The impact of fuel duty on work incentives

According to a review commissioned by the Department of Social Security, ‘the costs of travelling to work will ... be a factor in some people’s decisions about whether to look for or accept employment’. Indeed, one survey found that 50 per cent of unemployed people cited ‘extra costs such as travel’ as a major cause for concern about leaving benefits. Moreover, ‘travelling costs will also be a regular expense which may influence decisions about whether to remain in a particular job’. Studies of low-income families suggest that earnings from low-paid employment are significantly reduced by travel-to-work costs, with a particularly acute problem in rural areas. Since around two-thirds of working adults who travel to work do so by car or van, it is clear that motoring taxes - and fuel duty in particular - have a significant impact on travel-to-work costs. 

The impact of travelling costs on work incentives is likely to be most pronounced for those individuals that already experience very high effective marginal tax rates (EMTRs). Within certain income ranges, some workers face EMTRs as high as 96 per cent. High EMTRs reflect the withdrawal of welfare payments such as housing benefit and tax credits, as well as the imposition of income tax and national insurance. While EMTRs of over 90 per cent are experienced in quite narrow income bands, EMTRs of 70 per cent or over affect a large number of employees on relatively low incomes.

Accordingly, travel-to-work costs can make a large difference to the financial incentives to enter work. Case studies illustrate the magnitude of the effect. A single person over 25 in low-cost rented accommodation would typically be around £70 per week better off in a full-time job paying the minimum wage than on benefits, which works out at £1.75 an hour. However, if average costs for those driving to work (about £20 per week) are applied, this means the person is now only £50 per week better off, or £1.25 an hour. When a realistic estimate of the time spent travelling is incorporated, the effective hourly rate falls further to around £1.10 an hour. Thus, in this case study, under plausible assumptions, travel-to-work costs reduce the returns from entering work by almost 40 per cent.

A significant proportion of motorists, such as many in rural areas, face very much higher costs.  Travel-to-work costs of £40 per week would reduce the benefit of working to just £30 per week, equivalent to just 75p per hour, a drop of almost 60 per cent. At this point the financial incentives for entering employment may be extremely weak, particularly since there are likely to be additional in-work costs such as food and clothing. Worse still, several groups, such as single-earner families or households in private rented accommodation receiving large housing benefit payments, face even weaker incentives to enter relatively low-paid work. In such cases, travel-to-work costs may mean work does not pay or even makes the household worse off.

The AA estimates that fuel accounts for approximately two-thirds of car running costs (which do not include ‘standing charges’ such as insurance and VED). This suggests fuel duty accounts for roughly one third of the costs of those travelling to work by car or van. As the government introduces welfare reforms designed to improve work incentives, there is a strong case for policymakers to consider in detail the effect of travel-to-work costs, of which motoring taxes form a major component. 

The economic impact of motoring taxes is analysed in a new IEA paper, Time to Excise Fuel Duty?

Perhaps one partial remedy is to make it easier for people to travel to work without a car and without paying for (often expensive) public transport. In the UK, we provide extremely badly for those who wish to cycle - there is very little provision and it is made dangerous in many areas by the priority given to motorised transport. This, perhaps, is why just 2% of UK journeys are by bicycle, whereas in the Netherlands it's around 25%. I imagine that, for the low paid, the percentage is probably much higher in the Netherlands, since the lower paid tend not to be long distance commuters. The situation in the UK is just another example of where public policy makes it an expensive place for low paid people to live. What is more, cycle provision also improves the situation for vehicular transport because it reduces congestion.

@HJ - I'm not convinced that better cycle provision is a good use of taxpayers' money - at least in most locations. Judging by the cycle priority measures introduced in recent years, significant amounts of road space have been devoted to a tiny minority of users with scant regard for the delays imposed on drivers. One example would be the advanced stop lines introduced at traffic lights. Cycle lanes can also narrow roads causing delays when there are parked cars or at bus stops. There doesn't seem to be much economic analysis undertaken when these measures are introduced and often there is barely any cycle traffic where these schemes are put in place. Of course, the long-term solution is to move roads to the private sector so that the level of cycle provision becomes a commercial decision.

