Generally I found the trade union representatives at this meeting were among the least interesting of the various groups who attended. I couldn’t work out if they were intrinsically stupid or just outlining a preconceived union viewpoint in bad faith -certainly they were not engaging with those who showed their views were wrong. A number of other attendees of various political persuasions made the same observation.  I recalled with sadness the reasons I abandoned Labor in the mid- 1970s. These unionists embodied a kind of  bullying stupidity that must constrain the Labor Party and Australian politics.

The other sessions on corporate taxes, state taxes,  personal taxes and tax administration were much more interesting to me because they introduced me to broader areas where I had less expertise. Again the union representatives did not distinguish themselves either in terms of intelligence or good faith.  They are a bunch of reactionaries. On corporate taxes these representatives did not seem to understand the idea of effective tax incidence. Almost everyone in public finance agree that in an open economy with freely mobile capital that the corporate income tax falls primarily on labour creating a case – from the viewpoint of labour – for cutting corporate taxes to levels comparable to those of our major trading partners to increase investment and drive up labour productivities and hence wages. The ACTU dinosaurs saw arguments for cutting the corporate tax rate as a move that disadvantaged labour by giving a greater fraction of income to profits.  They refused to even engage with the alternative consensus scientific view. These unionistss  act in ways that disadvantage Australia and their own members.

The discussions on state taxes covered the standard disasterously inefficient state taxes such as stamp duties, taxes on insurance charges and mining royalties. The questionable status of payroll taxes  -  are they in the main analogous to income or consumption taxes? – was also raised.  Good session.

My negative comments on the unions are part of a general issue of the role of uninformed public discussion in complex debates on public policy.  Of course some weight must be given to public discussions for strategic reasons but perhaps there is the need to provide information to the various groups before discussion occurs.

Did I waste two days on a talk-fest? No, not at all. I know from long-term experience that arguing for efficiency-based economic reforms is a long-term project. But at this meeting I got the impression that efficiency-based reforms also have to be formulated in a way that cannot be demonised by deadheads and ideologues. I also think that the deadheads themselves need to understand a little bit about public policy issues before they spin their homespun views. Finally I got some good publicity in the press and on TV on the case for congestion charging. It helps to keep an important issue on the agenda.

A crucial remaining area of microeconomic reform for Australia lies in road transport.   Good policies for accurately charging users for the costs they create when roads are used encourages efficiency in road use.  These user charges attack ‘social bads’ such as excessive congestion, road damage and traffic accident costs.  There is an opportunity to levy taxes that limit these ‘bads’ and simultaneously allow reduced taxes on the sorts of things – savings and work effort – that as a society we value.  There are potential ‘double dividends’ associated with road sector tax reform.

Currently a set of fixed and variable charges – a two-part tariff – applies to private vehicle use.  Fixed charges comprise mainly registration, vehicle licensing and insurance charges.   The key variable charge is the fuel price excise.  To some degree this two-part tariff reflects road usage costs but only imperfectly.

Registration charges reflect the weight of vehicles and the heaviest vehicles do cause most road damages.  However such fixed charges do not reflect the extent to which vehicles are used and the types of road surfaces utilised. It is these factors that mainly drive road damage costs.  These costs are more effectively targeted by specific charges related to vehicle weights (‘axle loads’), distances travelled and the durability of the road surface.   This is now technologically feasible at reasonable economic cost by drawing on telematic technology already utilised by trucking fleet managers for logistic reasons – for tracking freight, checking that drivers take safety breaks and so on.

Fuel excises likewise capture some congestion and pollution costs since the extent of road use is approximately proportional to fuel use. It is, however, a poor approximation since congestion costs arise in crowded urban environments but not, for example, on lightly used country roads. Moreover, even where congestion does occur it typically depends on when travel occurs as well as where. The best alternative is to charge directly for congestion using tolls that reflect actual congestion costs.  This is again feasible using transponder, GPS and other technologies.  The appropriate technology should be selected on the basis of a cost-benefit studies of alternatives.

Most insurance changes are fixed and depend on driver characteristics but not distances driven.  Yet evidence suggests traffic accident costs are related to the extent of road use.  Thus fixed insurance charges do not provide the right signals to reduce traffic accidents. It is straightforward, however, to devise distance-related insurance policies which have the desired incentive effects.

