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BITRE | Working paper 74

Automatic earmarking of revenues guarantees an automatic revenue flow and, by

doing so, removes the rigour of sound planning and scrutiny of different projects.

In a televised debate in June 2005, London’s mayor, Ken Livingstone, announced an

increase in the congestion charge to £10

in 2008, to provide an increase in funding

Funding claims need to be assessed on

individual project merits.

for public transport. Such access to

ready funds would invariably reduce

the pressure that might be otherwise

brought to bear on optimising the

public transport system.

The main defence for such earmarking is that the public would not willingly commit

to such a radical scheme unless they could see clearly where the funds are being

spent. However, this underlines the fact that earmarking is generally not justified on

efficiency grounds but is aimed at improving community acceptability of congestion

charging.

Efforts to ensure community acceptance of a scheme may undermine the efficiency

gains that the scheme can potentially deliver.

In reality, the potential conflict between efficiency and acceptability is one of the

major issues confronting policy makers contemplating the introduction of congestion

charging. The dangers were succinctly identified by Lindsey and Verhoef:

Indeed, it is worth repeating here that general equilibrium studies of road pricing

strongly suggest that revenue allocation schemes designed solely to improve the

public acceptability may induce welfare losses elsewhere in the economy, leading

to efficiency losses that may even outweigh the initial improvements. A trade-off

between efficiency and acceptability impacts of revenue allocation schemes will

generally exist, and should be given careful attention in their design (Lindsey and

Verhoef 2000, p. 23).

In brief, there is considerable danger that efforts aimed at improving acceptability of

a congestion charging scheme can significantly reduce the efficiency gains from the

scheme, to the extent that while it may benefit select interest groups it may no longer

be in the overall community interest.

Reducing other taxes

The proposition

An obvious way of dealing with the objection to congestion charging because it is

perceived as a tax is to reduce other taxes in line with the revenue generated by the

charge: revenue neutrality. This would be even more convincing than earmarking the

funds for the enhancement of either public transport or the road network as it could

be argued that such enhancements may have taken place anyway.

However, as with other options, the specific detail will be important: in this case, the

choice of taxes to be reduced. For the ill-fated British national road pricing scheme,

a key option was to reduce other motoring taxes thereby ensuring that, on average,

road users would be no worse off (See CfIT (UK) 2002c).

92

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