Osborne’s pre-election gimmicks do little to address Britain’s long-term economic problems

March 24, 2014

History is unlikely to be kind to George Osborne. Four years after he became Chancellor, the national debt has exploded, the budget deficit remains at dangerously high levels and an increasing share of tax revenues must be devoted to repaying creditors.

The government also faces enormous long-term liabilities which currently do not appear in the national accounts. These include pensions and healthcare commitments that are spiralling due to a rapidly ageing population. The liberalisation of pension regulation announced in today’s budget, while welcome in itself, will not make a significant contribution to resolving this problem. Indeed, other government measures, such as the triple-lock on state pension increases will greatly exacerbate the long-term fiscal shortfall. Similarly, while the Chancellor was correct to focus on poor incentives to save, the impact of policies such as expanding ISA allowances will be trivial compared with the negative effects of loose monetary policy and new disincentives to save introduced as part of the government’s flagship welfare reforms.

To add to the demographic challenges facing the UK, a series of policy decisions, implemented for short-term political gain, have done lasting damage to the future prospects of the economy. One of Osborne’s first moves was to raise harmful taxes such as VAT in a misguided attempt to reduce the budget deficit and avoid additional spending cuts. It has backfired spectacularly by suffocating economic activity, dampening the recovery and as a result actually increasing government borrowing. And despite the depth of the recent slump, the burden of regulation on business has been increased. Tax and labour-market legislation has become even more costly for firms, while energy prices have spiralled due to government intervention.

The budget failed to tackle these problems. Yet more complexity was added to the tax system: another ill-conceived crackdown on tax avoidance was combined with a series of bizarre tax breaks for favoured sectors. Disappointingly, there was no rolling back of employment rules that are hindering business activity, such as mandatory workplace pensions, the Equality Act and the National Minimum Wage. And instead of reversing the government’s incoherent green energy policies, the Chancellor treated the symptoms rather than the cause of high bills by announcing special help for the heavy manufacturing sector.

But perhaps the most worrying blunder of all is the expansion of Osborne’s policy of subsidising borrowing to ‘stimulate’ the economy. His ‘Help-to-Buy’ scheme may be effective at winning votes from certain target groups, but it is potentially very dangerous indeed for the medium-term stability of the UK economy. Asset prices are already severely distorted by the Bank of England’s policies of low interest rates and quantitative easing. The Chancellor’s sub-prime subsidies risk further inflating the housing market: more households will take on debts that could become unaffordable should interest rates return to normal levels. Thus significant default risk has been loaded onto taxpayers. There are also potentially very serious implications for the banking sector should government policies ignite another boom-bust cycle.

Indeed, there is a strong argument that a significant part of the current economic recovery is artificial in the sense that it has been generated by the easy credit policies of both the government and the Bank of England. Sceptics might point out that politicians have often boosted the economy in the run-up to general elections. The long-term consequences have usually been dire.

Reuters, 19 March 2014

Filed under finance, political economy, regulation, tax

More regulation, more surveillance and more enforcement: the policies cycling groups plan to impose on other road users

May 25, 2013 1 Comment

On 22 May a seminar on ‘Cyclists and the Law’ was held at City Hall. It was chaired by the Green Party’s Jenny Jones and featured Andrew Gilligan, the Mayor’s cycling tsar, among the speakers. From an economic perspective, two aspects of the seminar were striking.

Firstly, the importance of cars and lorries to London’s economy was almost completely ignored. According to Jenny Jones, ‘London has become a city of buses, pedestrians and bikes’. This simply isn’t true. Within London, cars carry as much passenger traffic as the Tube, buses, trains and bikes put together. It is correct, however, that car use has been falling in recent years. This is unsurprising in the context of falling living standards and transport/planning policies specifically designed to push people out of cars and onto other modes.

Nevertheless, the sheer scale of motoring within the capital means that any measures that increase delays are likely to have substantial economic costs. Using DfT estimates of the value of time and making a conservative allowance for running costs, it can be calculated that a 1 per cent increase in car journey times will impose costs of approximately £200 million on motorists in London [the precise accuracy of this figure is less important for this argument than its order of magnitude]. And further substantial costs would be imposed on other road vehicles such as HGVs. The impact of particular measures is of course time and place specific, but it was telling that the potential economic costs of some cycling policies, both to other road users and taxpayers, were barely discussed at the event.

