The Office for Budget Responsibility has said that the UK Treasury will face a shortfall of £13bn in motoring taxes within a decade. Although car usage continues to rise putting increasing pressure on the road infrastructure, the greener and more fuel efficient cars being produced are driving down the tax revenues generated from motoring.
A report by the IFS has put forward the case for replacing the existing system of taxes on cars and fuel by a new road charging system. If no such change occurs, the IFS has forecast that with more electric cars and hence lower revenues raised from fuel and vehicle excise duties, the shortfall facing the Treasury would require an increase in fuel duty of some 50%. Instead of this, the solution could be to charge individuals for every mile of road they use, with the ‘price’ varying depending on the degree of congestion. For example, at peak times the price would be higher, where as for those in the countryside where roads are traditionally much quieter, charges would be lower. The IFS said:
‘Such a move would generate substantial economic efficiency gains from reduced congestion, reduce the tax levied on the majority of miles driven, leave many (particularly rural) motorists better off, and provide a stable long-term footing for motoring taxes without necessarily raising net additional revenue from drivers.’
Government policy across the world has been increasingly focused on climate change, with targets for emissions reductions being somewhat ambitious. However, many car manufactures who were told to reduce emissions significantly are on the way to meeting these targets and this success is a key factor contributing towards this new road ‘crisis’ that could soon be facing the government. The following articles consider the possibility of a road charging scheme.
Report
The road ahead for motoring taxes? Institute of Fiscal Studies (link to full report at the bottom of the page) (May 2012)
Articles
Compelling case for UK road charging, IFS study says BBC News (15/5/12)
Fears tax shortfall may lead to road tolls Sky News (15/5/12)
Who’s going to pay to update Britain’s infrastructure? Guardian Business Blog (15/5/12)
Motoring taxes: a future headache for the Chancellor Channel 4 News (15/5/12)
For whom the toll bills – less traffic hurts M6 toll road owner Guardian, Ian Griffiths and Dan Milmo (14/5/12)
Charge motorists per mile, says IFS Independent, Nigel Morris (15/5/12)
Green cars to drive down tax receipts Financial Times, Mark Odell and John Reed (15/5/12)
Questions
- Illustrate the effect of a tax being imposed on petrol. What happens to the equilibrium price and quantity?
- Despite fuel duty pushing up the price of petrol, why has there been such a small decline in the quantity of petrol individuals use?
- Evaluate the case for and against a road charging scheme.
- Why are tax revenues from motoring expected to decline over the next decade?
- Climate change has become an increasingly important focus of government policy. To what extent is the current road ‘crisis’ a positive sign that policies to tackle climate change are working?
- If a road charging scheme went ahead and prices were varied depending on traffic, time etc, what name would you give to this strategy?
- Why would it be possible to charge a higher price at peak times and a lower price for cars using country roads?
- Is there an argument for privatising the road network? Is it even possible?
Weather has already been partly blamed for poor economic growth, in particular in December 2010 and January 2011. April 2012 is no different – the wettest April on record is said to have caused the worst performance in sales since March 2011.
Like-for-like sales fell by 3.3%, mainly through lower demand for clothes and shoes. Supermarkets saw an increased demand for warmer food items with the colder weather and demand for home products also increased, with analysts suggesting that people decided to re-decorate their houses rather than venture outside! This was further supported by sales of gardening equipment, which also fell. However, the weather is not always bad – in March, sales were higher than expected, with the unusually warm weather, but unfortunately for growth statistics, the boost in sales in March has been more than offset by the decline in sales in April. Furthermore, there are concerns that the March ‘heat-wave’ may have encouraged consumers to do their summer shopping already and hence summer sales may suffer.
The retail data for April 2012 must be considered carefully, as comparing this month’s sales with the same period last year will be very misleading. Last April, the UK was hit with the Royal Wedding, which did boost sales of many products – underlying sales growth was recorded at 5.2% for the month. However, whilst April sales for 2012 could hardly hope to compete with April sales for 2011, the downward trend is undoubtedly going to cause concern for the government. Helen Dickinson, Head of Retail at KPMG said:
“While May will certainly be brighter than April, the health of the retail sector continues on a downward trajectory.”
Whether or not sales do continue their downward trend depends on many factors, including government policy measures to boost growth and cut unemployment. However, one other variable that may influence the trend is the weather. Here’s hoping that the sun shines and people begin to spend!
