Lovely bit of microeconomics covering HGV problems

 From CapX, a great source of information:

•  Restrictions on foreign hauliers have doubled the number of empty lorries on the roads
•   'Cabotage' rules belong in the 17th century
•   Both the EU and the UK have over-regulated the haulage sector to protect it from competition

As driver shortages dominate the news, it is curious that few people have picked up one of the main reasons why these shortages have become a problem. While Remainers call for the restoration of freedom of movement, Brexiteers call for more UK drivers to be trained, both sides are missing the point.

In the 1970s, trucking was seen as a cool job – Driving a powerful vehicle on the open road, radio blasting, traversing the country, picking up and dropping off goods, until you head home. Paid by delivery, the crucial thing was just to avoid driving without a load.

But times have changed and long-distance trucking is no longer seen as an attractive profession. The Covid pandemic has created a boom in short-distance delivery driving, so enticing people back into long-distance haulage will not be easy. There are driver shortages everywhere (Poland has over 100,000 vacancies). Shortages are also not a new problem, but date back a decade.

So the question really is why are these shortages such a problem now? The answer is surprisingly simple.

Empty Lorries

Both the EU and the UK have over-regulated the haulage sector with ill-conceived policies that protect jobs from competition that clearly does not exist.

To be precise, they limit the number of ‘cabotage’ journeys a foreign business is allowed to make in their territories.

The consequence of this is that there are many more empty lorries on the roads now than before Brexit.

According to Michael Clover of Transport Intelligence, prior to Brexit an average of 30% lorries were empty for their return journey, but this has now doubled to 60%.

Driving with no load is not commercially attractive. As the driver shortage allows operators to pick and choose which jobs to do, cross-border journeys between the EU and UK have little appeal.

Why do Cabotage rules exist?

‘Cabotage’ refers to the transport of goods (or passengers) between two places in the same country by a foreign operator.

While you may occasionally hear spurious arguments about national security, the reason that cabotage restrictions exist is to protect domestic industry from foreign competition.

Cabotage laws date back to the 1650s when, under Cromwell, the English parliament passed a series of acts, collectively know as the Acts of Navigation and Transport that banned foreign vessels from transporting goods to England or its colonies. Only ships with an English owner, master and a majority English crew were permitted to engage in such trade. They also placed other restrictions on international trade, such as prohibiting British colonies from importing goods from outside the Empire.

Unsurprisingly, these restrictions were very much resented by the colonies themselves, notably North America, where it became a key factor for the ’Sons of Liberty’ movement that led to the American revolution. Somewhat ironically, the ‘Land of the Free’ adopted the policy wholesale after independence, and has retained it in one form another to this day (Jones Act), while the UK changed course.

In 1849, British parliament abolished the Acts of Navigation and Transport.

Mercantilism gave way to the golden era of free trade.

The reason for this was not just fear of a tit-for-tat ban on British vessels in other countries, but because they could see the benefits of free trade in lowering costs for consumers and inputs for business.

However, a century later this had changed. The Great Depression led to the decline of British industry and a resurgence of protectionism. Transport became seen as a public good rather than an industry. Debating amendments to transport legislation in 1947 the Lord Chancellor, Baron Jowitt, went so far as to claim that ‘carriers are in a sense public utility companies rather than industrial or commercial concerns.’

When the UK left the European Free Trade Association and signed the European Communities Act in 1972, it passed the Road Traffic (Foreign Vehicles) Act, regulating international haulage in line with European law.

This permits three cabotage operations for hauliers from other member states in another without being required to register their business in that state.

While Brexit has presented the UK with the opportunity to set its own policy and return to free market principles, this has not happened yet.

Under the terms of the UK-EU Trade and Cooperation Agreement of 24 December 2020, the EU restricted UK hauliers to only two cabotage jobs within the Single Market – and the UK responded by imposing the same conditions .

As a result, the number of empty lorry journeys has doubled. Aside from hurting businesses and consumers, this obviously increases carbon emissions.

Given the government’s commitment to net zero, they should ask themselves how they can reconcile protecting an industry that does not need protection with their environmental agenda. Perhaps Greta Thunberg can give them a push towards free trade?

