Tuesday, 9 January 2018

Much ado about little

In an apparent attempt to make a great deal out of very little, there was a certain amount of over-reaction to yesterday’s news about the removal of VAT from the Severn Bridge tolls.  On the one hand, the Secretary of State for Wales declared that this would create "exciting opportunities for businesses and investors looking to make their mark in Wales"; whilst at the other extreme we had dire warnings about an influx from Bristol into Monmouthshire forcing up house prices and putting untold pressure on schools and surgeries.
The economics behind these predictions are sound enough in principle, according to the theories.  Changing the price of something affects the demand for it and people respond accordingly to the stimulus.  But there is another question involved in this, and that’s the ‘reasonableness test’: in the real world, it’s not just whether the arithmetic is correct, but whether the projected final totals look as if they might create the effects predicted.
Let’s do some simple sums.  The difference between the old toll of £6.70 and the new one of £5.60 amounts to a princely £1.10.  Assuming one trip a day, 5 days a week for around 45 weeks of the year (allowing for holidays etc.), someone commuting daily to Bristol would save a grand total of £247.50 a year.  However, assuming a cost per mile of around 12 pence, moving to a location only 5 miles further away from the place of work would eat up the whole of that saving, and end up costing more in travel costs.  If the tolls were scrapped completely, the saving would amount to a more substantial £1500.  That starts to look more significant, and provided that the increased travel distance to work isn’t more than 28 miles, there might still be a small saving, but the greater the extra travel distance, the closer to negligible the saving becomes.
So how many people would really take a decision to move home – with all the disruption and costs involved in doing so – solely on the basis of such a small sum?  Common sense suggests that the number will be low.  That is not to discount the importance of other factors such as a gap in house prices, but in the scale of things, the reduction in tolls is small. 
For businesses, of course, the economics work out rather differently, so Alun Cairns’ claims about the ‘opportunities’ depend on multiplying the effect by the number of crossings for which a business would have to pay.  For businesses involving little travel between Wales and England, the reduction or abolition of tolls makes little difference; they will naturally locate on the side of the estuary whether they trade.  For those needing substantial movements across the estuary, they are likely to locate on whichever side requires least crossings.  Reducing the tolls affects the decision in neither case.
It’s a pity though – I actually wish that the claims being made did stand up to detailed examination.  I’d really like to believe a government could achieve so much in terms of changing behaviour or promoting economic development from such a small change in policy at a comparatively low cost to government revenues, instead of merely generating photo opportunities for ministers.


Ioan said...

Another point - business claim back VAT on travel, so removing VAT does not change anything for most businesses!!

G Horton-Jones said...

Zero charges hide the fact that both Structures require continual maintenance. future replacement and possible major costs in removing structural components

I note that the completion of Crossrail One is to be followed up immediately by Crossrail 2

Something has to be done soon about the Severn Tunnel