Paying for roads

By Eric Crampton 18/12/2012

National has announced that petrol excise will increase for the coming three years. Some of my Twitter stream has been suggesting they’re doing this to patch up the budget rather than to cover roading expenses. Can’t it do both?

The most recent year-end financial statements, those for the year to June 2012, had the government receiving:

  • Road user charges of $1,045 million
  • Petrol fuels excise of $1,478 million ($847 million on domestic production; $631 million on excise-equivalent duties on imports)
  • Motor vehicle fees of $175 million.
So about $2.7 billion in revenues for roads.
Vote.Transport in Budget 2012 had just under $3.4 billion for the National Land Transport Programme, of which a substantial portion was a loan from the Crown for cashflow management. A quick adding-up of the real expenditures on road related stuff looks like $2.6 billion in road spending – about what they collected in revenue. I expect that the loan that’s on the books is for expenditures perhaps having been front-loaded during the year with excise dribbling in throughout the year, but perhaps somebody with more familiarity with the Crown Accounts can correct me if I have that one wrong. 
Simple cost inflation would require that petrol excise and road user charges increase if next year’s roading expenditures are the same in real terms as they were this year. If the government has any plans on spending more on roads next year than it did this year, then excise has to go up by more than that. I note also that Note e of the Financial Statements, page 129, includes the following:

“Other earthquake costs do not include costs associated with the future repair of local roadways. This exclusion reflects that the first call for funding these future expenses will be from dedicated ring-fenced revenue in the form of road user charges, fuel excise duties, and registration fees paid to the New Zealand Land Transport Fund. Should the Government’s share of the costs associated with the future repair of local roadways exceed the amount available from that ring-fenced revenue, the Government has a number of options to allocate future to this expense. The Crown’s share of the costs for local roadways remains uncertain, as is the range of funding options available to the Government.”

If the Crown’s share of roading rebuild costs has increased, then petrol excise rising to cover it isn’t crazy either.

A reasonable argument against the excise increases would be an alternative of issuing roading bonds to be paid off over a longer period of excise revenues, so the burden of current road construction is spread across future road users. And that would be reasonable for one-off shocks like the Christchurch earthquakes. But if every year we have to spend some amount to maintain the stock of existing roads, and some amount to build new roads to match population growth, and if the annual increases in the roading stock are roughly the same from year to year, then the annual burden should work out to being roughly the same under either regime.

I don’t think there’s sufficient evidence to conclude that National’s ramping up petrol taxes as a deficit-fighting measure, except inasmuch as it allows the government to continue building roads without drawing on revenues coming from outside the National Land Transport Fund. But I suppose that next year’s budget will reveal whether that’s right. It would be rather disappointing if the government were using petrol charges to raise funds for other purposes, but I expect that will not turn out to be the case.

As for whether the Government will produce a surplus … iPredict says there’s a 15% chance for 2014/15.

Update: Liberty Scott posts something useful in the comments; I’m hoisting it up here. If the new roading expenditures are a one-off rather than part of an ongoing set of construction projects, then it really makes far more sense to use debt to finance them.  Here’s Liberty Scott:

The fundamental problem is that the current capital expenditure on major roads is a one-off, as it really is a bunch of projects that have at best marginal economic benefit. There wont be equivalent major projects ever built again, so there is a major problem with the PAYGO funding system paying for capital the year it is built, even though that capital has a depreciated life (particularly if you consider earthworks and tunnels which largely never deteriorate) of 90 years +.
What should have been done is that the state should have borrowed for those projects and paid for them over many years, but MoT has been almost wilfully blind to this issue. What ought to happen in future is that there should be less long term spending on roads, because the network will largely be built out by the time all of the RoNS are finished.