Coal in Cumbria vs long term goals

 Log in to the paper and read the comments section; consider how hard it can be to have effective strategies when resistance is strong:

The Cumbrian coal mine is careless diplomacy and economic idiocy

Whitehaven Colliery plan is a dark stain on the UK’s green ambitions and it will soon be obsolete

AMBROSE EVANS-PRITCHARD9 September 2021 • 5:00am

As long as it entertains creating a brand new coal mine at Whitehaven Colliery, the Government is undermining its position on decarbonisation CREDIT: PA

Britain has sold its climate credibility for a mess of brown pottage. The proposed Whitehaven coal mine in Cumbria has no commercial rationale and will be obsolescent before it ever opens.

One can only sympathise with Alok Sharma. The president of Glasgow’s Cop26 “summit to save the world” is entering the last critical phase of talks with China, India and Russia, only to be undercut at home by well-meaning Tory colleagues living in an economic time-warp, and deaf to the higher notes of global statecraft.

Over coming weeks, Mr Sharma will strive to conjure some sort of G20 consensus on the hardest of the hard issues: a timetable for the total phase-out of “unabated coal power”, the bedrock requirement for a 1.5-degree world.

While he does so, his own country will be debating a brand new mine at Whitehaven Colliery, intended to produce coking coal until the middle of the 21st century. The public inquiry began this week and will run for four weeks, a ghastly torment for Mr Sharma’s negotiating team.

The G20 resisters might note wryly that if an affluent post-industrial UK cannot muster the political courage to forgo a pork-barrel scheme for jobs in Cumbria – where pre-pandemic unemployment was just 2.8pc – why should they give ground on a coal-based infrastructure of systemic economic importance.

The Whitehaven saga should have been shut down long ago. Cumbria County Council has withdrawn its support, switching to strict “neutrality”.

It was claimed at first that Whitehaven coking coal would supply Britain’s steel industry and displace imported variants with a higher CO2 footprint. But Tata Steel has since said the high sulphur content makes it mostly unsuitable for milling at Port Talbot.

Coking coal in British steel “could be displaced completely by 2035” CREDIT: PA

Documents submitted by owners West Cumbria Mining now suggest that 83pc of the 2.8m-ton production will be exported to Europe, some of it to Turkey. Europe? Really?

Presumably the Australian private equity group backing the mine – EMR Capital – is aware of the near unstoppable political moves in Brussels to extend the EU’s carbon trading scheme to steel producers, which account for 6pc of the EU’s total CO2 emissions.

Carbon futures prices in Europe have tripled in a year to €63 (£54) a ton. They will hit €100 a ton by the mid-to-late 2020s almost automatically because the European Commission is dialling down the permits. By that point coking coal will be caught in a hostile scissor-action of moving variables, ever less able to compete with exempted “green” steel made from hydrogen via electrolysis.

Chris Goodall, from Carbon Commentary, has crunched the figures: a ton of coal-based steel typically is responsible for 1.9 tons of CO2. Ergo, a carbon fee of €100 will add nearly €200 a ton to the final cost. That would raise the price of European steel by a third.

Turkey will have to shadow the EU carbon price, and so will others such as Ukraine. If they resist, they will be shut out of Europe’s market or forced to pay a “level playing field” charge. We are moving to a new world trading system of carbon border tariffs.

ArcelorMittal, the world’s biggest steel producer outside China, can see the writing on the wall. It is building a commercial-scale plant at Gijon in Spain, aiming for 2.6 tons a year of green steel from 2025 onwards. It will use hydrogen in a “direct reduction” process, drawing on the solar parks of the Spanish meseta where costs are near £25 MWh – getting close to free energy.

There will be costs replacing old steel with green steel infrastructure but governments are stepping in with blanket subsidies because none wish to miss the hydrogen boat. Berlin has promised to spend whatever it takes to help ThyssenKrupp and other German steelmakers to make the switch. Mirabile dictu, Big Steel is switching.

Lord Deben, chairman of the Climate Change Committee, says the coking coal in British steel “could be displaced completely by 2035”, the date set for net-zero steel emissions in this country. The Cumbrian coal would be obsolete, sellable only to a diminishing group of climate pariah states.

The CCC is being cautious. It will happen sooner than that. One thing we have learnt in the lightning-fast field of renewable energy is that the advances keep coming earlier than almost anybody expected, making a mockery of forecasts by status quo bureaucracies such as the UK Treasury or the International Energy Agency.

Michael Liebreich, founder of Bloomberg New Energy Finance, says green steel will have reached sufficient global scale by 2030 to undermine the market for coking coal. The game will be over by 2040.

He thinks the UK authorities should set three conditions for Whitehaven: no subsidy, no bailout; and a bond for decommissioning. “If they can still raise money under those terms, it is hard to see why they should not be allowed to lose it,” he said.