Secondly, it was notable that the focus was almost entirely on ‘command and control’ measures centred on extra regulations, more surveillance, stricter enforcement and the centrally planned installation of new infrastructure. Once again there was little awareness of the economic costs of such policies or the misallocation of resources likely to result from the knowledge and incentive problems facing state bureaucracies.

It was disappointing that several win-win measures with the potential to benefit all road users were not mentioned. Removing a high proportion of traffic lights, for example, would speed up journeys and improve safety for both cyclists and motorists. Better road maintenance – repair of potholes and so on – would also have major benefits for cyclists and drivers.

A list of policies advocated at the seminar is provided below. The first set was supplied by the event organisers and the second set by speakers and audience members (many of whom represented cycling or road safety groups).

  • Stricter liability – the assumption that injured cyclists deserve compensation unless it can be proved otherwise, or the Dutch scheme where at least 50% of responsibility for all cycle-related collisions lies with drivers
  • Legal priority for ‘straight across’ movements at junctions
  • European standards on vehicle design and fitting safety equipment, especially HGVs
  • Advanced Stop Lines to be treated the same as yellow box junctions
  • All KSIs to be properly investigated and the police should adhere to the Road Death Investigation Manual
  • Enforcement of 20mph limits by police
  • Close proximity collisions should be prosecuted using plain clothes police officers with cameras
  • Road crash victims of speeding, drunk and careless drivers should be included in the Government’s Code for Victims
  • The courts should make greater use of driving bans in sentencing and should be much firmer in resisting pleas of ‘hardship’, particularly when considering bans
  • Coroners should make greater use of their powers to make ‘Section 43’ reports to highlight solutions that might prevent deaths, and particularly the recurrent causes of deaths
  • Cycle lanes should continue across side roads
  • Implement 20 mph limits on main roads, unless a case for exemption has been made and approved
  • All major new developments should include Crossrail-type clauses on HGV safety training and joining the Fleet Operator Recognition Scheme (FORS)

Further policies advocated by panellists and audience members included:

  • Mandatory fitting of ‘black boxes’ in motor vehicles to monitor driving behaviour, including speed – possibly starting with commercial vehicles
  • Mandatory fitting of proximity sensors to large vehicles
  • Restricting HGV movements during peak hours
  • Use planning controls to force better HGV behaviour
  • Greater use of health and safety law to prosecute commercial operators
  • Police to seize and examine motorists’ mobile phones after accidents
  • Introducing new elements to driving tests
  • Installing average speed cameras to enforce 20 mph zones
  • Greater use of helmet camera video to monitor motorists
  • Prohibiting parking in on-road cycle lanes
  • Reduced stopping rights along cycle lanes, e.g. for deliveries
  • Re-allocating road space to cyclists from other road users
  • Expanding the cycling task force
  • Giving TFL the right to fine motorists entering ASLs and cycle lanes
  • Reducing the level of motorised traffic
  • Installing Dutch roundabouts
  • Attaching conditions to the award of parking permits to influence driver behaviour
  • Tying the amount paid in ‘road tax’ to driver behaviour

See also: Tour de France road closures could be avoided

Filed under transport Tagged with , , , ,

Renationalise the railways?

April 28, 2013

The West Coast franchising debacle has highlighted serious shortcomings in the structure of the railways – but it should not be used to justify renationalisation.

Indeed, the role of the Department for Transport in the scandal shows the railways were never properly privatised in the first place. Politicians and officials retain tight control over the industry, deciding service levels, fares and investment priorities.

Such interventions explain why privatisation hasn’t worked as well as initially hoped. While there have been successes – including a large increase in ridership and better safety – the level of taxpayer subsidies has risen to unacceptable levels (about £5 billion a year).

High subsidies reflect the complex, artificial structure imposed on the industry. Layers of bureaucracy mean costs are far higher than on comparable networks abroad.