Richard - A short visit to the Netherlands would soon rid you of your objections. You say; "Judging by the cycle priority measures introduced in recent years, significant amounts of road space have been devoted to a tiny minority of users with scant regard for the delays imposed on drivers." Can you provide me with an example? I can't think of one. In the Netherlands, if you need to drive into towns and cities, it is a so much more pleasant experience because there is much less congestion because of cycle infrastructure. As both a cyclist and a driver, I am much more often held up by car-created congestion when on my bike than I am by bicycles when I am driving. You also say that "often there is barely any cycle traffic where these measures are put in place". Have you asked yourself why? It's because the measures are so few and far between and they are not joined up - so you have to brave dangerous traffic before you even get to the few 'bits and pieces" provision that do exist. Surely you don't think that British people are just inherently much less likely to cycle than Dutch people? You also make this statement: "There doesn't seem to be much economic analysis undertaken when these measures are introduced..." Perhaps you can tell me what economic analysis was carried out which decided that motorised vehicular traffic should, by default, be allowed to drive non-motorised traffic off the road because of the fumes, danger and intimidation that it causes?

@HJ - I have visited Holland on numerous occasions. Many of their cycling facilities were included in the huge centrally planned housing developments of the post-war period. It is a different situation to trying to retrofit cycling infrastructure to existing roads.

The advanced stop lines at traffic lights, which seem to be spreading like topsy even in areas with few cyclists, are a good example of a measure that imposes delays on drivers. As I mentioned in my previous comments, ideally cycling priority measures should be judged commercially by private road owners. However, under state ownership, there should at least be some form of cost-benefit analysis to inform officials whether such spending is likely to represent good value for money. Such an analysis should incorporate the time losses imposed on drivers. In many cases the time savings for cyclists from these measures are likely to be negligible.

Richard - Clearly you don't know the Netherlands particularly well. I know several older cities in the Netherlands very well and they all put our cycling provision to shame - and have far more cyclists as a result. Ever been to Amsterdam or Maastricht, for example? Recently I was in Glasgow - a city hugely scarred by the priority given by planners to cars. Many streets there are wide and would easily be adapted to make then suitable for safe cycling. Instead, they are hugely hazardous to cyclists (and often pedestrians), of which there are very few as a result. "there should at least be some form of cost-benefit analysis to inform officials whether such spending is likely to represent good value for money. Such an analysis should incorporate the time losses imposed on drivers. In many cases the time savings for cyclists from these measures are likely to be negligible." There was never such a cost-benefit analysis carried out when motor transport was prioritised, so any such analysis now would say "only 2% of journeys are by cycle, therefore they're not important" - therefore not accounting for the fact that would-be cyclists have been driven off the road by motorised transport. In fact, if you knew the Netherlands well, you'd know that the reduction in traffic in towns because of good cycling (and pedestrian) provision reduces journey times for cars as well. You also fail to take into account safety aspects, not just time savings. As I understand it, you do not propose privatising most roads in urban areas and neither is it a feasible option, so I fail to see how privatisation would help.
Richard - one other thing that I think is flawed in your analysis. You refer to the fact that £30bn more is paid in tax by motorists than is spent on roads, as if motorists are somehow being short changed. But this ignores the fact that the existing stock of roads (many of which predate the car/lorry/bus) has an asset value on which motorists are not currently being explicitly charged a return. Were you to action off the roads, then the operators would want not only to charge for maintenance, etc., they'd rightly want a return on their upfront investment. It is not at all clear that costs for motorists would fall. In calculations about most roads in urban areas, which I think you'd accept are not candidates for private ownership, officials should not simply do a cost-benefit analysis. The roads are owned by everyone and they should operate roads in the interests of everyone, so and they should take into account the fact that motorised traffic tends to intimidate (and is often dangerous to) other road traffic. It causes congestion, noise and pollution. Therefore, these users should pay accordingly for safe provision for others or, perhaps be limited to using urban roads in the same way, i.e very slowly, perhaps 15mph. Cyclists and pedestrians do not penalise other road users in the same way.