The Cumbrian colliery is supposed to create 500 jobs, but if employment is the objective it might better be met by creating engineering and technical support jobs for the offshore wind farms in the Irish Sea CREDIT: Getty

The mystery is why mining veteran Owen Hegarty, from EMR Capital, is bothering with such a nonsensical venture. “There are technical challenges digging under the sea off Cumbria. 

It is far less expensive to mine coking coal in other parts of the world,” said Dave Jones from Ember. Mr Hegarty’s swashbuckling fellow Australian, Andrew “Twiggy” Forrest, is making the opposite bet after his Damascene conversion. The ex-Fortescue tycoon and epic carbon emitter aims to produce gargantuan quantities of green hydrogen from arrays of wind and solar across the outback of north-west Australia.

Twiggy calls it a “clear cut economic choice” regardless of climate science. There is nowhere cheaper on the planet to make power and therefore to make clean steel in situ. He thinks Australia can corner a large chunk of the $12 trillion (£8.7 trillion) hydrogen market worldwide, rendering the country’s current coal industry trivial to the point of irrelevance.

For starters, he plans an annual output of 15m tons of green hydrogen by 2030, with 50m later. Green steel, here we come.

The Cumbrian colliery is supposed to create 500 jobs, if workers can be found for underground toil in a region facing a labour shortage. If employment is the objective it might better be met by engineering and technical support jobs for the offshore wind farms in the Irish Sea. Each new gigawatt requires 1,500 workers.

The service hub for BP’s three gigawatt joint venture off Anglesey will probably go to Wales but there will be plenty more coastal jobs as the UK leads the world with 40 gigawatts of offshore wind by 2030.

While this wind power will never be as cheap as Spanish or Australian solar, it will be very cheap and effectively free for large chunks of each 24-hour cycle, nicely adapted for green hydrogen production at prices that will outcompete Cumbrian coking coal.

The Whitehaven Colliery is never going to happen. But the fiasco has dragged on long enough to leave Britain with an excruciating diplomatic embarrassment. Worse yet – unless you are a climate denialist – it has intruded on the delicate chemistry of Cop26. One weeps at the ineptitude.

Tax - a simple concept eh?

 

So much for simplification – we now have four types of income tax

There's no silver bullet to this muddle of complexity, and workers, savers and shareholders are all paying the price

SAM BRODBECK

PERSONAL FINANCE EDITOR

8 September 2021 • 3:56pm

You’ve got to pity the poor souls at the Office of Tax Simplification. Quite possibly the least sexy quango of all, the Government’s tax adviser is tasked with coming up with ways to streamline Britain’s ever more bloated taxation rulebook. Removing duplication, aligning rates and simplifying guidance is the aim of the game.

Picture the scene in the OTS on Tuesday, then, when the Prime Minister delivered a slew of tweaks and fiddles to National Insurance and dividend levies as well as a brand new health and social care tax. Their heads must have exploded. Or maybe accountants live for this stuff, the more complex and impenetrable the better.

All of which means that, despite appearances, there are now effectively four separate levies on earnings, only one of which has the word “income” in it. To add to income tax we have National Insurance, student loan repayments (better called a graduate earnings tax) and the new 1.25pc health and social care levy.

However - and you can practically hear the OTS bods rolling their eyes - for the first year of the new tax’s life it will exist as part of National Insurance, so the main NI rate will go from 12pc to 13.25pc and the top rate from 2pc to 3.25pc and then drop back as before.

From April 2023 state pensioners with earned PAYE income (excluding pensions, rental income and so on) will also pay the new levy, though only the 1.25pc surcharge, not the full NI whack. Though technically not National Insurance, this will mark the first time those in receipt of the state pension have made a contribution towards benefits via a levy. 

When NI was introduced in 1911 far fewer people lived much beyond the state pension age. Today the opposite is true, and tax experts have been pointing out for years how pensioners’ exemption from NI is baffling when you consider the enormous cost of the state pension, which works on a pay-as-you-go basis, with younger workers paying today’s pensions. 

So why was the 1.25pc figure chosen? Presumably it was the result of a tussle between the Prime Minister and Rishi Sunak, the Chancellor. More strange is that the same figure has also been used to increase taxes on dividends, adding yet more muddle.

Shareholders already pay tax on company payouts at a rate determined by their income tax bracket less a £2,000 annual allowance. Now investors have to contend with rates to two decimal places. It’s almost like someone at the Treasury saw the social care levy at five minutes to midnight before the announcement and suggested tacking the same figure on to dividends too, surmising (correctly) that no one would understand it anyway. 

