Paying for Infrastructure
At the moment 40 cents of the money paid for every litre of petrol sold goes to the government but a dwindling proportion of it goes to paying for infrastructure.
It is for this reason that the outgoing Chairman of the Productivity Commission, Peter Harris, has called the financing of roads through the fuel levy “as the biggest failure of his career.”
Harris told an ‘Australian Financial Review’ conference recently that it should not be beyond the wit of governments to persuade the public that a different and more efficient form of revenue raising, user pays, pays off through shorter commuting times and less fuel consumption.
The idea of user pays is receiving more attention these days because of the prospect of electric vehicles which will pay no fuel excise but still use the roads.
In 2014-15 the amount of revenue the government received from the fuel tax was only slightly above the amount of money spent on roads.
This is a consequence of the importation of more fuel efficient and hybrid vehicles now that local production has been phased out. Peter Harris believes there is an impending revenue crisis.
“So, in my view, the revenue crisis means we will need another source of road charging in the 2020s, lest all the owners of fossil fuel guzzlers end up subsidising all the hybrid and fully electric vehicles,” Mr Harris told the Infrastructure Partnerships Australia annual oration in Melbourne a week ago last Thursday night.
He said the model for road funding was completely wrong:
“We will need to make that mental shift from paying only for new roads to paying for a mix of older and newer roads and related projects,” he said.
“Because the misallocation of resources that will occur if we simply skew our future new road funding towards investments that can be turned into concessions is not at all efficient,” he said.
“To be accepted, even if grudgingly, price has to be about consumers driving suppliers, not the other way around. This is what electricity transmission got so badly wrong.”
Mr Harris told his audience that the biggest priority in infrastructure policy was getting the right roads in the right places. This would enhance the productivity of the economy.
“The biggest gains to this reform do not lie in getting more revenue,” Mr Harris said.
“That will just be the catalyst. The true public interest objective is a system that selects the right projects, projects where, as in other forms of infrastructure, people have a choice and yet show they are prepared to pay for them. We can sell that surely.”
On Monday Deputy Prime Minister, Michael McCormack, told “The Australian Financial Review” Infrastructure Conference that the government had some sympathy for the user pays approach.
He said the gradual uptake of electric vehicles could have a big impact on government revenue generated by fuel excise which is indirectly used to fund roads.
Mr McCormack used his address to the summit to warn state governments that the Commonwealth was “no longer an ATM.”
He said there needed to be a better use of taxpayer money in the funding of Australian projects through stronger business cases, shared funding with the states and more private sector investment.
“In the past, the Commonwealth has been regarded as an automatic source of funding for state government priorities as they arose.
But this has – frankly – risked a situation where a coordinated schedule of projects relies too much on good luck instead of good management,” Mr McCormack said.
“We are no longer an ATM for the states.”
It’s obvious that there’s a need for a new approach to infrastructure in Australia but, in order for the policy to be managed in an economically efficient way, the power over projects will have to be vested by governments, both state and federal, in an independent authority.
On Tuesday the Chairman of Infrastructure Partnerships Australia, Adrian Dwyer, told the ‘AFR’ summit that there was a three year horizon to get infrastructure policy right.
“Currently about $18 billion per year is collected in fuel excise charges, but with the rise of electric vehicles and more efficient modes of transport we can no longer rely on this funding source to pay for and manage our road infrastructure,” Mr Dwyer said.
“We need to tell the story that right now, the tradie driving a Holden Commodore is paying vastly more than the inner city professional driving a Toyota Prius.”
And while the millionaires who dominate the ranks of Tesla owners are paying luxury tax on their electric car at the point of purchase, Mr Dwyer pointed out they pay nothing at the point of use.
“Yet they benefit from well-serviced roads that other motorists pay hundreds of dollars a year in a tax to use.”
Nearly three decades without a recession had seen Australia's microeconomic reform muscle become “hopelessly withered” Mr Dwyer said.
Australia was already behind the curve in preparing for the rise of a booming and urbanised middle class in Asia, according to Mr Dwyer.
It’s clear that micro-economic reform is the weak link in economic policy at the moment.
Treasurers, from Peter Costello on, have had no stomach for the hard decisions and persuasion which go with this kind of reform.
Bob Hawke could manage it because he was popular and his reforms paid quick dividends in terms of a rising standard of living but, since the rejection of ‘work choices’, governments have been reluctant to put micro-economic reforms to the public.
As a consequence we have seen low levels of productivity growth which have resulted in sluggish wage growth.
Centre left parties have blamed the static standard of living on inequality which gives them the perfect excuse not to engage in micro-economic reform.
The solution that Anthony Albanese, Labor’s infrastructure spokesman, puts forward to funding major infrastructure is for the government to finance it by raising debt.
This policy approach violates all the principles of optimal resource allocation that Peter Harris was drawing attention to in his speech.
It is a clear indication of the mess that this policy area has fallen into.
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