Will new road taxes ease congestion?

The government wants to introduce a new tax regime, making those who use roads more often pay more. Is it a good idea? Matthew Partridge investigates.

What is the government proposing?

Currently all car owners in Britain have to pay an annual vehicle tax. The amount charged varies, depending on the age and model of the vehicle and the amount of carbon it emits. However, the distance driven doesn't have any impact on the bill, with an occasional user paying the same as someone who is on the road all the time.

The government now wants to address this by splitting the tax into a further two tiers, with a reduced rate for those who don't want to use motorways or certain trunk roads. Those who paid the discounted rate would be fined if they were then spotted on the motorway by special cameras.

Why are the changes needed?

The current lack of a link between road usage and the cost to individual drivers encourages unnecessary or poorly timed journeys, according to a major study by the Institute of Economic Affairs (IEA). This in turn increases congestion, which costs Britain an estimated £20bn a year, says the think tank. "Without pricing, journey costs do not reflect the scarcity of road space at particular locations at particular times. Motorists do not pay the full marginal costs they impose on other road users as a result of congestion."

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Also, while the government denies the changes are about raising more money, it is unquestionably under pressure to cut the costs of maintaining the road network. The Office for Budget Responsibility has warned that improved fuel efficiency means revenues from existing taxes will fall by £13bn by 2030.

What are the advantages of more direct road pricing?

The idea is to use the existing network more efficiently and pinpoint more accurately where new or larger roads are needed. Ideally, says the IEA, the shift to road pricing would be accompanied by privatisation of the roads (although this has had mixed results so far, as the Birmingham toll road shows see below). Yet even on its own, pricing has two key benefits.

Firstly, it is "an efficient way of allocating scarce road space". Drivers whose journeys aren't urgent can choose to save money by travelling at off-peak times. This means those who need to travel, or are able to pay the extra charges, can get to their destination more quickly. Secondly, the revenue generated by road pricing provides data about what consumers are willing to pay, and where.

Because this is based on actual behaviour, it's a far more accurate gauge of demand than more traditional methods, such as surveys. This data can then be used to direct "investment decisions, such as where to build additional road space".

How well does it work elsewhere?

Many countries around the world use road pricing for at least part of their network. The city-state of Singapore not only rations and heavily taxes cars, but charges those driving into the city centre variable rates, depending on the time of day and the length of their journey.

In Sweden, private groups own and operate two-thirds of the roads, accounting for 25% of journeys. John Walker of Oxford University points out that, although initial public opinion was hostile to the idea of road pricing, most schemes now have high rates of approval. That's probably because the impact on congestion has been dramatic, with a scheme in Stockholm cutting traffic by 28%.

Similarly, after the London congestion charge was introduced in 2003, congestion fell by more than a quarter, while public support increased from 40% in 2002 to 59% by 2006. However, it is important to note that traffic close to the zone's boundaries went up slightly so pricing in one area in isolation may simply shift congestion elsewhere, rather than cutting it overall.

What about expanding other forms of public transport?

Road pricing isn't the only solution to congestion. Earlier this year Ford Motors chairman Bill Ford (Henry Ford's great-grandson) unveiled his "Blueprint for Mobility", calling on governments and car makers to work together to address the issue.

Unsurprisingly, most of the solutions revolved around improving car technology, such as autonomous driving systems that cut distances between cars. However, it also sees a big role for "pedestrian, bicycle... and public transportation traffic".

Henry Graybar notes in The Atlantic that some European cities, such as Tallinn, are making public transit systems free, to get residents to ditch their cars. This wouldn't help in Britain, says Walker, because we lack the capacity. A shift of 10% from road would need more than double the current (already overloaded) UK rail capacity. He doesn't oppose railway investment, but by itself it can't solve traffic congestion.

Birmingham's failing toll road

TheM6 toll road, which opened in 2004, is one of the few toll roads in Britain. Built and operated by a private company (although the road will eventually revert to the government after a 53-year lease expires), the idea was to offer users the choice to bypass congested parts of the M6 motorway, reducing congestion for regular users, while saving the taxpayer the cost of building the relief road.

However, even The Guardian's Michael White, who backs national tolls, admits that the Birmingham scheme has its problems. "Its tolls on heavy lorries are so high that they stick to the public road, leaving the taxpayer to fund the consequent repairs, and traffic has always been lower than predicted since it opened."

The road is also loss-making, with its owners £1bn in debt. This suggests similar schemes may struggle to attract investment from the private sector without subsides or other incentives.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri