Monday, 23 June 2008

Will tax stop people driving?

In his most recent missive your FatBigot suggested that both recent and impending increases in "green" taxes on motorists are nothing more than a dishonestly disguised tax hike. Today I want to discuss what effect such increases in tax are likely to have on the number of miles driven in the UK. The need to do so has been prompted by a recent intervention by a junior minister of dubious history.

Recent increases in the cost of petrol and diesel have provided the Treasury with a nice windfall. Although the level of fuel duty is a fixed sum per litre, VAT is charged on top at 17.5%. For every penny that the base price of fuel rises, the increase at the pump is 1.175 pence. Similarly, an increase in fuel duty of one penny per litre is actually an increase of 1.175 pence because of the bizarre double-taxation scheme by which VAT is charged not just on the fuel itself but also on the duty.

The government has announced its intention to add 2 pence per litre in fuel duty in October of this year (they originally planned to introduce that increase in April but elections were looming so they chickened-out). The actual increase in tax, of course, will be not 2 pence but 2.35 pence once VAT is added. Many calls have been made for the proposed increase to be abandoned because the government has made a killing from the additional VAT received from increases in the base price of fuel caused by the rise in wholesale oil prices. Such calls were dismissed by that great champion of balance and fairness Joan Ruddock, the erstwhile big cheese at the Campaign for Nuclear Disarmament. Displaying the level of principled behaviour we have come to expect from our present rulers, her continued naive attachment to the aims of CND has not prevented her from collecting a Minister's salary in a government firmly wedded to the retention of nuclear weapons. Her feeble bleat was that the increase in duty must go through because we must not forget the environmental agenda.

Let us test the reasoning behind her comment.

For these purposes we need to make one, and only one, assumption, namely that the driving of motor cars causes damage to the environment. That being our starting point we must ask what difference an increase in duty of 2.35 pence per litre will make to the extent of use of motor cars and, thereby, to the extent of damage to the environment.

In order to examine that issue we need to make no other assumptions, but we do need to bear in mind two simple and obvious points. First, we have to choose how we spend our money and, secondly, we live in the world in which we live not in some fanciful place where modern life has never been experienced. All spending, whether by business or by individuals, is either essential or discretionary. What is essential depends on the means at our disposal; many things that seem essential when one earns £100,000 a year suddenly appear in a different light when we lose our job and find a replacement at a quarter of the salary. But the question I am addressing is all about Mr & Mrs Average – that band of people which constitutes the vast majority of the country and the vast majority of the motorists in the country. Those of sufficient wealth not to be affected at all by the price of petrol are irrelevant, as are those for whom petrol is an irrelevance because they do not have a car.

For Mr & Mrs Average essential spending includes such things as the costs of housing, food, water, clothes and travel. For these purposes essential travel includes that which must be undertaken in order to provide the housing, food, water etc – travel to and from work, to and from shops. It also includes other elements of travel which are necessary for people to live ordinary lives in the real world – visiting friends and relatives, going to the leisure centre, taking children to school and on excursions, going to the GP or dentist, and innumerable other things. Everyone must decide whether those journeys should be undertaken and, if so, by what means.

Over the last couple of years the average price of unleaded petrol at the pump has increased from around 90 pence per litre to more than £1.10. Has that caused a massive decrease in the number of miles driven? This is a vital question because if such a huge increase in fuel costs has not made a significant difference to behaviour it is irrational to think that an additional increase of 2.35 pence will do so. The answer, of course, is that there has been a reduction in the use of motor cars where the cost of driving has become disproportionate to the benefit received, but there are structural and practical reasons why no major change has occurred or will occur in the foreseeable future.

Many journeys cannot be undertaken other than by road. Where there is no train service, no river, no canal and no airstrip it is road or nothing. In such places the carriage of goods, the carriage of people for business purposes and the carriage of people for private purposes must all occur by road or not at all. An increase in fuel costs will not prevent essential journeys being undertaken, but they will increase the costs of business thereby adding to inflationary pressures in the economy as a whole. Undoubtedly certain private journeys will not be undertaken if they become too expensive. Perhaps people will not be popping out to the shops quite as often as before, perhaps they will visit Auntie Dora twice a year rather than three times, perhaps they will share a car to work with a colleague, but these are not going to make any real difference to the total number of miles driven because the shops need to be stocked, and people need to go to the shops for provisions, people need to get to work, children need to get to school, young and old need to get to the doctor or dentist and so on.

Where railways, buses, rivers or canals provide an alternative to the motor vehicle, price and practicalities determine whether people will choose not to drive. We can leave rivers and canals out of account because few carriers exist. The question becomes, will an increase in the cost of driving a car cause significant numbers to turn to the train or bus? Buses are, of course, for people only. Carriage of goods and people by train involve essentially the same considerations – is there a cost benefit to using the train and, if there is, are there any reasons why the car remains preferable despite being more expensive?

These considerations are constantly reviewed by businesses who have a choice of how to convey their goods. If diesel remains so highly priced that the switch to rail appears likely to be of long term benefit to a business one can be confident that the switch will be made. The same can be said of individual travel for business purposes because a sensible business will not want to cover the cost of its staff traveling to meetings by car if the train is cheaper. Recent increases in rail fares have not helped the anti-car lobby in this respect but it can certainly be said that for many businesses the decision between road and rail for their staff will often be a matter purely of cost.

When it comes to our personal lives there is a factor never addressed by the anti-car brigade. It is that ownership and use of a private car is considered by many to be something that enhances their independence. After years of standing at the bus stop in the rain they can walk out of their front door and get into their own means of transport. It might be slower than the bus or train or it might be faster, that is often of little concern to them. They are no longer waiting for someone else to carry them because they have earned the money to buy their own transport, they can enjoy the radio without interruption, sing along without complaint, have a cigarette if they are so inclined, take a detour to have a cup of tea with an old friend or drop off some dry-cleaning, buy something heavy which fits in the boot but which they couldn’t take on the bus or train and the list goes on and on.

Far more important than the mathematical assessment whether the car or train would be faster or cheaper for a particular journey is the fact that they have flexibility and choice – a choice which they have earned. In order for an increase in the cost of motoring to affect a driver’s decision whether or how to travel it is necessary to persuade the driver to give up his little piece of independence. It might or might not be right to label this as vanity, let us be generous to Joan Ruddock and call it that, but however one labels it, it is a factor which must be overcome before a driver will choose an alternative means of transport. For the driver, therefore, there are three considerations: (i) price, (ii) convenience and (iii) vanity. None of them stands alone, all three affect every decision.

Be it a trip to see Auntie Dora with your 3 children, the weekly shop, lending your garden shredder to a friend who lives 10 miles away, carrying yourself and your clubs and trolley to the golf club or a thousand other scenarios from real life, the car is the likely choice once you have a car. Who is going to say “sorry Fred I can’t lend you my shredder it would cost me £3 in petrol, last week it was £2.83 but the increase in fuel duty means it is now too expensive”? It simply is not realistic.

So where is the scope for reduction? It flies in the face of common sense to say that an increase in the price of petrol will have no effect on the number of miles driven, some will take the bus or train for certain journeys where it benefits them to do so. It also flies in the face of common sense to say that people are going to switch to the train or bus in vast numbers unless the cost saving outweighs the aggregate of the inconvenience and loss of vanity caused by abandoning the car.

There is no evidence of the huge increase in fuel prices over the last couple of years causing mass migration from the internal combustion engine. Joan Ruddock’s suggestion that a further increase in duty of 2.35 pence per litre will be good for the environment is laughable.

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