These are not small issues. The Australian road transport sector is a significant part of the economy and, like the communications sector, the extent of its efficiency conditions directly or indirectly the efficiency of almost every other sector. Transport generates huge costs and revenues.  The 38 per litre fuel excise delivered $10.3b in revenues in 2008/09, vehicle registration fees provided $3b and tolled roads $2b.  Road supply and maintenance costs were around $14.1b, vehicle insurance premiums $1.2b and the costs of road trauma and property damage in 2006, $17.2b.  There are also huge unpaid for costs – externalities. The pure economic costs of congestion in Australia’s capital cities were forecast by the BTRE to average 7 cents per kilometre or in aggregate $12.1b in 2008/09.  There are also significant noise and pollution costs (perhaps around $2b) and significant climate change costs caused by road transport. Road transport is a significant part of both the measured economy and of unmeasured environmental costs.

Broadly the reform priority should be to establish sensible demand-side reforms for managing road use employing user charges that reflect the costs of congestion created, road damages caused and traffic accident risks posed.  This is not an ‘anti-vehicle’ measure but simply ensures that road users pay the costs they generate.   Thus this achieves ‘user pays’ outcomes but more importantly, provides the right pricing signals for managing road use costs.  Congestion charges make people think twice about joining congested traffic streams and help to reduce congestion.  Use-related charges that reflect road damages encourage truckers to optimise their choice of route and also encourage local governments to make economically sensible decisions about allowing heavy vehicles access to their roads. Distance-related insurance that also reflect individual driver characteristics encourages motorists to pursue patterns of driving that reduce economic and social costs of road accidents.

Finally, the user charges that are forecast to prevail on planned roads provide a guide to the appropriate scale of road investment.  Road supply decisions are often seen as political ‘ribbon-cutting’ operations.  Depoliticising such decisions by tying patterns of investment to the present value of forecast revenue streams from user charges assists in developing appropriate location, scale and durability characteristics of roads.  It also helps to integrate central planning decisions required for network level planning with local road supply provision that is best decentralised. Local government in Australia incurs significant road maintenance costs but cannot sensibly be assigned monopoly power over road pricing because of potential ‘holdup’ problems. Such charges should be set by those in charge of overall road network design and, given these charges, local government can then make sensible decisions on the types of heavy vehicle traffic than should be allowed to use its roads. This efficiently resolves the ‘last mile problem’ by confronting local governments with the cost and benefit information required to make sensible decisions.  Local governments project revenues from potentially allowing heavy vehicle traffic on its roads and allows these traffic flows to occur if forecast revenues cover costs of upgrading roads, bridges as well as possible urban disamenity costs.

The main issue raised in relation to road sector ‘user charge’ policies is their political saleability and related implementation issues.  Beyond a curmudgeonly few there is little debate now on the efficiency case for levying user charges. Moreover, the technical issues of measuring vehicle weight, monitoring vehicle movement associated with pricing have been largely resolved.  The key factor limiting reform is community acceptance that is a prerequisite for reform.  This has been a focus of recent research efforts and a much better understanding of the issues now exists.  Without user charges road use is inefficient on the demand side and, unless supply decisions reflect projected revenues from user charges, there is inefficiency in supply too.  Thus there are net economic gains from implementing user charges.  This means that gainers from such a reform should be able to compensate losers so that all sections of the community are better off with user pricing.  As an example, heavy vehicle charging that reduces road maintenance costs should provide truckers with lower overall costs of using roads than do obtain with inefficient fixed registration charges.  Those who pay congestion charges for peak hour travel can compensate those tolled-off congested roads with public goods such as improved public transport infrastructure again leaving no-one disadvantaged.  Insurance costs should fall in aggregate if insurance markets are competitive and charges reduce accident risks.  These argument need to be pressed in advance of seeking reform.

Even then those who may not understand the logic of user charging might want to see its benefits demonstrated first before endorsing it.   Trial runs of user charging followed by a community vote are possible with those participating in the trials being exempt from conventional charges such as registration by an amount that reflects the efficiency gains.  Offering motorists choice between travelling in priced uncongested lanes and congested unpriced lanes can also advance acceptability of congestion pricing.

Some are cynical about the prospects for reforming taxes and charges in the road transport sector given the apparent slowdown in the pace of microeconomic reform and the cynical campaigns that delivered disinformation about mining and carbon tax reforms.  Apart from road construction companies however who seek overinvestment in roads and those with out-dated views of the world there are fewer interest groups interested in obstructing road sector reform. It is important to continue to make the intellectual case for charging and to seek community understanding of the difficult future Australia will soon face without it.  The BTRE estimate, for example, that congestion costs in capital cities will double to $20.4b by 2020n without charging.  The situation in cities such as Sydney and Melbourne is difficult now – an imperative for keeping on open mind on congestion pricing is to stop this currently bad situation from getting dramatically worse.