Politicians claim to want to simplify the system but there is little incentive to do so. When he set up the OTS in 2010, the then chancellor George Osborne pinned the blame on Tony Blair’s administration, for taking a “complex tax system and making it worse”.

He was quite right to say that a decade of “meddling and intervening” had turned the tax affairs of millions of families into a “mess”. He had six years to turn it around but instead made it a whole lot worse.

Mr Osborne clearly realised that complexity is pretty handy when you want to raise cash without people noticing. The interaction of those four income taxes combined with the means-testing of various allowances creates an array of different marginal rates far higher than the official 45pc top rate of tax. 

Well over 300,000 people effectively pay income tax at 60pc, for instance. This quirk is caused by the removal of the personal allowance, the amount you can earn tax-free, once you earn more than £100,000. For every £1 earned over £100,000, the allowance drops by 50p. The result is that each additional £1 of income effectively incurs 60p of income tax. Once National Insurance is factored in, the true rate is even higher.

The same thing occurs with the withdrawal of child benefit when one parent earns more than £50,000. The benefit is clawed back via tax charges until it is entirely wiped out once income tops £60,000. Again the result is that on that portion of income the effective tax rate is 60pc. Most bizarre of all is the marriage allowance, a perk afforded only to couples with one non-taxpayer and one basic-rate payer. As soon as one partner’s income breaches the higher-rate threshold, now £50,271, the couple lose the tax break entirely. That means £1 of income costs £252.

Aside from giving everyone a migraine, there are serious consequences of such a convoluted system. Firstly, the public don’t fully understand how the Government is milking them, and so are powerless to fight back. There is an economic cost, too. Individuals are forced to pay ever growing sums to tax advisers to help them comply with the rulebook, now far north of 10 million words long, 48 times the length of Hong Kong’s tax code. Investment is also hampered, as foreign firms spend gargantuan sums navigating corporate tax law or give up.

What to do? There’s no silver bullet to a muddle of this complexity but one place to start would be to make it a statutory duty of ministers to follow the OTS’s advice or explain why they refuse. The OTS was a great idea; we just need to give it some clout.

How wages rise as companies compete for staff

 

John Lewis gives lorry drivers a £5,000 pay rise

Employee-owned partnership is the latest retailer to offer lorry drivers a £1,000 sign-on bonus amid chronic shortages

ByLaura Onita4 August 2021 • 6:46pm

CREDIT: Alamy

John Lewis is the latest retailer to offer lorry drivers  a £1,000 sign-on bonus and higher salaries as the industry grapples with a chronic shortage of HGV drivers.

The partnership, which owns the Waitrose and John Lewis chains, said it will increase wages by up to £5,000 a year from Sunday.

The incentives are designed to ensure the retailer can continue to recruit drivers at “market competitive rates”.

The move comes days after similar decisions from Tesco, Marks & Spencer and Aldi.

Tesco has offered drivers a £1,000 joining bonus for those who join before 30 September, while Aldi is understood to have increased wages to maintain its position as the industry's highest payer. Meanwhile, Marks & Spencer offered a £2,000 joining bonus this week.

The Road Haulage Association has estimated there is a shortage of 100,000 HGV drivers mainly because EU workers have left the UK and the suspension of driver training and testing during the pandemic. Fewer people are taking it up as a profession, further exacerbating the problem.

The lack of drivers has caused disruption and delays across food supply chains, leading to product shortages in some cases. 

It has also disrupted waste management services in some areas, forcing councils to pause or cancel rubbish collection.

The Government recently granted a temporary extension of lorry drivers' working hours to help tackle the crisis.

Mark Robinson, director of supply chain at the John Lewis Partnership, said: “We’re responding quickly to the national driver shortage by ensuring our drivers are paid competitively and by investing in training for the future.

“These changes will mean that we can continue to serve our customers well and get them the products they need.”

Important piece on changes to GDP measurement

 

If it’s all about the data, a new way of measuring paints a completely different picture of growth

Philip Aldrick

Saturday July 03 2021, 12.01am, The Times

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Every so often new evidence emerges to remind us how little we understand the economy. Not in terms of what the future holds, but the shape of the economy now. In recent weeks, there have been a couple of such double-take moments — reminders that we know even less about what’s going on than we thought.

