Government spending remains at record levels. Material scarcity is driving up costs. Yet governments still want to deliver a massive pipeline of infrastructure projects over the next few years (the US plans to spend more than $1.2 trillion over the next decade1). So where is all the money going to come from?
Some will come from higher taxation. The US hopes changes to its tax code will result in $2.15 trillion in new tax revenues2. Many governments are considering shifting their tax brackets or implementing new capital gains taxes in order to place more of the burden onto the uber-rich.
At the same time, we are also seeing growing clarity around the need to introduce, broaden and better align user-pay funding options. It’s not a topic many politicians like to raise. And there are many markets where infrastructure services like water provision, healthcare and power are either provided free to residents or at highly-subsidized rates. This can lead to a misallocation of resources and significant waste.
The interesting change is that the topic is now broadening. People in some markets are asking why — in an age of digital work — drivers aren’t shouldering a greater share of the road costs. If governments were to apply variable fee rates (like the City of LA does on its high occupancy lanes), travel behaviors could be influenced and costs could be directly funded by those who use it.
Governments everywhere are under pressure to pass more of the cost of infrastructure to users, but they are worried about the political backlash. In the UK, for example, the energy regulator has been supported by the Government in its refusal to lift the energy price cap even in the face of dozens of energy firms collapsing. No-one wants to pay more for something they regard as essential, like power, water or the drive to work. But greater alignment between users and payers will need to be found if governments are to deliver on their infrastructure agendas and in particular their net zero commitments.
Not everyone will be able to do that. Indeed, despite both higher taxation and higher user charges, we are already seeing some scaling back of ambition. The Belt and Road initiative, for example, has been significantly scaled back. The UK recently cancelled the Eastern Leg of High Speed 2 and Northern Powerhouse Rail.
This year, expect to hear governments having more articulate and persuasive conversations about how they will fund their infrastructure plans over the long-term. Taxation will likely rise and expand. And serious conversations about user fees will come to the front page.
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2 U.S. Department of the Treasury (https://home.treasury.gov/news/featured-stories/preliminary-estimates-show-build-back-better-legislation-will-reduce-deficits).