Weaker retail sales, job surveys raise risk of longer slump Reuters, Olesya Dmitracova (9/5/12)
Wettest April ‘hits retail sales’ BBC News (9/5/12)
Retail sales slide in wettest April on record Telegraph (9/5/12)
April showers wash out retail sales Financial Times, Sarah O’Connor (9/5/12)
Retail sales slip back 1 per cent as fashion stores weather April showers Independent, James Thompson (9/5/12)
Questions
- Use a demand and supply diagram to illustrate the effects of the weather on equilibrium price and output.
- What other factors besides the weather affect retail sales?
- What government policy measures could be implemented to try to boost the retail sector?
- From the information you are told are there any sectors that surprise you in terms of whether sales have risen or fallen? Explain your answer in each case.
- With sales in April falling, what is the implication for a firm’s profits? What steps might a firm take in a bid to boost sales?
The trendy US fashion retailer Abercrombie & Fitch entered the UK in 2007 with the opening of a flagship store close to Savile Row in London. Located in the upmarket Mayfair area of London, Savile Row is famous for its traditional men’s tailors.
Recently Abercrombie & Fitch decided to go one step further by opening a childrenswear store directly on Savile Row. This move upset the local retailers and was met with protests.
This was just the latest in a history of controversy surrounding Abercrombie & Fitch which has included a product boycott and a lawsuit concerning employment issues. Should all this bad publicity be a concern for the company?
We expect tastes to be one of the key determinants of demand. If taste for a company’s product declines, its demand curve shifts to the left. This means it can sell less at any given price and consequently will have a knock-on effect on profits. Somewhat surprisingly, therefore, the PR expert, Mark Borkowski, quoted in the Guardian article above, suggests that all this adverse publicity may have in fact helped the company because:
“…the focus is on the brand. They’ve got a very keen identity of who they are, what they want, who they want to consume their products, and they’ve stuck to it.”
It is also clear that the company is very aware of the importance of protecting its brand – even going as far as paying television actors NOT to wear their clothes! Abercrombie & Fitch has also been reluctant to cut its prices during the current recession, perhaps because of a fear of harming its brand.
Abercrombie & Fitch with its ‘crappy clothes’ threatens staid Savile Row Observer, Euan Ferguson (11/03/12)
Savile Row cannot live in the past Guardian, Charlie Porter (24/04/12)
Sorry chaps, Abercrombie & Fitch simply doesn’t fit Savile Row Guardian, Gustav Temple (24/04/12)
Savile unrest … the tailors who want to stop Abercrombie & Fitch London Evening Standard, Josh Sims (27/04/12)
Questions
- What are the distinctive features of the Abercrombie & Fitch brand?
- What are the key features of competition in this industry?
- Why might Abercrombie & Fitch be keen to open up a store on Savile Row?
- Why might the local tailors object to Abercrombie & Fitch opening a store nearby?
- Why do you think negative publicity appears to have little effect on Abercrombie & Fitch?
- Why do you think television coverage could harm the Abercrombie & Fitch brand?
Binge drinking is a problem that has seen much attention, especially with regards to minimum price controls. However, in this blog, we consider attention in this sector concerning taxation on beer.
Alcohol is widely considered to be a de-merit good with negative externalities imposing external costs on society. This is one of the reasons why taxes are imposed on alcoholic beverages. By increasing production costs to the firms providing these drinks, prices rise and hence the policy aims to discourage consumption.
During the recession, many businesses have seen demand fall and one sector hit particularly hard because of this and very high tax rates has been the local pub community. Duty on beer has increased since 2008 by some 42%. As such, many rural and suburban communities have seen their local watering holes close down and this has led to a campaign by CAMRA to force a debate in Parliament, as a means of protecting ‘one of Britain’s oldest and best loved institutions’. Data suggests that 12 pubs per week are closing down, thus the future of the industry is now under threat. This may also have further damaging effects on local communities, as it may adversely affect the social aspect of communities. Camra’s Chief Executive, Mike Benner said:
‘Whether situated in a small village, city high street, or on the edge of a housing estate, pubs are so central to our society that whole communities can grow around a particular pub.’
