The government’s new plan for a two-tier road tax system has many shortcomings. In particular, it fails to address the economic distortions created by a fiscal framework that taxes road users particularly highly compared with other economic activities, including those associated with major environmental costs such as energy and agriculture (which is heavily subsidised).

If the two-tier system were a first stepping stone towards the introduction of a market-based approach to the road network, with an eventual shift towards private ownership, then it could be seen in a more positive light, however. Despite some discussion of granting private companies concessions to manage strategic roads, there is, though, little evidence that the government is seriously considering a genuine transfer of ownership to the private sector. As long as the road network remains under state control, it is likely to continue to suffer from endemic congestion, misdirected investment and poor maintenance.

The incentive structures under state ownership mean that roads policy is driven by political incentives rather than the entrepreneurial discovery and satisfaction of consumer preferences. Politicians may direct road investment in order to raise their chance of getting re-elected. Alternatively, new infrastructure might be provided for a politician’s local area as part of the bargaining process over government spending decisions. The political process is also subject to influence by special interest groups, who have far stronger incentives to engage in lobbying than dispersed groups such as taxpayers and motorists. To some extent, roads policy may be captured by powerful corporate interests seeking to shut out competition by the creation of unfair privileges. Alternatively policy may be unduly influenced by bureaucrats seeking to increase their status or maximise their budgets.

While the relative impact of these different incentives varies, the overall effect is that the allocation of resources is largely based on arbitrary political and bureaucratic decisions rather than on market processes. In combination with the economic calculation problems associated with central planning, the incentives facing politicians and bureaucrats have resulted in a high degree of ‘government failure’ on state-owned roads (see here for case studies). Accordingly, tinkering with road tax will do nothing to tackle underlying institutional failings. The long-term solution is to free the road system from government interference to remove the influence of special interests and allow entrepreneurs to allocate resources more efficiently.

This article is based on the new IEA study, Which Road Ahead: Government or Market?