I want to close with some remarks on the fuel excise. Moving toward user charges might suggest dumping this excise to compensate for the user charges introduced but, as David Prentice and I argued in our work for the Henry Tax Review, the case for abolition is not clear-cut.   The excise is a useful revenue gatherer that can be justified on ‘Ramsey grounds’ – demands for liquid fuels are quite inelastic and this tax yields much revenue without imposing significant deadweight losses on the economy.  As it has been pegged in nominal terms over recent years its impact will decline anyway.  My feeling that this excise might be retained also as a hedge against unanticipated possible dramatic future price jumps in fuel prices as a consequence of Peak Oil.  This view was probably the least attractive part of our report to laissez faire purists but, on balance, I retain the view.  Australian fuel prices are low by European standards and a bit high by US standards but for a number of reasons it does not seem sensible to cut fuel taxes now.  Of course if user charges are not imposed on road use then, imperfect as it is, the fuel tax works well as a proxy.  Our empirical estimates suggest an appropriate excise well north of its current values so we are happy to stick with our preference for retaining this excise.

I’ll talk on my standard hobbyhorse – road user charging – congestion, heavy vehicles, distance-related insurance and so on.  I’ll post the remarks I am drafting for presentation shortly.

* To be accurate the crassness emerged from a suggestion by commenter Uncle Milton that I request an invitation. Thanks Uncle Milton.

These sorts of projects will not reduce travel costs and congestion – by increasing unpriced road use demands into the city that will worsen such problems.  A disgraceful waste of public money.

With the Myki fare card system this type of arrangement can be finessed.  Financial incentives can be offered to people travelling after the morning peak and before and/after the evening peak. 

It’s a small  change but a simple example of how pricing can improve the quality of life for commuters.  Of course the big change would be to congestion price Melbourne’s roads. Same principal  and useful effects but there would be much larger welfare gains.

Many of the proposed policies I really like. Some I don’t like much.  Overall the policies are a dramatic determination of the administration in Beijing to address looming terrible traffic concerns in the city and I congratulate them for adopting that sense of urgency. 

• The main policy is to restrict the number of new car licenses to 240,000 per year by means of a quota.  Cars under this quota will be issued by a lottery system.
•  There will be a 5 year ban on official cars although I did not understand how this was consistent with the report that official cars would get up to 10% of the quota.
•  Car numbers will be limited on basis of odd and even number plates.  This was the policy adopted during the Beijing Olympics. 
• Parking fees will be increased and will be highest in congested zones.  
• Congestion pricing will be introduced at an ‘appropriate time’.  
• Bicycles will be publicly-provided to make free short trips from 200 locations in the city.  
• Extra trains and buses will be provided 
• Park-and-ride facilities will be provided at subway stations at low cost.  
• A whole set of new roads and tunnels will be built.

The big policy is the car quota which will cut growth in car numbers by more than 50%. 

 The policy will have an impact. Note that the quota is not being auctioned so the gains from the policy will accrue to those who get a number plate. Gains will also be conferred on existing car owners since the resale value of their vehicles will increase. If the cars can be resold these will be real capital gains to some. You get some measure of efficiency but it is imperfect since the price here is related to car ownership not congestion-causing travel.

 Having got a car there will be triple convergence incentives to use it a lot.  In simple terms once you get a car you will have enhanced incentives to use it given that there are fewer other drivers on the road.  Depending on the size of these ‘rebound’ effects (and ultimately on the scale of latent demands for travel) these effects can range from insignificant to effects large enough to destroy any advantages from the licensing scheme.

 Of course too this scheme will only slow the growth of new cars.  Unless the quotas are tightened there will still be catastrophically large numbers of vehicles in Beijing but it will take longer.  This extra time is an interim solution which permits introduction of a more efficient longer-term scheme such as congestion pricing.

 Of course I would have liked congestion pricing now which directly targets the externality in an efficient way.  Those with high-valued journeys will pay for them.

Presumably the park-and-ride policies will involve very large subsidies to those using these services. The subway stations in Beijing are in areas where property values are very high.

The supply options are inevitably subject to triple convergence problems.  My guess is that most will work short-term but fail longer-term.