Another factor is wasteful investment. Economic objectives have tended to be outweighed by politics and the desire to please powerful special-interest lobbies. The recent decision to electrify loss-making branch lines in Wales is a recent example of this tendency.

Renationalisation would only make these problems worse. It would inevitably lead to even more bureaucracy and political interference. The historical record bears this out. Nationalisation was tried before and outcomes were poor.

Rather than going back to the 1970s, the government should restructure the railways along genuinely private lines. The entrepreneurship and innovation of the private sector should be unleashed to deliver lower subsidies, cheaper fares and better customer service.

November 2012, Director

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Plan to ringfence banks misguided

March 4, 2013

The British government is right to be examining ways of shielding taxpayers from the costs of bank failure. However, proposals to ring-fence the retail operations of banks, and indeed to give the government to power to order the complete break-up of banks, are deeply misguided. The plans appear to be based on the misapprehension that retail banking is intrinsically safe, while investment banking is intrinsically reckless and dangerous. But recent history would appear to contradict this viewpoint.

Many of the banks that failed were largely or entirely retail operations, including Northern Rock, Bradford and Bingley, and Lloyds/Halifax Bank of Scotland. Indeed, this pattern has been characteristic of numerous economic crises, with institutions focusing on mortgage lending particularly vulnerable to collapse. By contrast, institutions that combine retail and investment arms may be better able to diversify risk. Losses resulting from a collapsing property market might be balanced by gains in other asset classes for example.

There are further problems with the government’s proposals. Clearly the possibility that banks will be forcibly broken up creates risk and uncertainty for investors. There is a real fear that it will put British banks at a competitive disadvantage. The tight regulation of the retail sector will also distort the allocation of capital within the banking sector, with a negative effect on the wider economy.

Worse still, the reforms risk exacerbating the problem of moral hazard within retail banking. The notion that retail banks are ring-fenced, regulated and safe, may further discourage depositors from favouring institutions with conservative lending practices. This echoes one of the major contributory factors to the financial crisis. Reassured by state-backed deposit insurance, regulation and an implicit bail-out guarantee, savers piled into banks that offered higher interest rates but engaged in risky activity, such as Northern Rock.

Rather than focusing on counterproductive ring-fencing, the government should tackle moral hazard head on. Deposit insurance should be phased out gradually and state bail-outs prohibited so that depositors are incentivised to bank with conservative institutions. This in turn would encourage banks themselves to behave more conservatively and to advertise their prudent practices to potential customers. Removing deposit insurance and reducing bailout expectations would change the whole culture of the banking sector, greatly lowering the risk of future crises.

At the same time, policy-makers need to address other fundamental causes of the economic instability that leads to banking crises. Large increases in the money supply instigated by central banks created the unsustainable asset price booms that turned to bust. In many ways, the explosion in bank credit that led to disaster was a symptom of reckless behaviour by central bankers who flooded the markets with liquidity as they attempted to counteract economic slowdowns.

Ring-fencing will do nothing to prevent central bank inflation from destabilising the banking sector; neither will it address the moral hazard that encourages reckless behaviour. It will, however, impose significant additional costs on an industry struggling to recover from a severe crisis, with knock-on effects on those businesses reliant on bank lending to fund new investment. It is not too late to reverse the reform plans and focus instead on addressing the deeper causes of the financial crisis.

6 February 2013, PSE

Filed under finance Tagged with , ,

Why are rail subsidies so high?

March 4, 2013

Taxpayer subsidies to the rail sector have reached astronomical levels. At £6 billion per year (including Crossrail), they have roughly trebled in real terms over the last twenty years. But the high rate of subsidy has not led to a reduction in fares, which recently have risen above the official rate of inflation. There are two main reasons for the large increase in taxpayer support. The first, and probably most important, is wasteful investment in loss-making new infrastructure. This is the direct result of policies that have aimed to increase public transport ridership and reduce car use.

