The scandal of Osborne’s £22.5 billion giveaway to motorists

We have discussed this giveaway before, but it appears that we underestimated the extent of this additional subsidy to motoring. What makes it worse is the justification for this policy given by the Treasury (and HMRC) this week: Analysis of the dynamic effects of fuel duty reductions

This policy has been appalling for the prospects of sustainable transport in Britain. I list problems with  the report below:

 1. The justification is politically motivated, ideological, drivel.

I urge you to read Simon Jenkins (despite him being something of a petrolhead he does make some useful comments from time to time) in full, and present the main comments here:
On Monday, Osborne issued a revelatory document. It purported to show the success of his 2010 freeze on the fuel tax escalator, a device to raise the tax on petrol each year by inflation plus 1p per litre. The aim was to avoid the political unpopularity of raising it in each budget. Osborne reversed this objective and courted popularity by abolishing the escalator altogether. The cost over five years has been a staggering £22bn. He likewise began to reduce corporation tax from 28% to 21%. From an austere chancellor such giveaways to drivers and corporations were reckless.
Osborne now tries to rebut the charge by claiming his Treasury witches have stirred eye of newt and toe of frog – “behavioural economics and detailed modelling” – in the pot to prove the giveaways so boosted private spending that they earned enough in VAT and income tax to make up half the lost revenue. That gets back £11bn. This would give the economy a boost of up to 0.5% of GDP. These figures do not add up. They suggest that cutting petrol duty was indeed a big giveaway.”
Of course, “ Analysis of the dynamic effects of fuel duty reductions” states that “The model has been peer-reviewed by leading academics in the relevant field, who found that ‘The basic design of the HMRC model for the UK economy meets at large the key requirements for state-of-the-art applied tax policy analysis’. Well, they would say that, wouldn’t they? There is a central question raised that this kind of modelling, whether on fuel duty or corporation tax: is it not ideological and unscientific, produced by a political view on who should pay taxes and receive subsidy?

So let’s get detailed:

 

2. The language

The Government will have eased the burden (my emphasis) on motorists by £22.5 billion over this Parliament to 2015-16. “. We have commented before on the language used to portray motorists as victims . In fact, the costs of motoring have often declined over the last couple of decades (depending on which time scale is being looked at),. Certainly, in comparison to other costs recently – such as in more important areas like housing – motorists have had it easy

3. It is a hand-out from Government, not money back to it.

As Jenkins argues above, for all the waffle about (alleged) GDP increases due to “easing the burden on motorists”, this move is a hand-out, because there is a net loss to the Exchequer.

 

4. It impedes the prospects for more fuel-efficient motoring.

For all the discussion about elasticity, the report fails to consider how long-term increases in the cost of fuel could lead to more careful and more fuel-efficient driving techniques. More importantly, it misses out entirely on the question of the new generation (either already on the market or in prototype) of cars which are two or more times as fuel efficient as typical cars now. In fact, fuel prices would have to double in order to maintain current levels of revenue to the Exchequer and not make motoring even cheaper, were such cars to become the norm.

 

5. The “externalities” question.

When considering Cost-Benefit analysis, there is as serious moral concern about putting monetary values on the adverse effects of motorisation. How do you put a price on the loss of children’s independent mobility, disappearance of a much loved local environment, or any of the other myriad forms of damage caused by mass car use?

But since economists like doing this kind of thing, let’s look at what they call “externalities”.

 

6. When you do cost external costs.

In November 2009, the four relevant Government Departments (Health, Transport, Environment, Communities and Local Government) and the Cabinet Office published “ The wider costs of transport in English urban areas in 2009” The graph below indicates the supposed external costs of motring in urban areas.

WidercostsoftransportAll this indicates that motorists were already being subsidised – even before the Osborne “burden easing” . And that is assuming these costs can easily be monetised. Fore xample, if climate change threatens thew rold economy, the imperative is for a Government to make a genuine commitment to reducing emissions which will be convincing in the international processes required to reduce greenhouse gas emissions. If you sabotage the prospects of presenting a genuine commitment by proceeding in the opposite direction on motor transport emissions, then the costs are likely to be a lot more than “£1.2 – 3.7 billion per year”.

 

7. The Treasury model and externalities.

“Analysis of the dynamic effects of fuel duty reductions” says:
Externalities
3.25
Goods which when consumed impose costs on others (“negative externalities”) are over-consumed because households and firms fail to take these effects fully into account, since these costs are not reflected in the market price. Congestion and air pollution as a result of vehicle use are both examples of negative externalities. Taxes can be used to correct for these externalities by increasing the market price to reflect the cost of the damage caused by them. “

And also:
1.6
Fuel duty plays an important role in supporting sustainable public finances and internalising the externalities associated with road transport, in particular greenhouse gas emissions. “

But: “ There are studies that consider the effect of fuel duties on externalities. The CGE modelling presented below is not intended to capture the impact of a reduction in fuel duty through externalities

So apart from a reference to congestion, which is not expected to be affected by the giveaway, forget the external costs.
So much for “Analysis of the dynamic effects of fuel duty reductions” The policy it underpins is a disaster for the possibilities of sustainable transport. Public transport suffers by comparison, and despite the nominal commitment towards cycling, the necessary type of amount of money required (a good £600 million to kick off with) – trivial by comparison to.

It is therefore fascinating how nobody is saying much about it. While small bodies like Sustrans and the Campaign for Better Transport make objections, the supposed Parliamentary opposition is silent. (Of course, I may have missed some objections, but then they must have been pretty quiet ones). the £4.5 billion annually in the giveaway, let alone other subsidy – is absent.

(Thanks to Richard Hebditch for reminder of the 2009 report)

 

 

 

 

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