It will be interesting to see how this scheme works out. I asked my BEDA students to keep me posted!

Free-parking in Australia is less on an issue than it is in the US – parking is much more typically charged for here at least in city areas – and free-parking provided by employers is subject to fringe benefits tax which prevents some of the worst US distortions.   A more significant issue in Australia is that on-street parking is typically much cheaper than off-street parking so that  people create congestion and social waste by searching around for on-street spots. This is a problem in Sydney and Melbourne. Underpricing on-street pricing is normally accompanied by inefficient forms of rationing such as limitations on the time you can spend at a metered spot.

I wrote a review of Australian parking policy here.

I am generally opposed to tacking environmental policies onto congestion or parking charges.  That is not to say that these externalities do not exist – they do – but there are much better tax bases to capture these effects such as excises on fuel.  These excises are more closely linked to the generation of pollution externalities, such as CO2 emissions, than are congestion conditions.  A petrol excise targets anti-social, four-wheel drive gas-guzzlers as well as cars driving under congested conditions and, of course, such a tax should be part of a comprehensive effort to target greenhouse gas emissions (GHG). That is not to say that controlling things such as congestion will not reduce emissions since, by reducing periods of waiting-in-traffic and reducing distances travelled it will.

Professor Shoup sent me  this article to me. It explains how congestion pricing can reduce GHG emissions by increasing average speeds and smoothing the traffic flow.  Congestion reduces fuel efficiency and increases GHG emissions because it slows traffic and causes drivers to brake and accelerate frequently. The article estimates how congestion pricing can reduce GHG emissions in typical Los Angeles traffic. Increasing traffic speeds reduces emissions by 7-12% , and smoothing traffic flows reduces emissions by another 7-12%. The article comes from the excellent Access which contains various interesting ideas on transport.

Shoup likes parking policies as means of congestion control since they are both effective and cheap relative to rather expensive road pricing.  On the other hand telematic devices which are useful for measuring and addressing congestion and other externalities can also be used to advise citizens where parking spots are available and facilitate electronic payments for such charges. In the US Shoup is also much concerned with employer subsidies for parking. The effects of existing parking subsidies are larger than the proposed congestion tolls and forcing employers to offer a cash alternative to a parking subsidy rids urban systems of this source of the distortion.  This is the good applied microeconomics that my heart warms to. But in Australia we still have $9 billion in congestion costs in our large cities annually despite relatively hefty parking charges and the fact that employer-provided parking is taxed as a normal income benefit.  I think congestion in Australian cities is much more than a parking issue.

It could be that The Age has misrepresented Professor Currie but, on the face of it, this looks like the most foolish set of proposals I have yet seen put forward to address Melbourne’s congestion – and that is really saying something in Victoria! Many of the proposals –particularly  rationing road use to non-car users in the face of expanding travel demands – will worsen congestion dramatically not improve it – by constraining the times cars can make journeys and thereby creating bottlenecks.  Rationing plans do not allow high-valued journeys to be undertaken – they try to reduce car use by making congestion worse. 

How could a Government shell out hard-earned tax-payer dollars for such advice? My only hope is that The Age have misrepresented Professor Curries’ views.

The only way to manage excessive demands for something whose price of usage has been set at zero is to allow a positive price for road use to develop.  Road use needs to be priced as has been argued by countless commentators for more than 50 years.  This reduces the excessive demands for road space and allows journeys to be undertaken which do have high value.  To be specific suppose your wife is pregnant, her waters have broken and you urgently need to get her to hospital.  Under the Currie proposals you will face a more difficult task of getting her to the hospital since, with reduced effective supply, congestion will be worse – with congestion pricing you simply pay the toll and avoid the excesses of congestion.  With pricing people making marginal journeys defer or shift to another transport mode – about half of all journeys in a city are discretionary so it is quite easy to cut out 10-15% of demand to eliminate excessive congestion by pricing.

Parking spots shouldn’t be cut but priced properly so that, again, high-valued journeys can be taken.  Professor Currie is out of touch with the recent literature on parking  - much of this associated with Professor Donald Shoup – which again emphases using economics not heavy-handed prohibitions to manage scarcity.

Transport planning in Victoria is a black hole but this type of nonsense should be buried and a rational rethink of transport issues developed which is based on the science of scarcity – economics . Forget about daft engineering solutions that are usually ineffective – this proposed solution is worse than that since it will make things worse.