Road pricing: to build the infrastructure we really need without government borrowing
31 October 2016
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Economic Theory
Economic Theory
Tax and Fiscal Policy
19 November 2024
It is odds on that Philip Hammond will announce in the Autumn Statement that government spending constraints will be relaxed to facilitate investment in infrastructure. We will be told that the government should borrow and invest more and that this will promote growth in the long run.
This argument might have merit if it were not for some inconvenient facts. The UK government already has among the highest borrowing levels in the OECD, and current government borrowing is effectively being used to finance consumption and not investment.
Furthermore, when government takes investment decisions, they are driven by politics and not by economic criteria. As such, we end up with HS2, Hinkley Point and, going back a few years, the white elephant of the Humber Bridge built purely to win a by-election in 1966.
At the same time, the expansion of London’s airports – something that could take place without government subsidy – and a myriad of road schemes that would reduce congestion and save people thousands of hours in traffic queues either take years to be decided upon or are ignored altogether. Against this background, the announcement that this year’s Wolfson Prize will be given for proposing alternative ways of funding road infrastructure is most welcome.
Conservatives often argue that the private sector cannot provide infrastructure. I have never understood why they maintain this position when it is manifestly untrue. Towns from Bath to Edinburgh were privately built and financed complete with infrastructure and housing for all social classes. Britain’s railways, canals and, in the early days, roads were the best in the world because they were privately financed, planned and built.
But even if we don’t go the whole way, there are ways of ensuring that governments take much better decisions when it comes to infrastructure.
Over 50 years ago, the Smeed Commission recommended that the government introduce pricing for road use. Despite the technological constraints of the time, its introduction would have led to huge welfare gains even then. It is probably one of the best pieces of economics writing ever to have come out of a government commission. Indeed, the report was so good that it has been suggested that Prime Minister Alec Douglas-Home said he would “take a vow that, if we are re-elected, we will never again set up a study like this one”!
Nearly all economists would agree that road-user pricing would dramatically change the transport landscape. Currently, we only have pricing on some toll roads, bridges, and in some city centre areas. And the pricing system is so incoherent it does not have the desired impact – with taxis being exempt from the congestion charge, for example, and charges not varying by the distance driven.
A proper road-user charging system to replace existing road taxes would vary prices by the amount of congestion and by time of day (often lowering them to zero on routes that were never congested). The prices would send signals to government – or private road builders – about the benefits of building new roads. Those who manage the roads (whether local councils, a government quango or the private sector) would have an incentive to reduce congestion in order to achieve more traffic throughput and more revenue.
If people were paying to use the roads, there would be a rational way of comparing a road improvement scheme in one area with a road improvement scheme in another area. And, for that matter, we could compare railway investment with road investment.
Of course, there is no guarantee that the government will take rational decisions simply because people are paying for the road infrastructure they use. After all, we pay train fares and yet our government ignores railway improvement schemes that have huge net benefits in favour of making the big, bold political statement of HS2.
However, there is a chance that, if we introduce markets and pricing for road use, economics and not politics might at last guide decision-making.
This article was first published in City AM.
This argument might have merit if it were not for some inconvenient facts. The UK government already has among the highest borrowing levels in the OECD, and current government borrowing is effectively being used to finance consumption and not investment.
Furthermore, when government takes investment decisions, they are driven by politics and not by economic criteria. As such, we end up with HS2, Hinkley Point and, going back a few years, the white elephant of the Humber Bridge built purely to win a by-election in 1966.
At the same time, the expansion of London’s airports – something that could take place without government subsidy – and a myriad of road schemes that would reduce congestion and save people thousands of hours in traffic queues either take years to be decided upon or are ignored altogether. Against this background, the announcement that this year’s Wolfson Prize will be given for proposing alternative ways of funding road infrastructure is most welcome.
Conservatives often argue that the private sector cannot provide infrastructure. I have never understood why they maintain this position when it is manifestly untrue. Towns from Bath to Edinburgh were privately built and financed complete with infrastructure and housing for all social classes. Britain’s railways, canals and, in the early days, roads were the best in the world because they were privately financed, planned and built.
But even if we don’t go the whole way, there are ways of ensuring that governments take much better decisions when it comes to infrastructure.
Over 50 years ago, the Smeed Commission recommended that the government introduce pricing for road use. Despite the technological constraints of the time, its introduction would have led to huge welfare gains even then. It is probably one of the best pieces of economics writing ever to have come out of a government commission. Indeed, the report was so good that it has been suggested that Prime Minister Alec Douglas-Home said he would “take a vow that, if we are re-elected, we will never again set up a study like this one”!
Nearly all economists would agree that road-user pricing would dramatically change the transport landscape. Currently, we only have pricing on some toll roads, bridges, and in some city centre areas. And the pricing system is so incoherent it does not have the desired impact – with taxis being exempt from the congestion charge, for example, and charges not varying by the distance driven.
