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Article from BTNews 27 SEPTEMBER 2021

SOAPBOX SPECIAL: Professor David Starkie

Tourism.  The stark figures.

David Starkie MSc (LSE) is a Senior Associate of CASE (founded in 1995 by Dr Cento Veljanovski), is one of the longest established competition and litigation economics consultancies in Europe.  He has published widely in academic and professional journals and his books include Aviation Markets: Studies in competition and regulatory reform. He is a long-time BTN commentator.

“Yet again, the Government drags its heels over freeing-up overseas travel. The latest position, or should that be rumour, is that British residents, fully jabbed returning from overseas, will still require PCR tests until the end of next month. Perhaps? Aviation chiefs have complained that the effect is to make “travel less affordable.” But has it occurred to them this is almost certainly the Government’s intention, to restrict travel by making it less affordable?

In a normal year Britain runs a huge “deficit” on its tourism account. In 2018, for example, Brits drained the economy of £71bn seeking sunshine, sea and sangria abroad. Inbound visitors spent only £31.1bn, so the account deficit was a whopping £40bn and increasing year on year.

With international travel severely supressed by Covid restrictions, current sums will look very different of course. Inbound tourism into the UK is a pale shadow of what it was. For UK residents, currently faced with a limited list of green countries and perplexing, continually tweaked and expensive testing regimes, overseas travel has plunged.

The bottom line is that travel restrictions will have diverted this year (my best estimate) over £40bn of potential spending power into the UK economy. Even in this day and age that is a lot of money and undoubtably it is this economic factor, aiming to boost a depressed post-Covid UK economy, not health concerns, that explains the Government’s foot dragging on changing travel rules.

But the Government is playing a high-risk game here. As always there are consequences following policy implementation, some anticipated and allowed for, but others unforeseen.

Some damage to the aviation sector would have been in the calculations but it is now reaching dangerous levels. If Heathrow Airport comes unstuck the Government will be faced with a number of serious problems including sorting out collateral damage to the UK Universities Pension Scheme, a major shareholder in Heathrow Airport Ltd (HAL).

It is the unforeseen consequences that catch governments out and one of these beginning to emerge is higher levels of domestic inflation. Consumer Price Index (CPI) rose in August (year on year) by 3.2% pushing the index of price rises well above the Bank of England’s 2% target. What is the connection between inflation and travel restrictions?

It so happens that hotels, restaurants, recreation and cultural activities command a combined weighting in the CPI of more than 25% and an element of this group, hotels and restaurants, has been a notable contributor to inflation for some months now. This should have been anticipated; a staycation boom has channelled huge demand into certain parts of the country with limited capacity to absorb it.

The markets’ response to capacity limits has helped spark another unintended consequence. This time with serious social implications. Landlords have been switching properties available for long-term letting into holiday accommodation creating a rental housing crisis, particularly in the West Country.

The Government speaks of Global Britain open for trade but, by restricting travel so severely when over 80% of the adult population has been vaccinated, it is operating a shadow policy of protectionism. There are shades here of the 1970s decade, and not only through the threat of high levels of inflation. Until 1979, to control spending by holiday makers going overseas and to protect Pound Sterling, policy focussed on currency controls. Now currency controls have been replaced by an expensive new barrier to exiting the country, backed up by a calculated exercise in sowing uncertainty.

Trade in services is not covered by World Trade Organization (WTO) agreements but every schoolboy studying the dismal science of economics is well versed in the theory of comparative advantage. Countries should specialise in what they are good at, to the benefit of all. Britain excels in exporting services, but the Government’s foreign travel policy puts the country in a difficult position in trade negotiations. The moral high ground has been sacrificed and in the process our significant national aviation industry.

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Andrew Sharp, United Kingdom

With all due respect to David, the assumption that Her Majesty's Government is capable of this kind of calculation strains my credulity!