User-pays is the best congestion buster
Published by the Australian Financial Review, Wednesday 12 June
Not for the first time, Reserve Bank governor Philip Lowe has highlighted that infrastructure has a part to play in helping an idling economy, to create construction jobs today and add to the stock of roads and rail for tomorrow.
But at the same time, ministers, bureaucrats and motoring associations worry that declining fuel excise means the money to pay for roads is drying up fast. They needn’t panic. Fuel excise revenue isn’t falling off a cliff, and even if it were, this wouldn’t spell the end of road funding.
The really pressing concern is not funding future roads, but how to get the most out of the road network we have. Congestion charging in the larger cities offers a way to do this.
First, let’s deal with the fuel excise furphy. Fuel excise raised $11 billion last year, by taxing every litre of petrol or diesel at 41.6¢. It’s small beer, just 5 per cent of commonwealth tax receipts. As cars become more fuel-efficient, the dollars raised by fuel excise are gradually falling as a proportion of GDP.
Fuel excise was more obviously on the decline between 2001 and 2013, mainly because of a Howard government decision to freeze indexation at 38¢ per litre. This meant rising petrol prices did not translate into a rise in fuel excise revenue. The Abbott government ended the freeze in the 2014-15 budget, with the goal of raising more than $2 billion of additional revenue over the following four years.
Even if fuel excise were to plummet, there’s no reason to assume that would have any impact on road funding. Excise is a Commonwealth tax, and the Commonwealth is only a minority funder of roads. In a typical year, the Commonwealth pays 21 per cent of the roads bill, and local government 26 per cent. The state and territory governments do the heavy lifting, paying the remaining 53 per cent.
What the Commonwealth does spend on roads comes from general revenue – there is no meaningful earmarking of fuel excise to road spending.
To see just how baseless is the fear of declining road spending, look no further than recent elections. In the federal campaign, the Coalition promised $42 billion for transport infrastructure, and Labor $49 billion. It was a huge increase on 2016, when the promises totalled $5 billion and $7 billion. Even with the political imperative to achieve a budget surplus, Josh Frydenberg’s 2019 budget committed to spending 0.37 per cent of GDP on transport infrastructure – around the mid-point of the transport spending under treasurers Morrison, Hockey and Swan.
It was a similar story during the NSW election campaign in March. The Coalition promised to spend $70 billion, topping up its massive existing infrastructure program, while Labor promised $50 billion. And the promises during the Victorian election campaign last November were even bigger: Labor pledged $95 billion worth of transport infrastructure, the Coalition pledged $68 billion. There’s no evidence that governments and would-be governments are reticent about spending on roads and other transport infrastructure.
A deeper problem with fuel excise is it is becoming increasingly unfair. Wealthier drivers who buy electric vehicles don’t pay fuel excise, whereas people who drive older and cheaper cars continue to pay. This problem can also be overstated: only 0.1 per cent of new vehicles sales are electric today, and this share is projected to reach 15 per cent – or 4 per cent of the fleet – by 2030. And concerned governments have many avenues to raise revenue from wealthier drivers; for example, Illinois has just dealt with exactly this situation by charging an extra $100 for registration of non-petrol cars.
So fuel excise is only a footnote to any spending decisions on roads. But road spending will never be enough if we don’t find a better way to ease congestion at peak times. The solution is congestion charging in our biggest cities.
If drivers are asked to pay a modest fee for driving on the most congested roads at the most congested times, they might consider their own contribution to slowing everyone else down. All we need is for a small proportion to opt to avoid the fee by taking their trip at a different time, or by a different route, or by a different method of transport.
No matter how many roads we build, they’ll fill up if governments act as if we can use them for free.