Economics Presentation

By Brian Ross,

Stop Stansted Expansion

• Local environmental impacts

• Climate change impacts

• Adverse economic impacts• Economic benefits

The Policy & Planning Balance

Also, social impacts – positive and negative – but almost impossible to quantify

Economic Arguments – DfT

• User benefits – Consumer surplus theory, based on value of time for new and existing users and for foreign residents as well as UK residents • Producer benefits – Profits for airlines and airports

• Government revenue – APD

DfT methodology under review but presently includes:

Less: Carbon costs and Capital costs:

Net economic benefit

• No-one really understands DfT methodology• Benefits accrued for 60 years post-completion• Disregards HMT ‘Green Book’ guidance• Illogical, discredited, unconvincing

However:

Economic Arguments – Industry

Aviation industry emphasises:

• Jobs – but read Brendon Sewill*, Jeremy Birch and some basic economics about opportunity costs and efficient labour markets.

• Need for business connectivity – but UK business accounted for just 9% of UK air passengers in 2009 and are not price sensitive.

• Overseas tourists – but overseas tourists accounted for just 23% of air passengers in 2009 and are only slightly price sensitive,

* ’Airport jobs: false hopes, cruel hoax’, Sewill, Brendon, AEF, March 2009

Our Economic Arguments

• Jobs: One man’s airport job is an eventual redundancy notice in the domestic tourism industry. Over 2 million jobs depend on UK tourism compared to 180,000 on aviation)

• UK plc: How does it benefit the British economy to help an Irish airline which buys American planes in order to transport millions of British people to spend their disposable income in other countries?

• International competitiveness: So why is Japan, an island trading nation like the UK but with twice our population and twice our GDP, able to compete so well internationally with so much less runway capacity than the UK?

So who’s right?

• 100 economists will have > 100 different opinions

• It’s not about winning a Nobel Prize for economic theory – it’s about winning hearts and minds

• Our arguments must aim to convince the media, politicians and other opinion formers, and the public

• We may need to be unashamedly tabloid in our approach

UK International Travel Deficit

NB: Excludes deficit on air tickets (£1.9bn in 2009)

£bn

Does the tourism deficit matter?

• Inward tourism = exports; outward tourism = imports;

• Balance of Payments must ultimately balance;

• Floating exchange rate – i.e. self correcting?

• No such thing as free lunch – ultimately either £ is devalued or interest rates rise – or both;

• Why not a Queen’s Award for Imports?

• When we import goods and services we are exporting jobs and investment - and vice versa

Outward vs Inward Tourism

1985 1990 1995 2000 2005 2009

= Outward visits= Inward visits

UK Travel Deficit (£billion)

1985 1990 1995 2000 2005 2009

Price Elasticity of Demand

UK Leisure = - 1.0Foreign Leisure = - 0.2

Source – ‘UK Air Passenger Demand and CO2 Forecasts’, DfT, Jan 2009.

• In other words, if air fares increase by 10% UK leisure demand will fall by 10% but foreign leisure demand will fall by only 2%.

•This effect is amplified by the fact that the UK leisure sector is almost three times bigger than the foreign leisure sector.

•Thus higher air fares (e.g. As a result of higher APD can have a very large dampening effect on outbound tourism and yet hardly affect inbound foreign tourist numbers.

Purpose of tripUK residents'

visits abroad (‘000)

Overseas residents' visits

to the UK ('000)

Holiday 30,458 7,685

Business 5,627 4,753

Visiting friends & relatives 9,592 7,203

Miscellaneous 980 2,439

Total 46,657 22,080

International Air Travel 2009

Source: Travel Trends 2009, ONS, Tables 2.07 and 3.07

Sterling Effective Exchange Rate

Source: Bank of England: 2005=100.

Sector

Share of passenger demand

2005

Elasticity of demand with respect to

Income Air Fares

UK Business 8% 1.4 -

UK Leisure 29% 1.5 -1

UK Charter 16% 0.4 0.4

Foreign Business 6% 0.6 -

Foreign Leisure 11% 0.7 -0.2

International to International Interliners

11% 0.7 -0.3

Domestic 17% 2.1 -0.3

Overall 100% 1.3 -0.5

Long run price and income elasticities

Key Data Sources

ONS Travel Trends, MQ6, Pink Book, Blue Book

HMT Red Book, Green Book

DfT Air traffic forecasts, SCAB spreadsheets

CAA Airport statistics, Annual Passenger Survey