@HJ - There is in fact a strong case for urban roads to be privatised, and this is set out in our recent monograph, 'Which Road Ahead - Government or Market?'. However, the process is perhaps less straight forward than denationalising motorways and trunk roads. Minor residential roads could be transferred to residents' associations who would then control access, speed limits, parking restrictions and so on. Roads on new developments could remain under private ownership rather than being adopted by local authorities. The process is likely to be evolutionary and its speed would depend to a large extent on the degree to which the planning system could be liberalised concomitantly. Of course private owners would wish to make a commercial return on their assets, but under current conditions of state ownership, given the absence of markets, fiscal and regulatory distortions and so on, any given road is very difficult to value.

Richard - I think more cost benefit analysis is always welcomed, but from what we know new roads sometimes provide less than 1:1 CBR, whereas cycling schemes involving new routes and promotion can provide benefits of 9:1. This is compelling enough in itself. In your studies you rightly point out the significant costs of congestion to business. I would agree with IEA call for congestion charging varying at different times of day, but also point out that many journeys to work and school are easily within cycling distance. Converting these journeys would cut congestion for those who had to be on the road, and cut pollution as well. It would also lead to less wear and tear on our roads (perhaps an incentive for private owners!). But we know from people who don't cycle but would like to, that lack of safe space on our road network is a key concern. Retrofitting is possible, Glasgow are making changes in some parts of the city, for example. Businesses are seeing the benefits of this: GlaxosmithKline, BSkyB and B&Q are among major employers working to encourage cycling to work. Interestingly, the Institute of Directors in Wales have backed calls for more to be done to make cycling safer: http://www.walesonline.co.uk/news/wales-news/2012/11/04/short-drives-on-...

@Matt Hemsley - It is very rare for road schemes with low BCRs to get the go-ahead, although there are a small number of examples such as upgrading the dual carriageway from the M6 to the M74 to motorway standard. The average BCR for road schemes deferred in the post-2010 review was 6.8. The Eddington Report survey found an average BCR for strategic road schemes of 4.7. While they are a lot better than nothing, cost-benefit analyses can nevertheless be affected by using unrealistic assumptions, as we have seen with High Speed 2. It would be preferable for entrepreneurs to invest in new schemes based on expected toll or fare revenues.

Richard You want a study that shows how getting rid of cars is good for urban economies? Here you go: https://d3n8a8pro7vhmx.cloudfront.net/americabikes/pages/211/attachments... Thats a PDF for the NYC Department of Transport's findings that show a HUGE increase in prosperity for those streets that design for cyclists and pedestrians, rather than cars. And The Economist is good on the costs associated with negative externalities of parking places etc: http://www.economist.com/blogs/freeexchange/2011/03/tragedies_commons
Richard - there is much of interest in your report, but I do think that it has significant flaws and omissions. It devotes very little to the rights of non-motorised users of the roads. It doesn't mention, for example any rights of cyclists to travel safely or any measures that would ensure this.

We are holding a debate on roads policy at the IEA at 6:30pm on 29 November. Full details are here: http://www.iea.org.uk/events/ending-the-road-building-gridlock-a-private...

Please email iea@iea.org.uk if you wish to attend.

