Workplace parking tax in Nottingham

Nottingham is introducing a tax on workplace parking if a firm has more than ten parking places for employees. The aim is to provide a further disincentive to using private transport and reduce congestion.

The fee for a parking place is £288 a year and employers can pay it or charge their employees. Presumably if the employer pays the fee then employees will need to declare it as a 'benefit in kind' for tax.

Will £288 be enough to reduce congestion very much? Well probably not. But the scheme should raise £14 million and that is going to fund two new tram lines and provide a cheap and efficient improvement to public transport.

Trams are incredibly cheap to provide compared to other types of public infrastructure and if they have good routes will be very fast (but not if they head down crowded streets and compete with cars of course). They are also very environmentally friendly and fit into a sustainable transport policy very well.

We know from places like Singapore that congestion policy needs a series of supporting measures. This increases the effectiveness of each (making the cross price elasticity of demand more elastic). So Nottingham are also introducing parking restrictions to avoid people avoiding the charge by parking on the street. With the investment in trams they are probably doing all a local authority can.

Many people object to this move but it really does seem to be a policy informed by our understanding of transport economics.

Local coverage of the policy is here

Red tape - a legitimate target for supply side policy?

Today the new Planning regulations for England are published. They are to be 50 pages, not 1000, pages long.

What prompts this move is the desire to speed up development plans. At present it can take two years to get permission for even a moderate development and while the planners and councils consider their opinions and check against the regulations labour stays idle and growth is stalled.

Good supply side policy allows the Long Run AS curve shift to the right more quickly. This cutting of red tape seems to fit that bill. It should give a one-off boost to growth, at least in construction, but also in the faster building of private and public infrastructure and may allow improved growth in the future.

However it is worth asking why there were 1000 pages in the first place? Often it is to prevent environmental damage and to protect the sustainability of development. Do we really want no gaps between urban areas?

In reality 1000 pages was certainly too much. Petty rules to preserve old fashioned and outdated ideas, but 50 may be far too few and we may have endless appeals as planners have to make personal judgements.

The Independent covers the story here

So the Budget.....

As Budget's go this one had a lot of different things in it. You might not agree with the direction but you have to admire the width. There were both demand side and supply side measures.

Demand side measures

Included raising the income tax allowance to £9,205 from next April. This is effectively cutting income tax and so increasing AD by raising consumption.

Indirect taxes have risen on tobacco and alcohol. This will reduce AD by raising prices, but there is a clear justification on this on the grounds of market failure.

The Budget deficit will continue to fall over the rest of the parliament reaching just £21bn bu 2017. This is a contractionary stance and will push AD down.

Corporation tax will fall from 26% to 24% from this April. This should boost profitability and so raise the incentive to invest, so raising AD.

Higher stamp duty and the closing of 'loopholes' means that really high earners are not as well off as tax cuts appear.

On the supply side there were a number of measures.

There is help in gaining finance for small businesses with a loan guarantee scheme.

The top rate of tax will fall from 50% to 45% from NEXT year. It is argued that this will increase incentives to work and will therefore increase output and benefit the economy. Combine this with the cut in Corporation tax and this can be seen as a clear attempt to make Britain appear a better place to locate your business than other countries.

Faster broadband speeds in the major cities to improve infrastructure.

The income tax and corporation tax measures listed in Demand side also have a supply side incentive effect.

Overall

There are a lot of measures! I have listed only a few and you should read the papers on this, but looking at them in a list does not really do them justice. Is there an overall philosophy behind the budget and does it make economic sense?

I think the Budget can be summarised as a mixture of short term details and long term vision:

In the short term the economy is growing, but slowly, and can manage with less fiscal support in the future. Some people are really struggling and the higher tax allowances and concessions of child benefit are designed at help them a little. Some people are too generously dealt with and they must pay more.

In the long term there is a need to re-balance the economy by reducing the deficit and encourage growth. The Chancellor has avoided short-term popular measures in favour of a long term view.  The supply side measures really stand out here.

Of course some policy objectives are so low down the list they have pretty much dropped off. Can you order the priorities?

As usual the BBC provide excellent coverage with plenty of interactive bits

Road privatisation - is this the death of sensible road pricing as an option?

The Prime Minister announced that there is to be a consultation on putting the road network, at least partially, into private ownership.

This move has many implications and Transport Economics will be changed forever.

The Independent article raises most of the important issues. How will the roads be 'privatised', will the same mistakes be made as in past privatisations? Has PFI ever really worked? Will this scheme bring the investment the roads need?

But there are two issues I need to highlight.

The report suggests the cost of congestion is £7bn a year. I know this was estimated at £15bn in 1990, so this seems far too low a figure. I have asked for information on the source of The Independent's figure, but the difference seems to me to be so massive that it would change the result of any Cost-Benefit Analysis.