For much of the post-war period, rail was viewed as a declining industry. Despite previous government efforts to suppress private road transport, the step change in efficiency resulting from the door-to-door transit of passengers and freight led to rapid growth in car and lorry traffic. A policy of ‘managed decline’ was therefore applied to the railways. British Rail received subsidies to keep the system going and there was some modernisation of key inter-city routes, but there was little enthusiasm to attempt to reverse the long-term trend.

This changed with the ascendancy of environmentalism within government. With their perspective grounded in radical egalitarianism, environmentalists not only objected to the pollution produced by private road transport; they also resented its social aspects – for example, the way that cars had become symbols of wealth and individual expression. The environmentalist agenda gradually captured university departments, various government bureaucracies, elements of the media and eventually national policy. In the mid-late 1990s, the road construction programme was cut back dramatically and a new strategy introduced. Private road transport would be deliberately discouraged with travellers encouraged to use buses, trams and trains instead.

For the railways this represented a sea change. The new policy meant that rail now had prospects for growth. It did not, however, change the fundamental economics. Since rail involves at least a three-stage journey, compared to the door-to-door convenience of private road transport, it remained unattractive for the vast majority of journeys.

Following privatisation, however, the policy of encouraging more rail travel appeared to be successful. Usage rose by around 50 per cent between 1997 and 2012, to levels not seen in peacetime since the 1920s. This reflected not just the impact of various deliberate policies, but also other trends such as a booming central London economy for much of the period and demographic changes that led to a huge expansion of the ‘inner city’, pushing middle-class families out into the commuter belt to avoid poor schools, anti-social behaviour and fear of crime.

A combination of increased ridership and price controls produced severe peak-time overcrowding on several routes into London. Train operating companies have been constrained in their ability to smooth the peaks using the price mechanism, since season ticket fares on most London commuter journeys are regulated by the government. With a severely limited ability to deploy the price mechanism and other means to make more efficient use of existing rail capacity, the industry has increasingly focused on supplying new infrastructure to accommodate growth. This has proved hugely expensive, however. The final cost of the ongoing Thameslink 2000 upgrade, for example, is likely to be £6 billion. And the Crossrail scheme will cost £16 billion.

Since in commercial terms such projects are loss-making and would never be undertaken in their current form by the private sector, taxpayers have been forced to fund them. Accordingly, wasteful investment in new rail infrastructure is probably the largest single factor in the growth in taxpayer support in the post-privatisation era. Such investment has not been restricted to overcrowded routes in the South-East. The government also funds improvements for blatantly political reasons, in regions where there is little passenger demand. For example, it was recently announced that branch lines in South Wales would be electrified – at taxpayers’ expense, of course. The environmentalist agenda means that rail schemes get priority even though the government’s own cost-benefit analyses show that economic returns from road improvements are far higher.

The second major reason for the increased burden on taxpayers is the artificial structure imposed by the government on the post-privatisation rail industry. Historically, railways that developed in the private sector exhibited a high degree of vertical integration. This meant in practice that the same company owned the tracks and operated the trains, thereby avoiding the transaction costs associated with complex contractual arrangements between highly interdependent separate organisations.

Partly as a result of EU policy, Britain’s privatisation model has been very different, with one firm owning and maintaining the tracks, other firms operating the trains, and another set of firms leasing out the rolling stock. On top of all this complexity, the industry has been tightly regulated by various government agencies. The resulting fragmentation, combined with layers of bureaucracy, needlessly increased costs on the network. In addition, the high levels of regulation severely hindered entrepreneurship. As a result, the productivity-boosting innovations that have cut costs in other industries did not materialise on the railways. Indeed regulation is now so restrictive that private rail firms have effectively become subcontractors for the Department for Transport.

Structural reform would therefore be one of the best ways to reduce the burden on taxpayers. The government should stop prescribing the level of vertical integration and instead free the rail industry to become more efficient. This policy should be combined with a more rational approach to rail investment. A first step is to abolish price controls to remove artificial distortions to fare levels and consumer demand. The provision of new capacity should then be left to the private sector, without taxpayer support. It would make commercial sense to build new infrastructure in high demand locations where it could be funded by fare revenues or land development. Uneconomic projects driven by political motives and special-interest lobbying would no longer get built.