Richard - thank you for the invitation, but it's very difficult to get into London for that time. Can I point out, however, that your panel really doesn't include anyone who might have nay concern for the interests of non-motorised road users. I believe that studies have been carried out in other countries (Denmark, for example) that shows that cycle infrastructure produces clear economic returns compared to prioritising cars. Perhaps you would swat up on this beforehand and make sure that this is represented fairly at your debate?
I agree that BCRs are crude and we need to look again at how we asses the values of transport schemes. Currently walking and cycling schemes are significantly undervalued compared to road schemes. More roads have been proven to generate more traffic and more congestion, rather than improve traffic flow as so often seems to be assumed. Reducing traffic levels by way of providing alternatives will benefit the economy. In terms of cycling, this means making it the normal way to travel for journeys under 5 miles. Shared paths away from roads are ideal, as is highlighting routes along quiet back streets. If safe routes lead to more cyclists - and there was an 18% increase in use on the National Cycle Network in 2011 from 2010, then it would reduce traffic levels and therefore help with traffic flow.
Richard - just in case you are under the impression that a whole lot of cycling obsessives have got together to post like crazy under your article, I can assure that that we haven't. I commented just because I find the difference between travelling around towns and cities in the UK and those in the Netherlands, stark. I find it very hard to believe that the way that we do it is more economically efficient - it is certainly far more congested and far less pleasant. If we want less congestion (and to reduce the costs and other unpleasant consequences of congestion), it seems they have a better idea how to achieve it than we do. Just think of what could be achieved by scrapping HS2 and instead spending the money on cycle provision - it would be of far greater benefit to far more people.

@HJ - Such debates can be very worthwhile and often alert the participants to aspects they have not previously considered. I agree that there are many better uses for the resources being squandered on HS2. Allocating resources efficiently is difficult, however, given the current context of pervasive state regulation and huge fiscal distortions.