According to a study, pubs in Lancashire and the West Midlands have been hardest hit by the pub closures. If pubs don’t pass the tax increase on to consumers in the form of higher prices, then they must bear the burden. If they do pass the tax rises on to consumers then the larger chain firms can increase their market share by selling at a lower price. They are also facing growing pressure from the supermarket industry, which are able to sell cheap alcohol, also contributing to going to the pub becoming an ‘unaffordable activity’. The following articles consider this industry.
Pub closures spark beer tax plea The Press Association (30/4/12)
A dozen pubs close each week Telegraph, James Hall (30/4/12)
Calls for beer tax rethink as 12 pubs shut every week BBC Radio 1, News Beat, Steve Holden (30/4/12)
Pubs in the West Midlands hit hardest by pub closures ITV News (30/4/12)
Questions
- Illustrate the effect of a tax being imposed on a product such as beer.
- In this market, would the tax be more likely to be borne by the producers or consumers? Explain your answer and illustrate on the previous diagram why this is the case.
- Why are supermarkets able to compete local pubs out of the alcohol market? Do you think a minimum price will have any effect?
- What is a de-merit good? Illustrate the concept of a negative externality on a diagram.
- Explain how a de-merit good causes the market to fail. To what extent does the tax on beer solve the market failure?
- Why are there likely to be adverse effects on local communities? Could this have an adverse effect on economic activity in the area?
46p – that buys you a First Class stamp. However, the price will now rise to 60p and the price of a Second Class stamp will increase to 50p from 36p, as Ofcom lifts some price caps. These significant price rises have seen shortages of stamps emerging across the country. As people anticipate the price rise, individuals and businesses are buying up stamps while they remain relatively cheap.
The problem is that this has started to result in a stamp shortage, so much so that the Royal Mail has now begun rationing retailers’ supply of stamps, capping each retailers’ supply this month to 20% of its annual allocation. A Royal Mail spokesman said:
“We are more than happy for retailers to receive the normal commercial return they obtain on stamps and no more than that … That is why we have put in place a prudent allocation policy to safeguard Royal Mail’s revenues and ensure there are more than enough stamps for people to buy both now and in the future.”
With postage volumes falling, as individuals turn to other methods of communication, Royal Mail says that this price rise is essential to keep this universal service going. Revenues have been low and the Royal Mail has been loss-making for some time.
However, while the price rise may help the Royal Mail, many businesses may suffer in its place. One optician, who sends out approximately 5,000 reminders to patients each year intends to bulk-buy 10,000 stamps in the hopes of saving some £1,400 when prices of stamps rise. An IT worker bought 20 books of 12 first-class stamps and said ‘If I could afford it, I would buy a lot more’. Many are unhappy at the ‘shameless profiteering at the public’s expense’, but whatever your opinion about the price rise, it does make for an interesting case of demand and supply. The following articles consider this stamp shortage.
Man’s 10,000 stamp panic: stampede for stamps leaves a 1st class mess as Royal Mail introduces rationing ahead of 30% price rise Mail Online, Colin Fernandez and John Stevens (15/4/12)
Stamps rationed by Royal Mail in run up to price rise (including video) BBC News (13/4/12)
Stamp rationing could hit pensioners Telegraph, James Hall (14/3/12)
Stamp sales limited ahead of price hike Sky News (13/4/12)
How stamp collecting came unstuck Guardian, Hunter Davies (13/4/12)
Royal Mail limits supply of stamps ahead of price rise Telegraph, James Hall and Andrew Hough (12/4/12)
’Profiteering’ Royal Mail limits supply of stamps before price rise Guardian, David Batty (13/4/12)
Royal Mail’s stamp price rises come into force BBC News (30/4/12)
How businesses will be affected by Royal Mail’s changing prices BBC News, Catherine Burns (28/4/12)
Questions
- If people expect prices to rise, what will happen to the demand curve? Illustrate this idea on a demand and supply diagram?
- If suppliers anticipate a price rise, what would their best strategy be?
- On a demand and supply diagram, illustrate the shortage of stamps that has emerged. If left to the free market, what should happen to the price of stamps?
- Why could pensioners and those in rural areas be the most adversely affected by this shortage and price rise?
- Why could ‘children and new collectors’ be priced out of the market?
- Why will small businesses be affected by this price hike? How could their customers be affected?
‘Such a move would generate substantial economic efficiency gains from reduced congestion, reduce the tax levied on the majority of miles driven, leave many (particularly rural) motorists better off, and provide a stable long-term footing for motoring taxes without necessarily raising net additional revenue from drivers.’
