How train fares are becoming affordable only for the rich


9:33 am - August 15th 2012

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contribution by Richard Hebditch

In the 1990s, the privatisation of British Rail under John Major was one of the most controversial privatisations and, in an attempt to appease critics, the Government agreed to control many train fares to protect passengers.

In 1999, John Prescott changed the formula for the fare rises to be RPI-1% (ie one per cent below the RPI rate of inflation).

But in 2004, there was a change and the system to protect passengers turned into a way to simply extract more money from them.

Instead of keeping fares at inflation or below, fares rose at one per cent above inflation year on year.

One per cent on top of inflation might not seem much but the compound rate of year after year rises contributed to rail fares as a whole rising by 17% in real terms over the lifetime of the Blair and Brown governments.

Before the 2010 general election, most politicians accepted that simply hiking up fares more and more in the long term wasn’t tenable.

But in the 2010 Spending Review, George Osborne announced that fares would increase at an even higher rate of 3% above inflation for 2012, 2013 and 2014. The policy of protecting passengers was turned completely on its head. Passengers were to be squeezed more and more until the pips squeak.

Rail minister Theresa Villiers today defended the fare rises as it was revealed that next year they would be over three times expected wage increases, saying the rises would “make life better for passengers” as part of wider investment.

The Government does deserve credit for maintaining investment in rail through the recession, there is no reason for this investment to come at the expense of pricing people on ordinary incomes off our trains.

The last transport secretary Philip Hammond said that he thought trains were already a “rich man’s toy”. His successor Justine Greening managed to get George Osborne to drop the plans for steeper rises in 2012 but she needs to win the battle with the Chancellor to scrap the plans for 2013 and 2014.

It’s time we returned the system of regulating fares back to its original purpose of protecting passengers. Our railways should be for everyone, not just the “train toffs” who can afford it

—-
Richard Hebditch is Campaigns Director at Campaign for Better Transport.

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1. margin4error

Two things occur

1 – Don’t credit the government too highly for maintaining investment in the railways. They have maintained talk of investment in the railways, but precious little by way of new projects have actually happened. Hopefully this will change in the coming year. But we should never assume.

2 – It is remarkable the number of ways this government has set about punishing work. cutting back on in-work benefits, hiking up the cost of getting to work, scrapping schemes that train people for jobs, sackling thousands of their own staff, and so on. It is almost as though they don’t really value people going to work, and don’t want to encourage people to do so.

Sadly, Labour isn’t interested in renationalisation or simplifying the rather complicated arrangement that sees track, trains and stations as separate entities. Maria Eagle on Newsnight last night offered no comfort to passengers and seemed to underline Labour’s wholehearted commitment to neoliberalism. Tragic.

3. margin4error

buddyhell

in fairness – labour did renationalise the actual track.

I know that officially it did no such thing – but that was because admitting to nationalisation would have meant compensating shareholders a fortune. Nationalisation allows for shareholders to claim a four year average price for their shares, instead of the rock bottom price that railtrack shares were when the government took it over.

So to avoid having to give four times more money to shareholders when bringing the company out of administration – which would have been morally repugnant – it was never called nationalisation.

But the government restructured it. The government appoints directors that can’t be removed. The finances are recognised as public finances. It is a nationalised company.

That said – you are right that there is little ambition for extending that to train companies despite the phenomenal experience of Ken Livingstone’s London Overground.

Admittedly I only occasionally use our trains but generally I’m impressed when I do. My one gripe is that our trains are too often full. I’ve just returned from Italy where what had been a wonderful railway to travel on 30 years ago is now pretty rough.

I think the issue is that we can see there is room for improvement in our railways but there are political and practical barriers. For example any investment in new rolling stock is disincentivised by the short-term franchises offered to operators. Politically it’s difficult to argue that our system uses competition to increase its efficiency if longer franchises are offered, especially with their absurd complexity.

Companies such as First Group, which sadly seems to retain influence at Whitehall, do their damnedest to stop any competition. They use their size to destroy smaller competitors and then basically act as rent-seekers on their territories. We saw Virgin do the same much more publicly recently.

Any price increase for passengers should not result in an increase in profits for rentiers and government needs to find a way to prevent this without recourse to the huge cohort of lawyers that now preside over the management of our railways.

The Scottish government will only allow fare rises of 1% above inflation.

“The Government does deserve credit for maintaining investment in rail through the recession, there is no reason for this investment to come at the expense of pricing people on ordinary incomes off our trains.”

Have you any proposals then for how it should be financed, other than the hand waving stuff in the link, do you actually know how railway financing works even ?

“Our railways should be for everyone..”

Why ? Don’t just make assertions explain why one service industry should be subsidised but not others.

@margin4error

“in fairness – labour did renationalise the actual track.”