It is fair to talk about non-motorised road users, and to consider them as critical in an urban context. In the sort of scenario Richard Wellings is advancing, it would mean that such roads including footpaths would be owned by some sort of collective body corporate type arrangement. In such situations, with residents and commercial property owners having control, they would seek urban environments which provided plenty of high quality access for pedestrians and cyclists, but also accommodate vehicles for delivery, taxis, residents' and customers' cars and public transport. In all cases the non-motorised users are free riders who impose little external costs. There is much to be said for high value improvements to pedestrian and cycling infrastructure that reduces accidents, but if you really want a policy step change to reduce traffic congestion it is pricing of road use - which is done very bluntly in the UK. The urban form of cities varies enormously in the UK, so that with some exceptions, cycling simply will never be a major mode. However, the now old adage that more roads means more cars is increasingly a nonsense, given the flatlining of traffic demand in the UK over the past decade (i.e. pre-recession). In fact in London, it is clear that the failure to build adequate road capacity, particularly in the south, has stunted growth and limited opportunities for people there to access a diverse range of employment opportunities, as well as exposing them to accidents and emissions because of the lack of a dedicated right of way for orbital traffic within the M25 and radial traffic going south of London. The ad hoc planning framework for highways has proved to be utterly hopeless in delivering high standard arterials for London, as politicians have focused on commuter rail trips (understandably important, but not sufficient) and clumsily proposed invasive cheap and nasty part solution highway schemes that simply created reactive NIMBYism, whilst DfT and Treasury regarded road tunnels as a waste of money (with no thought of tolls of course). A combination of the planning environment, anti-motorised road transport philosophy, politically dominated penny pinching ad-hoc central government funding and a "pillage the motorist through tax" approach have delivered appalling results. Who knows what an entrepreneurial highway company might do, if allowed to toll, if allowed to acquire properties to build highways, if it only need mitigate externalities by innovative design like tunneling and compensating land owners and didn't have to care about the endless whining of "generating more traffic", because what it is doing is facilitating new opportunities and trade? Whatever it would be, it can't be worse than the status quo - where the last Mayor replaced an old bridge on a major highway which created a bottleneck as the road narrows from 2 to 1 lane each way, with a brand new one, which repeated the bottleneck, instead of building a dual carriageway bridge - because the policy was never to increase capacity. If road owners were able to access a third of the revenue generated off of their roads, the results would be astonishing.
If we were to turn over management of the highways to commercial control then prior to that event there would have to be a massive increase in spending on cycling infrastructure. Why? Because for the last 80 or more years the car has benefitted massively from government investment, money stolen from the taxpayer to pay for pro-car roads whether or not the public wanted them. This has been going on for so long that if we simply switched ownership to the private sector it would not be a free market, the market is loaded in favour of cars by previous government spending and many who would like to cycle cannot for fear of injury. The new owners would then be reluctant to rebalance this situation without a proven local market. It would only be by creating an environment where it is as convenient and safe to cycle as it is to drive that a real free market could exist post-privatisation after the many decades of government interference in the market.
I think the IEA have completely missed the point. Fuel duty has technically DECREASED over the last 10 years (even in relation to wages). The price of a barrel charged by oil companies has actually been the key change. I also think half the problem is peak-car. It has certainly happened in parts of the country: Bristol, London, Southampton, Portsmouth, etc.. an indicator that this is a problem is the very fact that it is hard to find a place to park. Another indicator is how the average number of cars per household is now 3 in those cities. Another indicator is the dreaded traffic jam. Then there is the issue of the availability of oil. It is a finite resource and we have to find ways to conserve it. Electric cars will only take off so far and will never be green until power stations go green also. It has become clear, to this driver atleast, that we have to do MORE to increase cycling levels. Even the AA acknowledges this - cycling is a transport enabler for the disenfranchised or the well-to-do (look at how many senior Tories cycle). The real issue here in British society is not fuel duty but successive government avoidance on making cycling safe and convenient for the majority. The DFT's own figures show that the average driver (excludes the 1 million disabled drivers and the 300,000 HGV and logistics drivers obviously) drives a total of just 6 miles a day. 75% in fact of those drivers actually drive less, and 25% less than 2 miles.
Just to re-focus on the original discussion. It significantly reduces the incentive for people to take low paid work if a significant part of their (after tax) earnings are consumed by the cost of getting to work. However, I don't think that Richard Wellings argument is entirely convincing, because the cost of fuel, although very significant, is not the biggest cost involved in running a car. The lowest paid probably wont be able to afford a car/insurance/road tax in the first place - especially if they are young and face huge insurance premiums. Public transport is often not a good alternative either. It's often pretty expensive and it often takes a long time and/or doesn't go where you want to go, when you need to go. This is why the prioritisation of provision for motorised transport often to the direct detriment of those that would travel distances up to (say) 10 miles by cycle, were it safe and reasonably pleasant to do, directly disadvantages the poor. As supporting evidence for my view that our transport policy disadvantages and disincentivises the low paid finding/taking work, especially the young who therefore lack transport to work options, I point to the Netherlands where safe cycling provision is widespread and where youth unemployment is the lowest in the EU - half that of the UK.
It's always disappointing when economists approach something they don't understand (how people move round the country) with the prejudices they have (cars are the best mode of transport, all congestion and parking problems are artefacts of an anti-motorist state), to produce results that are utterly meaningless. This is a shame, as with knowledge of statistics and game theory then you may have something to contribute, especially once you learn your queue theory. While your article -somewhat rightfully- complains about the costs of driving that impacts residents in a rural environment, the majority of the english population has lived in the cities for about 200 years. In the cities, those cars cause delays, parking problems and their excessive demand for space compared to other options imposes an opportunity cost -they take away the space. Given that the areas of the inner cities are fixed, parking and driving capacities are fixed unless you copy glasgow and flatten the inner city. How then to effectively make use of it? Lowering the costs of driving for the poorest in our society is not it. Better to impose a charge proportional to amount of the finite resource, possibly offset for peak traffic times. A congestion charge for all transport option -walking, cycling, driving, with peak hours charging more. This would help when driving as it would suppress other car traffic -so reducing delays imposed on those people whose need to drive is such that they are willing to pay a premium over other options. Similarly, realistic billing for the value of on-road parking spaces would make the opportunity cost much clearer: a row of parked cars are not only preventing a cycle lane being built, they are preventing a whole new all-traffic lane being built (which, queue theory being what it is, may or may not be beneficial). If you want to advocate some things then, consider Why does the DfT's transport models value the time of people differently when they are walking, driving, cycling, on a bus or on a train? It makes five minutes of time saving on HS2 more valuable than five minutes lost by making the walk to the train station longer by changing the wait times on the crossing. Similarly, why value the time of someone in a car higher than someone on a bicycle, when many of us in Bristol cycle to work precisely because it is faster (and more deterministic) than driving. I consider my time to be too valuable to waste in a traffic jam, especially if I then have to go to a gym afterwards. Yet the DfT models price pedestrians' and cyclists' time below everyone else's so skewing their transport plans against them. Of course, the DfTs spreadsheets have a bad reputation these days -but the value per transport modality is an intrinsic part of their cost model, not an error. As I said at the beginning: how people move round a city is a fascinating subject, and if you bring your mathematical expertise to the problem, rather than your opinions, you may soon have something to contribute.
HJ - I agree with you entirely. The wider costs of owning and running a car are becoming more of a struggle for many. But people feel they need to own a car to get around, even though it spends a significant amount of time doing nothing on a driveway or in a car park. This is dead money to the economy. Already a quarter of households in England don't have access to a car (OK - for some this is a personal choice), and two-thirds of jobseekers have no car access. A lack of options - including safe cycling routes - is preventing many people getting back to work (again, good for the economy). Changes to fuel duty aren't hurting or helping this group into employment. Making more workplaces accessible by bike (and 5 miles is about 30 minutes) would enable more people to get back to work, and others to shift their current commuting trends. Again, this would free up road space for those who have to use motor vehicle. I have e-mailed in to attend the panel discussion next Thursday.
Here is a link to a document about the benefits of cycling infrastructure in Copenhagen: www.kk.dk/sitecore/content/Subsites/CityOfCopenhagen/SubsiteFrontpage/Li... On sheets 18 and 19 it attempts to quantify the benefits (I freely admit that the document is pro-cycling and doesn't explain how they did their calculations, but it does indicate that other countries often calculate things using very different assumptions than we do here). I do find it interesting that EU countries with the best cycle infrastructure (Netherlands, Denmark, Germany and even Belgium) have the lowest youth unemployment levels - lower than the UK. It would seem quite a coincidence if it had no relation to cycling provision.

