16 11 2011

Or; a lesson in poor strategic thinking and poor vertical integration.


I have visited the Government’s war on the motorist on this blog before when I highlighted how fuel is the only essential commodity subject to a double tax (the fuel levy and VAT). At current prices this combined tax sees the motorist paying a rate of around 160% tax on the fuel he or she buys at the pump.

Taxation at that level on any other essential commodity would likely see rioting in the streets however, for this article, I intend to ignore the debate of fair versus unfair and instead focus on how flawed strategic thinking is now undermining the Chancellor’s predictions of income from fuel taxation while, at the same time, contributing to the general public’s reticence to return to the high street.

I will apologise in advance for addressing the matter in simplistic terms and would like to point out that the main purpose of the article is to demonstrate to those who develop strategy the importance of vertically integrating thinking and of taking into consideration cause and effect. The Government’s poor understanding of strategy is merely the vehicle for the lesson.

Starting at the beginning, I will address two of the Government’s stated strategic aims:

  1. To raise income via taxation on fuel in order to address the national debt.
  2. To encourage the public to return to the high street where an increase in consumer spending will boost a near flat-lining economy.

When looked at in isolation, Aim 1 seems reasonable; the scale of the dual taxes on petrol should create income for the Exchequer, an income enhanced by the increase in VAT to 20%. And although the rate of the fuel levy has recently levelled further increases of 3p per litre are due in both January and August of next year.

However, the income generated from this taxation has actually fallen. The AA reports that in the first twelve weeks of 2011 the Government lost almost £650m in tax revenue due to a drop in the amount of petrol and diesel being sold at the pumps. In short, the consumer can only afford so much before he/she simply has to buy less, exposing the myth that higher taxation will mean higher income for the Exchequer.

As a direct result of this high taxation, Aim 2 is also undermined. Consider how many daily household items, essential or otherwise, are not affected by petrol (and diesel) prices; without fuel the goods are not delivered to the shops from warehouses or to warehouses from manufacturers or farms. The manufacturers have sales forces travelling by car; the farmers have tractors working the farm. All use petrol or diesel and therefore all have to allow for the higher cost of fuel by increasing their prices. Ultimately this means higher prices for the consumer who, already struggling to fill the car has to cut how much he/she spends on other commodities as prices rise.

That is the knock on effect a single, poorly thought through strategy, one that considers want and need without considering cause and effect. When we introduce how well vertically integrated this strategy is with other strategies the picture only worsens.

The Government is not expecting taxation on fuel to encourage the consumer back to the high street. The principle mechanism for that has been Quantitative Easing or QE. Under this mechanism more money is produced and released into circulation under the assumption that more money in the economy will lead to more spending. QE has a chequered history being blamed for driving inflation into four figures in pre-war Germany as well as having some modest successes in other countries.

Successful or not, one effect of QE, wherever it has been employed in the past, has been weaker currency, in our case Sterling. In theory, a weaker Sterling is not a huge price to pay for ‘rebooting’ the economy. It can assist with exports for British industry however drives the cost of imports up. It can make Britain more attractive to tourists however makes overseas holidays for Britons more expensive.

And where a commodity is traded in another currency (e.g. Dollars) it will inevitably mean it becomes more expensive for the British consumer; meaning that oil, traded on the markets in Dollars, goes up in price as a direct result of a policy (QE) designed to put more money into the economy and to encourage consumer confidence and spending.

And more expensive petrol means, less money spent at the pumps resulting in less income from fuel for the exchequer and resulting in more expensive goods in the shops as both import and delivery costs inevitably rise.

End result? Both of the stated Government aims are falling short.

The more strands you add to the necessary vertical integration of strategy, the more we see strategy failing. Gas is also traded in Dollars meaning a higher percentage of household income will be needed for winter heating bills meaning less to spend on the high street, and so on.

Single issue, unintegrated strategy is risky at the best of times. Failing to properly consider cause and effect is to undermine strategy even given the best intentions.

The Government have consistently told us there is only Plan A, there can be no Plan B and that is not necessarily an issue provided Plan A has inbuilt flexibility, that it is subject to proper, regular review and that where it ‘underperforms’ adjustment and adaptation are carried out.

Without, it is difficult to see where either the extra income to the Exchequer or the return of confidence in the high street will come from.

(Author’s note: It is the nature of blogs that they continue to be read long after they were written. To put the above into context, at 11.38 this morning, 16th November 2011, the Dollar stood at $1.5758 representing a drop of 5% since the policy of QE began in the UK. Many analysts believe that the fall could have been far worse but for the US maintaining interest rates lower than those in the UK making it less attractive to investors. It should also be noted that the US Federal Reserve has also used QE in an attempt to breathe life into the US economy which, although still risky, is seen as less risky by investors due to the Dollar’s status as a ‘safe haven’ currency. Should the US not apply further QE and/or raise interest rates, even to parity with those in the UK, forecasters predict that Sterling will appear far less appealing).

© Jim Cowan, Cowan Global Limited, November 2011

Read more blogs by Jim Cowan


Twitter @cowanglobal




One response

9 03 2012

[…] reported the government’s poor understanding of cause and effect in previous blogs, principally in November last year when I looked at how raising income by increasing taxation on fuel was unsustainable; firstly […]

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