Monday, February 17, 2003

London's new congestion charge comes into force today. Vehicles entering central London will face a £5 daily charge. Payment is to be made by a variety of means (SMS, phone, web, ticket booths etc.) and monitoring is by CCTV reading number plates.

Road pricing has been on the agenda for 40 years. Alan Walters (who later became Margaret Thatcher's economic guru) proposed the introduction of road pricing in the UK in the early 1960s. The roots of the idea go back further.

The rationale is simple. A driver who takes his or her car into a congested area contributes to that congestion, but up till now has not paid a price for the inconvenience caused to other people. This is what economists call an externality. The tax introduces a price for this, and therefore compensates for the externality.

No doubt the charge will infuriate many people who have grown used to having something that they value given to them for free. (In that respect, it is a bit like the proposed hikes in tuition for universities.) But the congestion charge is undoubtedly good economics. The niggling doubt concerns the capability of the technology to cope with the task in hand. If it can, the benefits of the scheme will be substantial indeed.

Sunday, February 09, 2003

Reports today suggest that Chancellor of the Exchequer, Gordon Brown, has privately decided that Britain should not join the European single currency. While at the present time I think this is the right decision, I do not think the Chancellor's reasoning is sound.

The reason reportedly given by Mr Brown is that he regrets the decision of the European Central Bank not to cut interest rates, and that he values Britain's own flexibility to do so. Nothing would benefit Britain more at present than a cut in interest rates in the Euro zone. Yet by staying out of the Euro, we have ensured that we have no influence in this decision. By Mr Brown's own reasoning, we should join, so that we can have influence (though of course not control) over such a key determinant of our own economy's success.

But in my view the time is not yet right to join the Euro - albeit for different reasons. Our economy is not fully in synch with that of the rest of Europe. And so the time for us to make the (politically desirable) decision to join remains some way down the road.

Thursday, February 06, 2003

Interest rates have been cut today, to 3.75%, by the Bank of England's Monetary Policy Committee. There has been some debate in recent days about whether or not such a cut is desirable. The argument is that the downturn in manufacturing in Britain, in particular, is due to a fall in international demand rather than low demand within Britain, and that therefore a cut in domestic interest rates will not fix the problem. Those favouring this line of argument suggest that a cut in interest rates will boost an overheating housing market, and would therefore be damaging. In constrast, I would have to say that I agree with the Bank of England's position. Retail sales in the Christmas period disappointed many, and there are signs that the housing market boom is slowing. The fillip provided to the domestic economy by the interest rate cut is therefore very welcome.