@HJ Thanks for the link. I will read the document with interest. However, I'm not convinced that low youth unemployment in those countries is related to good cycling infrastructure. A better explanation may be the nature of the economic cycle. Certainly the boom was far less pronounced in Germany and her immediate satellites than in many peripheral EU countries.

Richard - I'm not suggesting that I have convincingly demonstrated a link between youth unemployment and cycle infrastructure, but I think that the correlation suggests that there may be some significant linkage especially as, if Matt Hemsley (above) is correct in saying that two-thirds of job seekers have no car access (I'd imagine that it's an even higher proportion of young jobseekers). I don't accept your assertion that a link with the economic cycle is a more likely explanation because the figures show that these countries had lower youth unemployment than the UK even at the height of the boom (which was more pronounced here, and less pronounced in those countries with good cycling provision). See this link where The Guardian reproduces OECD figures: www.guardian.co.uk/news/datablog/2012/may/16/youth-unemployment-europe-oecd If we think about it - the point you were originally making was that unemployed people need to be able to travel inexpensively in order to be incentivised take low paid work - and the young unemployed are the people most likely to be looking for low paid work (especially as the more skilled young will likely be in education and not on the jobs market). Unemployed young people are perhaps also the least likely to be able to afford cars (cant get a loan, haven't had the opportunity to save, highest insurance premiums). Consequently, they would benefit most from being able to travel to work safely and cheaply by bike.
Increase in the rate of the vehicle fuels, automatically increase the travel expenses. Increase in traveling cost making much more problems for the public or passengers. Mostly, the higher percentage of the people belongs to the average families. So increase in travel expenses will make their life difficult. Basically, the people in rural areas suffering the most. In rural areas, the roads are well constructed and the use of fuels much more due to the under constructed roads. So the people have to pay more travel expenses for them. So the fuel price needs to be in control to minimize the travel expenses.
Fuel is an important factor for vehicle. Traveling cost is a regular expenses for working employee. Generally low-income families affected much through traveling because they do not get proportionate traveling expenses. Generally rural areas motorists face very much higher cost. So fuel cost should be distributed in right proportion which will be benefited to working employee.

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