Overview of poll results by Warwick Davis

November 2018

By Warwick Davis, Economist, Frontier Economics

Three months ago Australia’s population ticked over 25 million – an increase of around 5 million in 8 years. Much of this growth is centred on major cities. The strain placed on transportation infrastructure has hardly gone unnoticed. Barely a week passes without new announcements of road and public transport investments to “bust congestion”. Yet governments of all persuasion are unwilling to make the most of the infrastructure that we already have by considering the introduction of congestion charges.

Congestion charging has a long history in economics. Nobel prize winner William Vickreyproposed it for the New York subway system in 1952, although the underlying economics of using prices to counter negative externalities (of which congestion is an example) dates from Pigou’s contributions in 1912. The concept has become so mainstream that one contributor (Kingston) describes it as coming “straight out of Econ101”.

Congestion charges are also commonly recommended by government initiated reviews – the best known iteration in Australia was the Henry Tax Review (2008). Recommendation 61 was

“Governments should analyse the potential network-wide benefits and costs of introducing variable congestion pricing on existing tolled roads (or lanes), and consider extending existing technology across heavily congested parts of the road network...The use of revenues should be transparent to the community and subject to further institutional reform.”

A panel contributor (Roy) has even managed to persuade transport ministers across Europe and the OECD to endorse the principle of congestion charging. Needless to say, few governments have taken a serious look at how such a scheme might work. London and Singapore are some well-known exceptions.

The second component of the proposition relates to how the money raised from charges is used. Reducing congestion increases efficiency directly, as congestion wastes resources that could be used elsewhere. However, benefits can be increased if the revenues from these “good” charges replace “bad” taxes which distort economic activity. Australia has no shortage of bad taxes, particularly state-based taxes on transactions (stamp duty) and employment (payroll tax), and company tax.

Objections to congestion charging arise from various sources.

One objection is technological; how can one measure and charge the “right amount” to deter congestion in a low-cost way? This is less of a problem for some transport services, like railways or airports. However, road networks are ubiquitous and congestion can arise anywhere in the network at different times. Modern electronics finally seem to offer solutions to this problem – low-cost GPS devices can measure exactly where we have been and when.

Concerns are also raised about the equity of introducing congestion charging, particularly on existing roads. In principle, revenue raised can ameliorate concerns, but it raises questions of winners and losers. History also cautions that shiny new infrastructure is more popular with voters than new “taxes”.

The responses

The panel spoke with a largely united voice: 96% agreed or strongly agreed with the central proposition, with none uncertain and only one in disagreement.

A number of responses noted that the proposition was sound or a “no brainer” (Quiggin, Kingston, Dulleck, Corden, Webster, Roy). This perhaps reflects that the potential for gains from charging and reducing other taxes is not controversial. As Foster and Frijters suggest, taxing “bads” like congestion is particularly desirable because it raises tax revenue and reduces externalities.

More detailed responses noted that the size of the gains was less certain.

Benefits from reducing congestion

Makin notes the social costs of metropolitan congestion in Australia will rise to around $30 billion by 2030. Freebairn further identifies that there are both short-run and long-run benefits from congestion charging; better usage signals in the short term also means better investment signals.

Although it was not mentioned by panellists, the transactions costs associated with road congestion charging – and even privacy concerns – are not likely to be trivial with any particular congestion charge proposal. This will reduce the net benefits from charging.

Benefits from reducing the burden of other taxes

Foster suggests that for the proposition to hold true, there must be at least one existing tax that reduces welfare more than a congestion tax: “a question to which the answer is almost surely yes.”

Suggestions for which taxes to reduce included stamp duty, income tax and the Medicare levy (Foster), special taxes on motor vehicles (Freebairn), as well as using revenues to reduce other subsidies and charges such as public transport subsidies and vehicle registration (Makin).

There was some disagreement on the benefits of ‘earmarking’ revenues raised for other projects – Foster warns this might make reform less appealing, while Cameron suggests it would be better to spend proceeds (as has London) on public transport.

Views on political economy

Quiggin, Dulleck and Roy highlight that the real challenge is not agreement on the merits of combining congestion charging with tax reductions, but the political economy of making changes.

One issue that received a number of comments is whether such changes would be equitable or progressive. The one dissenter (Cobb-Clark) noted that there was no surety that the transfers would leave people better off “on average”. Others highlighted that congestion charges were likely to be progressive (Foster), but this view was not universal, with Dixon highlighting careful management would be needed to identify winners and losers and ensure a fair transition.

Edmond suggests governments could go a step further to address equity rebating revenues to households in a progressive manner.

How do our responses compare?

Panellists in the United States and Europe were asked the same questions as the Australian panel.

Similar to the Australian survey, there was next to no disagreement with the proposition. On the whole, American and European economists are even surer of congestion charging benefits, with 63% and 52% of experts strongly agreeing with the proposition respectively. This compares to Australian experts’ 44%.

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