, making it a bad funding source — if the economy slumped, the government might want to stimulate it with extra roads spending at the exact time there was less excise revenue. Moreover, governments need to commit funding for roads projects years in advance. So they’d long since abandoned the notion of spending whatever came in via the ALTD in favour of a guaranteed program of roads spending announced each budget, usually reflecting election promises. The ALTD fund was simply rolled into ordinary Commonwealth accounts.

“That was why hell had broken loose. The government was taxing motorists and not even spending the money on roads!”

The ANAO, however, calculated that nearly $3 billion extra “should” have been spent on roads under the ALTD Act if the default 4.95 cents per litre rate had applied, because the last time the Commonwealth had varied the rate was in 1993-94.

It was rubbish: governments of both sides had abandoned that sort of approach years before. The ANAO even acknowledged in its report that roads funding “complied with current government payment practice”. But its officers refused to see reason and, in the face of pleas from Transport officials, insisted that, because the ALTD Act was still on the books, there’d been a $3 billion underspend on roads from fuel excise.

That was why hell had broken loose. The government was taxing motorists and not even spending the money on roads! For the media, this was a very, very red circus tent to a bull (Malcolm Farr yesterday gave an inside account of the fury from the media end). The government, from the prime minister down, panicked — thus the desperate call from my former department to find all the briefings that might have been prepared on the subject. There was even a story, possibly apocryphal, that the heads of the Roads Branch — one of the best, most decent public servants I ever met — had been hauled into cabinet to be personally dressed down by Howard.

But while Howard might have pushed the panic button, the button did the job. He cut excise and then ended indexation of it, and launched an inquiry into it. Along with some handouts to pensioners, it got his government off the floor. By midway through 2001, the Coalition was competitive again. Then along came Tampa, and 9/11, and the rest is history.

The cost, however, has been enormous. The conservative estimate, based on Treasury figures in 2001, is that non-indexation was costing $3 billion per annum in lost revenue in 2010-11, but there are other estimates of up to $6 billion a year. Whether full indexation would have survived all the way through until now isn’t clear — periodic petrol price panics sweep Australian politics, and prices would be a lot higher now if indexation had been in place over the last 13 years. But the restoration of indexation, apparently under consideration for Tuesday’s budget, will only see incremental increases in prices over time.

Some years ago I bumped into a former Transport colleague, a senior officer there when the whole thing had unfolded. Mention of the affair still got him seething. “It was a complete act of bastardry by the ANAO,” he said. And, as it turned out, a hideously expensive one.