The issue that really bothers me about this plan is that it effectively abandons any thought of a national road pricing scheme. Such a scheme, where charges vary according to the time of day and level of congestion and co-ordinated on a national basis, holds the answer to the road problem.

Road pricing will pass on external costs, reduce road use and encourage alternative modes of transport. Such a scheme uses all the principles of charging that economists know can lead to an optimal outcome and a sustainable transport policy.

Can you imagine a road network with a mixture of public and private roads, a variety of tolls and SatNav's that direct traffic down the cheapest route, which will probably be past a school or old peoples home? Let's not even start on what happens when firms and investors walk away from their franchises!

Vital reading for Grecians, but important for everyone.

The Independent article is here

What should be in the budget?

Fiscal policy works well once it actually gets to be implemented. The first stage is the Budget, which will announce the measures that will be put in place over the next financial year (or two or three).

At this stage the long process of considering possible measures is concluding. What objectives the government will try and achieve, and what measures they will use will now have been decided. One thing is for certain, the Chancellor has not wanted for advice.

Some people are very keen to have more supply side incentives, others want an expansionary budget to boost aggregate demand. This reflects the deep concern people have for the state of the economy.

The piece below comes from The Guardian and is an opinion piece on what should happen. This is a thoughtful article, but does represent one point of view (a Labour front bench MP) so please remember that when reading it.

The Guardian article is here

Unemployment, a ray of hope or not?

Unemployment rose to 8.4% (2.67 million) last month on the LFS measure. The claimant count rose to 1.61 million.

There is no doubt that rising unemployment is bad news. The cause is, however, largely due to public sector job losses rather than cyclical unemployment which had been driving the figures higher since 2008.

The loss of public sector jobs has had the surprising effect of raising female employment. The state sector employs more women than men and the loss of public sector jobs means that the number of women unemployed has risen sharply and increased as a proportion of the total.

The BBC article below points out some significant points in the figures and also graphs them. You should visit the BBC economy page here and look at their map of unemployment too.

Is this the start of the 'flattening out' of unemployment? Will the private sector at last start driving a recovery. All these and more questions to be answered in a future episode.

The BBC report the figures here

Do governments get more money by cutting tax?

You could be forgiven for thinking that raising tax rates is a way of reducing government revenue. So far various groups have asked for:

* The 50% income tax rate to be scrapped
* The duty of fuel to be reduced
* The VAT on tourism to be cut to 5%
* The passenger duty on flights to be dropped

All four have claimed that as a result:

* The government will receive higher revenue
* Jobs will be created

What are the reasons for these arguments? And does this not imply we should simply cut taxes and solve the economic crisis?

Well on one level these groups are arguing for an old fashioned fiscal stimulus. Lower taxes and raise consumption and so Aggregate Demand. On the other hand they are relying of incentives to change behaviour.

For those advocating the cutting of the 50% income tax rate they suggest people will work harder if they keep more of their wages. This is a supply side measure.

For the other measures its just the law of demand and the proponents are really assuming a lot about the elasticity of demand. More jobs may result, but it seems optimistic to suggest that the government will get more tax revenue due to increased output and sales.

Of course the other interpretation is that the proponents of these tax cuts are all vested interest groups who want a boost to their incomes or their business.

The linked article relates to the latest calls for lower VAT on tourist services.

Call for 5% VAT on tourism

Has Rail Privatisation failed?

Yesterday The Guardian compared the NHS reforms to a 'failed Rail Privatisation'. I'm not at all clear on the NHS aspect of this but the article largely dealt with rail anyway.

The article chronicles many of the worst aspects of what was a botched privatisation in the rail industry. But even so I found  the negative aspects of it somewhat overstated. The problem of rail privatisation was its success allowing a huge rise in use.

That is very little consolation to those who stand everyday on overcrowded trains and pay the world's highest fares, but a more than 50% rise in passenger km's since privatisation seems like a measure of success, not failure.

The problems of the rail industry were highlighted in the McNulty report (a copy is now on the website in the Transport Economics page). The poor privatisation and subsequent meddling of an incompetent government (Prescott and Byers primarily) has prevented the intended competition from keeping costs down and the necessary investment has not happened because nobody trusts the government or PPP.

If the NHS reforms led to 50% more patients being treated on essentially the same health infrastructure wouldn't that be counted as success? Really the rail industry needs £20bn of new infrastructure investment in the next five years and about the same each five years after that without a single high speed line being built.

The Guardian article is here

Imperfect information - the case of payday lenders

In recent years there has been a boom in the business of lending people small amounts for short periods. These have become known as 'payday lenders'.

They specialise in allowing people to meet their bills between today and the next time they are paid. It seems an easy way to manage personal cash flow. Added to this the small loans are easy to arrange and the borrower can choose the term of the loan.

So what is the problem? Do the borrowers actually fully understand what they are doing? The interest rates are potentially 16,000% (although that is very unusual) and always much higher than borrowing from a bank or even a cash advance on a credit card.

