Google Maps for the 8-bit NES. Click for street view of Crown St, Sydney

It seems Australian governments don’t want to tax and they don’t want to spend. Given the enormous changes happening in our cities, that’s an untenable strategy.

As I noted recently, the revenue foregone by the abolition of indexation of the fuel excise is now estimated to be $5 billion per annum but the government isn’t prepared to do anything about it. At the same time, Wayne Swan isn’t merely afraid to spend, he wants to cut 2.6% out of the Australian economy in 2012-13 so the Government can honour a political promise to balance the budget.

Tim Colebatch says the impact on the economy would be “equivalent to shutting down the entire electricity industry, all arts and entertainment venues and all airline travel for a year”. It could be catastrophic:

That is 2½ times the fiscal contraction imposed by the Hawke government in 1986-87, or the Howard government in 1996-97. It is the stuff recessions are made of.

The reluctance to tax and spend is likely to have very severe implications for our cities. If they keep growing, if established suburbs continue to densify, and if travellers continue to shift from cars to public transport – all of which seems highly likely – then the demand for urban infrastructure will soar to unheard of heights.

There must now be an increasing realisation that the promise of urban consolidation – of untold riches of cheap spare infrastructure capacity within established suburbs – was an illusion. To the extent there ever was spare capacity, it’s long gone. The reality is in most cases new infrastructure has to be retro-fitted at considerable cost in established suburbs, where land values are high and disturbing existing activities is expensive.

Governments must now find money on a monumental scale to finance a massive expansion in infrastructure, most especially public transport.

This presents a serious problem. For all the talk about the high level of public subsidy of motorists, they actually pay a hefty share of their financial costs. I know there’re complications with company cars but motorists generally pay all or most of the capital and operating costs of their vehicles. Moreover, they pay 38 cents fuel excise on each litre of petrol, registration fees and tolls on some major roads.

Most of the “subsidy” to motorists is an economic cost e.g.the unpaid cost of traffic congestion, noise, parking, pollution. But by and large these aren’t borne directly by governments (although they might contribute to higher financial costs later on e.g. because of the downstream impact of pollution on health expenditures).

The challenge for governments is that public transport travellers pay none of the capital costs and only around 30-40% on average of the operating costs of their travel. Moreover they don’t pay any tax equivalent to the fuel excise.

In financial terms, the marginal traveller very likely costs government more if he uses public transport than if he drives. If travellers shift from cars to public transport in large numbers, the additional cost to government in infrastructure expenditure and foregone revenue could be mind-boggling.

The funding problem is likely to be magnified by declining revenue from the fuel excise as motorists drive less, shift to more fuel-efficient cars or vehicles powered by alternative fuels, or of course abandon driving for public transport.

The scope to reduce road expenditure is mostly limited to untolled freeways. It’s no accident cities like Manhattan and Melbourne were laid out on grids well before the invention of the car. Even if most of the population uses public transport, roads are needed anyway to give occupants, buses, public transport, emergency vehicles, delivery vehicles, etc, access to properties. They also provide separation between buildings to insulate noise and give access to light and air.

Some of the funds might come from road pricing if Governments have the nerve to implement it, but it would only be a partial solution to the financing issue because it would contribute to the shift to public transport. In any event, what’s the right price for managing congestion in most cases isn’t the right price for maximising revenue.

Charging more for public transport demands serious consideration. If the vast bulk of users are prepared to spend a lot of money on cars – and we’ve shown we are – then we should be prepared to pay a much larger part of the real cost of travelling by public transport. We customarily pay circa $10,000 p.a. to operate even a medium-sized new car.

That possibility is only likely to be tenable if policy meets two conditions. First, public transport subsidy should be targeted to passengers who actually need assistance, rather than to all travellers irrespective of income. Second, travellers will only be prepared to cop a reduction in the public transport subsidy if they no longer feel they need to also pay for a car – hence public transport has to be an adequate substitute.

We will be better off if the economic costs of cars are reduced, but nevertheless governments will have to find money for public transport infrastructure and lots of it. That’s going to need some big changes in thinking. However the current fetish for balanced budgets (in fact a small surplus) at a time when the economy is running out of steam is a very bad sign.