The economic case for phasing out subsidies is very strong. The taxes imposed on individuals and businesses to support the railways destroy jobs and hinder wealth creation in the wider economy. In addition, large parts of the rail industry could thrive without the bureaucratic micro-management that comes with government support. It may seem counter-intuitive, but removing rail subsidies could also end up benefiting passengers, by unleashing entrepreneurship and innovation on the railways that would drive down costs.

22 January 2013, LSE

Filed under transport Tagged with , , ,

Do we need to make further spending cuts?

March 4, 2013

George Osborne is taking a reckless gamble by extending his fiscal target out to 2017/18. Government borrowing will now remain at dangerously high levels for a prolonged period. Worse still, the deficit reduction plan could easily be derailed by lower-than-forecast growth. The Chancellor is relying on robust growth in the medium term to boost tax revenues and enable him to meet his targets without the need for radical spending cuts. This outcome cannot, however, be guaranteed. Recent history shows that OBR forecasts are extremely unreliable. Borrowing in 2013/14 is already likely to be almost double the figure originally expected. If stronger growth fails to materialise, the UK could quickly lose the confidence of the bond markets and face a debt spiral. Given the risks, a wiser Chancellor would have taken a much more conservative approach. Deeper cuts would have made Britain much more resilient to future growth shocks.

6 December 2012, City AM

Filed under tax Tagged with ,

The Chancellor is still gambling on strong medium-term growth

March 4, 2013

At the time of the last Autumn statement, the Office for Budget Responsibility (OBR) was predicting growth of 0.7 per cent in 2012, followed by 2.1 per cent in 2013, 2.7 per cent in 2014 and a robust 3.0 per cent in 2015. Yet again, these forecasts have been downgraded, to -0.1 in 2012, 1.2 per cent in 2013, 2.0 per cent in 2014 and 2.3 per cent in 2015. Forecasts of strong growth of almost 3 per cent have now been put back to 2016 and 2017.

Despite the unreliable nature of such forecasts, the Chancellor is still gambling that strong medium-term growth and the consequent increases in tax revenues will allow him to meet borrowing targets without making radical spending cuts. So far this strategy has not been successful. As a result of lower-than-expected growth over the last two years, government borrowing in 2012/13 on a like-for-like basis will be around 50 per cent higher than projected in the original deficit reduction plan. Borrowing in 2013/14 is now forecast to be almost double the figure expected back in 2010. At around 7 per cent of GDP, it will remain at a similar or higher level than in several countries currently experiencing debt crises, such as Italy, Spain and Portugal.

In addition, there are good reasons to believe that the long-term ‘trend’ rate of growth in the UK has declined over the last decade or so. This reflects a large rise in public spending – to a peak of 50 per cent of GDP – as well as an expanded regulatory burden on businesses. Moreover, various government stimulus policies since 2008 have hindered recovery by preventing necessary adjustments, such as the liquidation of boom-time malinvestments and the reallocation of resources to more productive activities. Going forward, significant increases in energy and transport costs, resulting from the government’s environmental policies, are likely to have a negative effect on economic output. And, as the Chancellor mentioned in his statement, the ongoing euro zone crisis adds further uncertainty to the medium-term growth outlook.

In this context, the Treasury is taking a major risk in basing its deficit reduction plans on growth forecasts that are likely to be inaccurate. Given that government borrowing remains at dangerously high levels, and that the confidence of the bond markets could quickly be eroded if outcomes disappoint, there is a strong case for taking much more radical action to reduce public spending. The real terms reductions in working-age benefits are a good start, but the Chancellor could also have acted to cut age-related benefits, as well as abandoning the coalition’s deeply unpopular plan to increase foreign aid. Significant medium-term savings could be achieved by cancelling major projects such as Trident and High Speed 2. The IEA’s recent publication, Sharper Axes, Lower Taxes, provides a long list of potential savings.