The industry is, according to many, under-regulated. Are people being properly informed about what they are buying? This lack of information market failure can lead to disastrous consequences where consumers make bad choices, in this case buying more services than are optimal. The financial services industry has many other examples of this, such as payment protection insurance and endowment policies.

The attached article makes the concerns of many clear. People may well start taking out loans each month or week out of habit and believe they are managing their finances. In fact they will be compounding mismanagement of their finances and in the end they will reach the limit of their ability to borrow but with higher and more expensive debt.

Another worry is that this is just another example of 'sub-prime lending'. This was the cause of the credit crunch when banks extended mortgages to those who were in weak and unreliable financial circumstances. Maybe the lenders think this is safer, lower amounts and faster repayments so default on the scale of 2007/8 is impossible? But where is the moral justification for this? Lending to people not able to fully understand their product and endorsing behaviour that is unsustainable.

This does need sorting!

The Guardian covers the story here

Unemployment - an insight

David Blanchflower is an expert on the labour market. He was once on the Monetary Policy Committee and constantly worried about the effect of monetary policy on the jobs market, which annoyed the government as it was inflation he was meant to be worrying about.

In the piece below he looks at the current state of the UK labour market, considers why it has performed in the way it has and what schemes might work to improve it. This is a must read article.

You will notice that he too refers to the film 'The Full Monty', so its not just me!

Blanchflower's article is here

Numeracy skills hold back UK economy

For those who have already encountered supply side policy it may seem odd that much remains to be done on the basics.

A report suggests up to 50% of the UK adult population has numeracy skills no better than an 11 year old. This is a significant handicap to the economy.

Improving the supply side of the economy requires, among other things, improving the capabilities of the working population. If the workforce cannot perform simple calculations then they have little chance of performing the complex tasks required of a competitive, skills based, economy.

So what is the solution? We could attempt to improve the numeracy skills of the existing adult workforce. This is unlikely to meet with much success and could absorb a great many resources. The alternative is to improve the numeracy skills of school leavers.

Currently only 15% of UK students study mathematics after GCSE. That makes the UK unusual among developed nations (where the figures range from 50% to 100%) and we may have to consider sacrificing some higher skill development post GCSE to allow further training in mathematics. However it would seem that it is more likely that the numeracy figures represent a massive failure of mathematics teaching to age 16. Surely any successful programme would ensure a competent level of numeracy?

The solution, whatever it is, will take two generations to put things right. A frightening prospect, but an essential one if the UK workforce is to be fit for purpose.

The BBC covers the story here

Does this mean QE has failed?

Today it has been reported that the high street banks are raising their mortgage rates by between 0.25% and 0.5%. This is despite the fact that the Bank of England is unlikely to raise rates for at least the rest of the year and there has been more Quantitative Easing.

The problem for the economy is that higher rates of interest, especially for mortgages, will lead to lower discretionary income and so lower aggregate demand. This is exactly the opposite of what the economy needs at present.

The aim of Quantitative Easing is to increase the liquidity in the money markets and so reduce the market rate of interest. Yet the high street banks say that they are finding it more expensive to obtain funds and hence the rise in mortgage rates.

The problem for the banks is that they have to pay somebody for the use of the funds they lend to customers. This may be those who save with them or they may borrow in the interbank market.

Karl Popper, a philosopher of science, urged theorists to set out falsification conditions for their ideas.  These are things that would be observed if the theory is wrong. It would seem that after three rounds of QE and the ECB lending billions to UK banks, the rise in market rates qualify as a falsification condition for the effectiveness of monetary policy.

The Independent covers the mortgage rate rise here

The Telegraph covers British banks borrowing from the European Central Bank here

Written from my sick bed

Incentive to work vs revenue from a higher rate

The last government introduced a 50% income tax rate on taxable earnings over £150,000. The aim was to raise more tax revenue by making the rich pay more.

This is a well established principle of progressive taxation. However the trend has been to reduce direct tax rates because of the disincentive effect this has on workers.

The 'Laffer curve' describes how as tax rates rise the government gains a higher tax revenue. As tax raises, however, some people begin to think that working is no longer worthwhile and start to reduce their working hours. Eventually this effect becomes so strong that raising the tax rate even more leads to lower government revenue. The increased tax rates add less to government revenue, due to the higher proportion of income being paid tax, than the loss of revenue due to people opting to work less.

It is very difficult to find the tax rate where the government maximises its revenue but also keeps the labour supply sufficiently high for the economy to grow.

Many people are making a lot a of noise about the "temporary" 50% tax rate and saying that it is already holding back growth. Their argument is basically that the disincentive effect has already kicked in.

The counter argument is, of course, equity. The less well off would have to pay an unfair proportion of the cost of the collapse of the banks and the resulting deficit. Further many might say that having the chance to pay 50% tax is quite a good position to be in!

The Guardian covers the story here