The first of those surprises came from the European Union settlement scheme, under which EU migrants can apply to remain in the country permanently. During the Brexit negotiations, the plight of the three million EU citizens in the UK was front page news. When the deadline closed on Wednesday, 5.2 million of those three million had been granted the right to stay and another 500,000 were being processed.

That’s right. It turns out there are 2.7 million more non-Irish EU migrants in Britain than was thought during the referendum, and 2.2 million more than the Office for National Statistics’ estimate in mid-2020. The overshoot was so large that Jacob Rees-Mogg this week felt it necessary to pay tribute to deluged Home Office officials.

CHRIS DUGGAN

Where were they hiding? In plain sight. We just had not counted them. Speaking to the Resolution Foundation think tank on Thursday, Sir Charlie Bean, the former Bank of England deputy governor, said: “It’s always struck me as bizarre that we are an island yet we’ve never had a good handle on how many people are here because we’ve never really measured migration.”

Assuming no over-counting elsewhere, the discovery of these lost residents has big implications. For a start, questions may be asked about the economic benefits of migration if more were needed to deliver the same output. A larger total population means national income per person is lower. That would make Britain economically weaker than thought, with an even worse productivity record. Or perhaps we have a thriving shadow economy of crooks and money launderers.

The ONS says the two datasets are not comparable, that 5.7 million probably overstates the true figure as many left in the pandemic (informed estimates suggest 500,000) and that the ONS’s 3.5 million estimate was never the full picture. Either way, all we know is that the official estimate for EU citizens in the UK appears wrong by a factor of 50 per cent.

Measurement matters. Policy is guided by data, which is why the second revelation is even more important. This week, the ONS unveiled a new way of calculating GDP. The changes were technical but significant. What they showed was that Britain’s manufacturing sector, all too often unloved against services, has been a far stronger driver of the UK’s economic engine than thought.

In aggregate, the size of the economy is unaffected but the story of how we got to where we are today is different. Two decades of economic history have changed and the new methods raise the possibility of a better tomorrow.

To understand the changes, though, we first have to tackle the complex subject of “double deflation”. There are two main measures of national income — nominal, or cash, GDP and real GDP. Real GDP growth, which strips out inflation to reveal the volume increase in the economy, is what we all talk about.

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Say a car manufacturer makes £200 million one year and £220 million the next but sells the same number of cars in both. From a GDP perspective, cash growth would be 10 per cent but real growth would be zero as the extra revenue was only in the price. But if the manufacturer added a stereo to the cars in the second year, the quality improvement would be treated as an increase in volume. In economic terms, the £200 million cash GDP would translate into, say, £202 million in real GDP because the “deflator” would now be smaller. This hypothetical auto economy would now have seen 1 per cent real GDP growth.

What the ONS has done, in a painstaking but long overdue piece of work, is create a new set of deflators for each industry, both for their input costs and their output prices, to establish the real economic value they have added. This has transformed the telecoms services sector, the old phone companies that now supply superfast broadband.

Telecoms prices have barely risen but data has multiplied. The ONS has begun adjusting to reflect units of data. Imagine each of those cars had not just been fitted with a stereo but could also fly. As we get so much more for our money, the effective price has fallen, which conversely means the volume measure has exploded. This quality effect means real growth in telecoms has averaged 27 per cent a year since 1998, not the 6.8 per cent previously estimated.

Unfortunately, that vast growth does not mean the economy is bigger. What’s happened is that growth attributed to other industries under the old measurement methods has been shifted to telecoms. This is where double deflation comes in. As the telecoms deflator raises the effective input cost for companies using broadband, their volume growth falls. Architecture, for example, was thought to have grown at 1.9 per cent a year between 1998 and 2018. The new deflators now suggest the industry has not grown at all.

Like telecoms, double deflation has revealed hidden real growth in manufacturing, which accounts for a tenth of GDP and is now thought to have expanded at 3.1 per cent a year in the decade to 2008 rather than 0.3 per cent. Productivity between 1998 and 2018 has been upgraded sharply in manufacturing and downgraded in most services.

The economy is no longer what it was. Measurement changes mean telecoms, technology and manufacturing are the fast-growing industries. Services, still four fifths of national output, remain key but the balance has tipped a little.

It may be no coincidence that the UK is the only G7 country not using double deflation and is sitting at the bottom of the productivity pack. Previous analysis suggested Britain’s factories have been responsible for much of the productivity slowdown. With double deflation, they may become part of the solution.

Either way, pity the policymakers. They can only be as good as the data they are given.

Philip Aldrick is Economics Editor of The Times