5 December 2012, IEA Blog

Filed under regulation, tax Tagged with , ,

Energy Bill will impose immense costs on households and businesses

March 4, 2013

Today’s agreement on energy policy, ahead of the forthcoming introduction of the Energy Bill, shows the government remains committed to meeting ambitious targets on greenhouse gas emissions and renewable energy. The economic cost will be immense. The Department of Energy and Climate Change quotes a figure of £110 billion of investment in the electricity sector alone (by 2020), a high proportion of which will be used to expand offshore wind capacity and connect it to the national grid. This investment will be funded by higher bills.

A number of questionable claims are made to justify the policy. Firstly, it is claimed that new investment is required to ‘keep the lights on’ since a significant proportion of coal-fired power stations will close within the next few years.  In fact, environmental policies – in particular the EU Large Combustion Plant Directive (LCPD), which is supported by the UK government – are forcing the closure of coal-fired power stations which are not fitted with desulphurisation plants. In other words, the potential reduction in generating capacity is itself largely the result of environmental regulation.

Then there is the claim that meeting the targets on emissions and renewable will add only a small amount to bills. In reality, these policies are already inflating electricity prices by a very large degree. This is because government regulation effectively forces power companies to generate electricity from high cost sources and limits the extent to which they can deploy low-cost sources such as coal. The Renewables Obligation and feed-in-tariffs are two ways in the electricity market is rigged to achieve this result. And as long ago as the 1990s the ‘dash for gas’ was partly spurred by the imposition of EU regulations on coal-fired generation. It is telling that in US states that have refused to adopt European-style green policies, electricity prices are now over 50 per cent lower than in the UK. Indeed, DECC itself has estimated that by 2015, climate change policies will be adding 26 per cent to domestic electricity prices and 10 per cent to domestic gas prices. The impact on commercial users will be similar. This estimate implies an extra burden on energy consumers of approximately £12 billion per annum. Other environmental policies such as the LCPD will push up prices even further.  Moreover, there will be additional negative effects on the wider economy. For example, rising energy costs are likely to add to the political pressure to raise welfare benefits for those on low incomes, who spend a disproportionate share of their income on utility bills.

Despite the huge costs being imposed within the UK, these policies are unlikely to make a discernible difference to climate change. Firstly, Britain accounts for only a tiny fraction of global greenhouse gas emissions. Moreover, developing countries are rapidly increasing their carbon output. Secondly, higher energy costs in the UK are likely to displace economic activity, particularly energy intensive industries, to countries with lower costs such as China, a process known as ‘carbon leakage’. If production is less energy efficient in developing countries, as is often the case, this may actually lead to a rise in emissions. Given their questionable overall effectiveness, there is surely a strong case for the British government to moderate its green energy policies to take greater account of their impact on households and businesses. At the very least, the government should ensure that targets are met at the lowest possible cost by reforming fiscal and regulatory frameworks so that they treat different sources of emissions similarly.

23 November 2012, IEA Blog

Filed under energy, environment Tagged with , ,

The impact of fuel duty on work incentives

March 4, 2013

According to a review commissioned by the Department of Social Security, ‘the costs of travelling to work will … be a factor in some people’s decisions about whether to look for or accept employment’. Indeed, one survey found that 50 per cent of unemployed people cited ‘extra costs such as travel’ as a major cause for concern about leaving benefits. Moreover, ‘travelling costs will also be a regular expense which may influence decisions about whether to remain in a particular job’. Studies of low-income families suggest that earnings from low-paid employment are significantly reduced by travel-to-work costs, with a particularly acute problem in rural areas. Since around two-thirds of working adults who travel to work do so by car or van, it is clear that motoring taxes – and fuel duty in particular – have a significant impact on travel-to-work costs. 

The impact of travelling costs on work incentives is likely to be most pronounced for those individuals that already experience very high effective marginal tax rates (EMTRs). Within certain income ranges, some workers face EMTRs as high as 96 per cent. High EMTRs reflect the withdrawal of welfare payments such as housing benefit and tax credits, as well as the imposition of income tax and national insurance. While EMTRs of over 90 per cent are experienced in quite narrow income bands, EMTRs of 70 per cent or over affect a large number of employees on relatively low incomes.

