Friday, 30 December 2011

Rail Subsidies

Last week I watched a nerdy documentary on steam trains in Wales and the Beeching cuts. Intrigued a read a bit more about the Beeching cuts which gives a good insight into the more recent history of British railways. Essentially since the second world war the railways have operated at a loss despite numerous schemes and ideas to make them more profitable.

 There was a typically simplified study this morning highlighted by the BBC which suggests that London commuting fares are 10x a similar Italian fare. I would highlight this is somewhat extreme and also misleading. For instance London in the financial capital of Britain and a place where wealth is highly concentrated due principally to a large financial sector. To compare prices with Rome and Berlin is misleading as these are political but not economic capitals and Berlin in particular is a poor city relative to other areas of Germany. However it is certainly true that British rail fares are the highest in Europe. 

The reason for Britain having such high fares is the lower level of subsidies provided to the railways. Since privatization in the 1990s the railways have been weaned off their subsidies at the expense of fare payers. This seems fair to some extent - why should all taxpayers subsidise transport for a slice of the commuting population. However the effect of compounded above inflation fare rises means that rail fares are becoming excessive. I believe the government target in the end is to end subsidies entirely. Currently the cost is around £6bn to fare payers and £5bn to the taxpayer so substantial further fare rises or greater cuts in costs are needed to balance the books. Cutting costs looks difficult given the woeful state of many of Britain's trains and track.

Arguably the policy of indexing fares to inflation + x% is a serious error. To index fares to the RPI rate and then add a further margin both compounds the on going rate of inflation in the index (albeit for a small constituent) thus maintaining and driving up RPI in the future. Additionally wages are rising at nothing like the RPI rate so for many rail commuters this means a squeeze on real income or at least that is the general argument.

Its important to remember that if my wages are £30k p.a I should earn around £1,900 a month. Now say my rail ticket is £300 a month. If my salary rises 1% I earn around £1,920 a month and if my rail fare rises 6% it also rises to £320 a month. So in reality one is really no worse off. Now obviously the lower your wage level and the higher your ticket price the more the squeeze on your income. For instance if my wages are £20k with a 1% pay rise would see a gain of just ~£10 a month whilst the aforementioned railfare rises £20 a month meaning a net squeeze on income of £120 a year. This means workers with lower wages who live further from London (or a given destination) become disincentivised to travel to work.

This to my mind is the crux of the issue. Realistically many workers can easily afford the fare rises on the railways however rail fares are effectively a tax on jobs. Most rail journeys are commutes and they are commutes which cannot be made by car due to distance/parking constraints etc. So effectively its a tax on commuting in much the same way as fuel duty. Therefore arguably one could say fuel duty on motorists subsidies rail fares for rail commuters.

However all of this ignores the social good of both railways and roads:

  • Road users forget that roads themselves like the railway are a public good. There is no road pricing system in the UK and so effectively roads are subsidised by the government just like the railways. This is an important distinction as motorways in Italy and France are toll roads which may help to subsidise and incetivise the use of railways.
  • As a public good railways provide intangible economic benefits beyond the simple calculation of ticket revenues against operating costs. Railways facilitate travel and without them London would literally be starved of workers due to the total incapacity of the road network to handle the volume of commuters. The loss of jobs and income from people being unable to travel to work would be so vast for the tax system that the cost of a rail subsidy pales into insignificance. Railways like roads are a public good and therefore the government needs to fund and subsidise them to encourage greater economic activity. Thus the payback is indirect via the taxation of rising personal income.
  • Railways are more environmentally friendly than cars and the environmental protection from lower emissions is impossible to quantify economically but has a clear benefit for the future economy due to reduced environmental degradation.
  • Government policy states that they wish to improve the usage of public transport and get people out of their cars. Making all modes of transport simply more expensive does not constitute a policy. Rail fare rises are rising above inflation, fuel duty increases continue and air passenger duty increases are coming in the spring. If the government wishes to have a policy it needs to decide where it wants to focus investment and subsidies.
Since rail fares are effectively a tax on commuting arguably the subsidy should be increased in order to benefit the less well of in society. This could be paralleled with a rise in the rate of income tax in the higher brackets. At the moment the rail fare acts as a poll tax with those earning the most paying the least proportion of their income and vice versa. Imagine theoretically that rail fares were tax deductible expenses; this would have approximately the same effect as increasing subsidies. Someone earning £60k could take a their £3k rail fare off their income as a deductible leaving a taxable income of £57k and someone earning £20k could do the same leaving £17k. This way people are not disincentivised to travel to work and seek productive employment by the rail system. The cheapest way for the government to implement such a system would be to make employer season ticket loan schemes tax deductible.

To my mind the current policy is wrongheaded as it assumes the railways can operate at a breakeven level without huge demand destruction. I could be wrong of course but given that no government has managed to operate the railways at a profit in over 60 years it might be high time to change course.

1 comment:

  1. Hi Boag.

    This is interesting to me as here in Japan many workers have their commuting costs covered by their companies (who, as someone pointed out to me today, differ from companies in the West in that they have an increased sense of social responsibility for their staff, deriving from the lifetime employment model). Unfortunately I think introducing this in the UK would be impossible as employers would be disincentized to hire workers, or would even fire even more to keep their HR overheads down... hmm. But I was shocked at how expensive train tickets were when I went home last Christmas. £15 to London from St. Albans? For a 20 minute journey? A 20 minute journey in Japan is about £3 and extra distance is always measured incrementally. Admittedly the bullet train is pricey but few use them to commute (although they do). I think you're right to point out roads are a much taken-for-granted public good and that the government needs to subsidise the trains more, not less, for the overall benefit of the economy.