Efficiency first in road pricing case

Dr Matthew Birchall
NZ Herald
16 May, 2024

The Government plans to implement road pricing tools like congestion charging and toll roads. This will be an important first step in establishing a more rational transport system.

Over time, the transport funding model has become increasingly dysfunctional. Late last year, the NZ Transport Agency Waka Kotahi (NZTA) observed that it will have to invest about twice as much as it expects to receive in revenue over the next decade – an annual funding shortfall of $4-to-$5 billion. In this context, a shift to road pricing and user-pays principles makes good sense.

However, its implementation is also likely to arouse passionate debate.

One of the most common objections to road pricing is its perceived negative impact on low-income households.

Critics concerned with potential social equity implications of road pricing contend that it disproportionately hurts the most economically disadvantaged, who may struggle to afford toll payments or congestion charges. Moreover, they argue that many low-income workers lack flexibility to adjust their work hours to avoid these charges. They may also have limited access to reliable public transportation. Advocates call this transport poverty.

While social equity is undoubtedly important, there is abundant evidence to suggest that road pricing can work for everyone.

The current setup is arguably more regressive than universal road pricing. Fuel taxes disproportionately burden low-income individuals because they often drive older, less fuel-efficient vehicles. As a result, they pay higher fuel taxes per kilometre driven than those who can afford newer vehicles. Social equity, in other words, is not served by the status-quo.

At the same time, low-income households are more likely than affluent ones to rely on public transport. And public transport would be less affected by road user charges on a per-passenger basis than private vehicles. Reduced congestion benefits users of public transport as much as users of private vehicles, making journeys faster and more reliable for all. When low-income motorists place a particularly high value on their time, such as making doctor’s appointments, they would still reap the benefits from congestion-free roads by opting to travel by car.

There is strong international evidence to suggest that worries about the distributional impacts of road pricing are overblown. For example, a major study of the Stockholm congestion charge found that a majority of road users, including low-income groups, were better off after the charge was implemented. Affluent men paid the most in congestion charges – hardly the group of most concern for those worried about social equity.

In any case, the handwringing over social equity shows a loss of focus. The primary purpose of a transport system is to efficiently move people and goods, not (directly) to address income inequality. Affordability and access are important considerations. But using transport policy as a vehicle to achieve social equity objectives risks compromising the smooth operation and long-term financial sustainability of the network. It is a road to nowhere.

The poor state of New Zealand’s roads, and the massive funding shortfall facing NZTA, point to a system starved of cash. If much needed revenue sources like toll roads and a universal road user charge are forgone because of equity concerns, the problem of deteriorating infrastructure will only get worse, negatively impacting all road users.

Concerns about the allegedly regressive impact of prices on low-income households are not unique to road pricing. The same logic could be applied to low-income individuals paying market prices for staples like milk and butter. However, it is widely accepted that the prices of those goods should reflect costs and market conditions, with income insufficiency addressed separately through the tax and welfare system.

New Zealand already has income-redistribution mechanisms in place to support low-income households’ standards of living. Fine-tuning redistributive policies is likely to be a more effective and appropriate way to improve social equity than distorting transport pricing.

While the upfront costs of road pricing may seem daunting, it is important to consider the even higher costs of doing nothing. Traffic congestion already imposes major economic costs in terms of wasted time, fuel, and productivity. Aucklanders, for instance, spend an average of five days a year stuck in traffic. These costs are ultimately borne by everyone through higher prices, not to mention the costs of stress and a lower quality of life.

No policy is perfect, but road pricing is a powerful tool for creating a more efficient and rational transport system. With thoughtful design and implementation, road pricing can improve how Kiwis get from A to B. The alternative – endless traffic and an underfunded transportation system – is far worse for social equity in the long run.

To view the full article on the NZ Herald website, click here.

Stay in the loop: Subscribe to updates