Accordingly, travel-to-work costs can make a large difference to the financial incentives to enter work. Case studies illustrate the magnitude of the effect. A single person over 25 in low-cost rented accommodation would typically be around £70 per week better off in a full-time job paying the minimum wage than on benefits, which works out at £1.75 an hour. However, if average costs for those driving to work (about £20 per week) are applied, this means the person is now only £50 per week better off, or £1.25 an hour. When a realistic estimate of the time spent travelling is incorporated, the effective hourly rate falls further to around £1.10 an hour. Thus, in this case study, under plausible assumptions, travel-to-work costs reduce the returns from entering work by almost 40 per cent.

A significant proportion of motorists, such as many in rural areas, face very much higher costs.  Travel-to-work costs of £40 per week would reduce the benefit of working to just £30 per week, equivalent to just 75p per hour, a drop of almost 60 per cent. At this point the financial incentives for entering employment may be extremely weak, particularly since there are likely to be additional in-work costs such as food and clothing. Worse still, several groups, such as single-earner families or households in private rented accommodation receiving large housing benefit payments, face even weaker incentives to enter relatively low-paid work. In such cases, travel-to-work costs may mean work does not pay or even makes the household worse off.

The AA estimates that fuel accounts for approximately two-thirds of car running costs (which do not include ‘standing charges’ such as insurance and VED). This suggests fuel duty accounts for roughly one third of the costs of those travelling to work by car or van. As the government introduces welfare reforms designed to improve work incentives, there is a strong case for policymakers to consider in detail the effect of travel-to-work costs, of which motoring taxes form a major component. 

The economic impact of motoring taxes is analysed in a new IEA paper, Time to Excise Fuel Duty?

19 November 2012, IEA Blog

Filed under transport Tagged with , ,

A radical proposal for privatising the UK’s road network

March 4, 2013

For decades governments have used motorists as a cash cow. Fuel duty and road tax now raise around £35 billion a year, while less than £10 billion is spent on road maintenance and improvements. Indeed, as motoring taxes have increased, investment in new road capacity has collapsed.

Transport policy has gradually become dominated by a green agenda that seeks to reduce emissions and shift journeys to public transport. In terms of revenues, however, this policy is beginning to backfire.   

Drivers are now buying smaller and more fuel-efficient cars, meaning they pay much less tax. Electric vehicles also threaten a collapse in receipts.

The potential shortfall explains the urgency with which the government is exploring new ways of charging motorists. This week it emerged that officials are considering a two-tier system of road tax, with motorists paying a higher rate if they wish to use motorways.

Charging that better reflects different levels of usage makes sense. But motoring taxes are a very crude way of doing this. Ideally, charges should reflect infrastructure costs and congestion levels. Drivers should pay more to use an expensive urban motorway with huge peak demand than a relatively empty rural motorway, or a minor road that has barely been improved since the 1930s.

In practice an efficient road network can only be obtained through more widespread pricing. The government, however, is not well suited to the management of a tolled network. Pricing and investment decisions would be influenced by special interests and political expediency. Tolls would probably be added on top of existing taxation, or unwarranted environmental levies imposed. Under political control, many of the benefits of road pricing would be lost.

A better long-term solution is therefore to transfer ownership and control to the private sector. Pricing would then be based on consumer demand rather than political calculation. New investment would be directed to those locations where the highest returns could be achieved. Productivity-boosting innovations would also be possible, such as raising speed limits and increasing lorry weights.

But privatisation and pricing need to be combined with a very substantial reduction in motoring taxes to be both politically acceptable and economically efficient. In the IEA’s new report, Which Road Ahead: Government or Market?, we set out a way of achieving this. Flotation receipts from the privatisation of motorways and trunk roads – estimated at around £150 billion – would be used to abolish road tax and reduce fuel duty by at least 75 per cent. Public spending on transport would gradually be phased out and in the longer-term the Treasury would also enjoy a large increase in general tax revenues as efficiency gains such as lower congestion fed through into higher economic output.

The denationalisation of roads is therefore a win-win policy. For most drivers, tax cuts would mean cheaper journeys despite the introduction of tolls. And for the government, substantial short-term flotation receipts would be followed by a lower spending burden and a major boost to the wider economy.

30 October 2012, City AM

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