Abolishing the car tax by cutting rail spending increases the collective benefits

When asked by CNBC for his views on George W. Bush’s plan to revive the economy, Milton Friedman replied: “I don’t know much about the plan in general, but I am in favour of cutting taxes at any time, in any way and in any form. It is the only possible way to prevent public spending from rising too high.” The interviewer countered: “But should we be cutting taxes on the eve of a possible war and whilst we are grappling with deficits?” To which Friedman replied: “I know, but deficits only arise if the government fails to reduce spending in the future. And deficits have their merits, because they are the only thing that puts pressure on Parliament to curb spending.”

The observations of the father of monetarism are well suited to the government’s decision to reduce vehicle tax partially, in a convoluted manner and, as things stand, temporarily. The measure is expected to result in a tax reduction of 2.4 billion. This represents a modest reduction – less than 3 per cent – of the heavy tax burden weighing on the road transport sector, which is set to total 83 billion in 2025. And it is a minimal proportion – 0.2 per cent – of the public expenditure forecast for 2026, which amounts to 1,252 billion.

If one were so inclined, it would not seem an impossible task to find, within this vast array of resources, the funds to offset these and other minor shortfalls in revenue. This could even be achieved by narrowing the scope to the transport and infrastructure sectors alone. According to Minister Salvini: “The money for scrapping road tax in 2027 comes from unspent funds earmarked for projects that were never carried out”.

Now, given that the costs of most major infrastructure projects, particularly railway projects, (which are constantly being revised upwards: an extra 3 billion for the Terzo Valico, an extra 2 for the Turin–Lyon line) that far exceed the benefits, leaving those resources in taxpayers’ pockets – who would spend them on something that would obviously yield benefits greater than the costs – would be a desirable choice both from the point of view of collective well-being and that of fairness. Indeed, whilst the costs of these projects are borne by all taxpayers, the majority of the benefits are enjoyed by a few hundred thousand people who will use them very frequently. The rest will make only very sporadic use of them and, in a great many cases, none at all.

Alongside the cost of building new infrastructure, there are also expenditure on the maintenance and management of the network and on subsidising services. For many decades, public funding for the railways has stood at between 10 and 15 billion a year and has increased further in recent years (a further 5 billion a year goes towards covering the deficit in the sector’s special pension fund). Everyone’s money is being channelled into a mode of transport that meets only 6.3 per cent of people’s travel needs; fewer than three per cent of people commute to work by train, whilst more than seventy per cent do so by car. Over long distances, more people travel by bus or aeroplane – at no cost to taxpayers – than by rail. Yet every time we board a train, we receive an implicit bonus of 15 euros (as if we were being given seven litres of petrol for free); for those who use it regularly, the annual subsidy amounts to many thousands of euros.

Given the failure of modal shift policies over the past decade, a thorough spending review for the railways would appear to be in order. On the expenditure side, not only should investments be selected with far greater care, but efforts should also be made to contain operating costs through ‘genuine’ competitive tendering, for both long-distance services and local transport. In the latter area, there is also scope to increase ticket and season ticket prices: the majority of those who choose to travel by train are heading into city centres and, as the British experience shows, would continue to do so even if they had to pay more, because for this (sole) type of journey, rail guarantees shorter journey times than travelling by car. On many local routes, it would be worth considering the alternative of providing the service by coach, which is considerably cheaper.

However, this outcome is highly unlikely: cutting spending is politically very costly. It involves taking a great deal from a few (manufacturers, suppliers and travellers) to give back very little to many. It is better to scrape by than to face electoral disaster.