A proper road-user charging system to replace existing road taxes would vary prices by the amount of congestion and by time of day (often lowering them to zero on routes that were never congested). The prices would send signals to government – or private road builders – about the benefits of building new roads. Those who manage the roads (whether local councils, a government quango or the private sector) would have an incentive to reduce congestion in order to achieve more traffic throughput and more revenue.
If people were paying to use the roads, there would be a rational way of comparing a road improvement scheme in one area with a road improvement scheme in another area. And, for that matter, we could compare railway investment with road investment.
Of course, there is no guarantee that the government will take rational decisions simply because people are paying for the road infrastructure they use. After all, we pay train fares and yet our government ignores railway improvement schemes that have huge net benefits in favour of making the big, bold political statement of HS2.
However, there is a chance that, if we introduce markets and pricing for road use, economics and not politics might at last guide decision-making.
This article was first published in City AM.
3 thoughts on “Road pricing: to build the infrastructure we really need without government borrowing”
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Couldn’t agree more. Further, instead of the Government borrowing even more money to placate big business in the wake of the Brexit vote, it should seek to substitute the public subsidy given to certain industrial players, like Defence Contractors with Private Sector funding.
This proposal is at the heart of a Defence Industrial Strategy that puts the National Interest first, not military equipment manufacturers’ interests. It comes in the form of written evidence published recently by the Business, Energy and Industrial Strategy Committee, which is conducting an inquiry into Industrial Strategy.
The submission observes:
“It is called the Private Sector for a reason – so that it can use Private Sector funds, not Public Sector subsidy to innovate, grow, create jobs and make a profit. It is the job of Government to foster an environment which causes this to happen, within the context of a modern Industrial Strategy.
If the Government is going to intervene in the market with public funds to stimulate economic activity and boost export-led growth, then provision of this subsidy should be made conditional upon Private Sector players making an equivalent contribution of investment capital to increase the competitiveness of their own products and services, both in the domestic and export markets.
As for the Ministry of Defence, there exists no evidence that its long-standing policy of securing input of Private Sector investment capital into defence equipment programmes is being applied, which means that they continue to be funded exclusively by the taxpayer – yet, the Intellectual Property Rights for the resultant fully engineered equipment, which rightly belong to the Exchequer, is simply handed over to the main Contractor for nothing in return!
Accordingly, to avoid repeating mistakes of the past, a revamped Defence Industrial Strategy should have at its heart, a built-in mechanism which elicits Private Sector capital into defence equipment acquisition programmes, as its first and foremost priority.
This submission shows how to go about doing exactly that.”
And it concludes:
“At a time when senior members of this Government are firmly behind the view that this country should put economic security first and balance its books at the earliest, there exists an excellent opportunity to introduce a Defence Industrial Strategy which gradually replaces the public subsidy given to Defence Contractors with Private Sector funds.
Ask not what Government can do for Business, but what Business can do for Government.”
The full submission can be downloaded via this link:
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/business-innovation-and-skills-committee/industrial-strategy/written/36606.pdf
@JagPatel3 on twitter
My challenge to those claiming to be neo-liberal is on why the road network is still run by the state but other infrastructures (rail, air, ports, pipes, cables…) are now private. Road pricing would be a step towards user-pays but doesn’t really deliver the market in road building and maintenance that free market theory suggests should benefit it.
The uncomfortable truth is that many roads simply wouldn’t be profitable, especially in rural areas or, indeed, sparsely-populated commuter areas around the Home Counties. The cost-per-mile would leave these roads in a ruinous state. It would be unwise to treat the profitable motorway and highway network as being somehow separate. The M6 Toll is a bit of an aberration as it is.
I also don’t agree about the comparison with the city, canal and railway building of the 18th and 19th centuries with the claim that the private sector can run these things today. These projects were this high-tech developments of the day. A modern equivalent would be the internet, the fibre-optic networks and mobile phone technology. Even the development of low-cost air travel. One day perhaps these will be in state hands.
However I totally agree about HS2 and Heathrow. Where is the private money that backs up claims that these would be good for the economy? And which economy are we talking about? Neither will change my life here in Scotland. These are London projects most of all, like Crossrail and Eurotunnel, the latter being privately funded.
Do major infrastructure projects require state sponsorship? I think in many ways they do. I don’t think we have a free market that facilitates players to come together and raise capital to fund the projects. That might suggest that the projects aren’t economic. Or it might suggest that a free market is good at the small things but not the big things. What would the UK look like if it never had a Department of Transport or the council equivalent? Would we still be a country of turnpikes and private estates? I don’t think so. Not as a democracy, where the nation would have insisted that roadbuilding was a collective responsibility. But perhaps, as your article states, we can put in some kind of road pricing. Some might say we have that already with fuel duty.
I used to be against road pricing on grounds of cost. But perhaps a box that can monitor vehicle locations and a central computer to crunch the data can now be down cheaply enough.
Which would also mean private infrastructure providers can either take a cut, or be taxed (as scarcity rents) if they charge directly themselves.
Lots of possibilities.