Network Rail is not really a nationalised concern, it’s hard to say exactly what it is, maybe a sub department of the DfT. NR’s financing comes via the Control Period arrangements which can perhaps be seen as a form of PPF, as is the way new trains are purchased for the TOCs. This system like others has a lot of faults the main one, IMO, being that it is the DfT which calls all the shots and we all know how good government departments are at directly running stuff, which is why we end up with nonsense like the IEP train. Re-nationalising would be a bad idea, yet another major reorganisation with yet more opportunity to destroy morale, waste millions and end up with the usual horse designed by a committee that we have got every time the government has directly intervened in railway operation in the past hundred years.

It is almost as though they don’t really value people going to work, and don’t want to encourage people to do so.

The impact of this appalling anti-work prejudice can presumably be seen in the most recent employment figures.
http://blogs.spectator.co.uk/coffeehouse/2012/08/good-jobs-news-goes-against-grain/

8. alienfromzog

Until very recently I used the train to commute to work every day.

It really is a stretch to call it a good service.
It is over-priced and unreliable.

And now Last Great Western (as they are affectionately known down this way) get to take over the busiest routes in the country.

The thing is, that whilst the renationalisation of RailTrack was an absolutely vital first step… there remains a major issue of an infrastructure much in need of investment.

The argument about cost to the tax-payer is fatally flawed.

Let’s do a little thought experiment:

Let us say that we had no railways; what would be the knock-on affects of that? Road usage would inevitably be much higher, and many would not be able to work in their current jobs because the practicalities of commuting by road would be prohibitive. In terms of the national economy this would be vastly expensive. Roads and railways and water supplies and sewage etc. are all vital infrastructure that makes it possible to function as a nation. Trust me, a trip to the average African country will really make you appreciate the tax-payer funded UK roads.

If railways are not subsidised appropriately then the cost to the nation is several times greater than the saving from the subsidies. That is not to say that the government funding should be unlimited, that would be ridiculous but let us have a proper debate – about why it is in tax-payers’ interest to fund railways even if they never use them.

And maybe one day, we can talk about re-nationalising them as well. Maybe.

AFZ

Well, there’s only two sources of money. Either the passengers or the taxpayers.

So, should passengers pay the costs of where they decide to live and work? Or should taxpayers?

There are good arguments for taxpayer subsidy to short run commuter lines like those in South London.

There’s not really much convincing that says the taxpayer should subsidise me traveling from Bath to London say.

And no, don’t say carbon costs. Trains aren’t any more efficient in this that modern cars.

@alienfromzog

“there remains a major issue of an infrastructure much in need of investment.”

How much investment do you want for God’s sake ? There has been massive investment in railway infrastucture in the past couple of decades and there’s more on the way. The question is has it and will it produce value for money ? Again, what sort of investment is it you want and where ?

11. margin4error

thornavis

you are right that nationalised is not quite the right defintion of network rail – but NAO recognises it as a public body and that’s probably about as good a guage as any we could hope for.

Disagree about your analysis of the government getting involved in the railways though. Not because what you describe is not a distinct possiblity. But because a direct control system like the DLR and London Overground seems to work consistently well over time.

Basically these services are state owned – but with a management company bidding to run the services that takes about 10% of the revenues from them. The management is not a train operating company. The trains are owned and timetabled and priced by TfL. It is centrally controlled. The management just operates the basic day to day delivery of the service, and recieves only about 10% of revenue for their efforts (90% going to TfL)

It’s a bit like running the train system the way other contracted out services are run. The state owns a school – but it pays a company to manage its maintenance. So the state owns a railway and should just pay a company to staff the platforms.

This doesn’t have any particular ideological fit for left or right – but it works really really well with the DLR and London Overground.

@Cherub
“Admittedly I only occasionally use our trains but generally I’m impressed when I do. My one gripe is that our trains are too often full.”

It’s interesting to see that an occasional users perspective is quite positive .There’s actually nothing wrong with full trains although ideally long distance travel should at least be reasonably comfortable, which it generally is in my experience outside of the weekend. Far better that the trains be running at capacity, it’s what they are for after all, than tootling about with a handful of passengers per coach – that’s how we ended up with very few branch lines, not many were using them. Commuter services in particular aren’t doing their job unless they are full and the fact that our railways are so crowded is surely an indication that people aren’t being priced off, it’s not as if there aren’t more trains and plenty of cheap fares available either, much of the criticism of the privatised* railways is ill informed and mis-directed but for some peculiar reason it’s become an article of faith on the left that they are doing a terrible job, a classic case of confirmation bias, the left is in love with nationalisation so anything else can’t be working properly.

* I would maintain that our railways aren’t really privatised although perhaps they should be.

@3

Network Rail is a private company, not a state-owned body. Furthermore, the railways remain as fragmented as ever. The privatisation model is fundamentally and fatally flawed. Have you ever wondered why no other country has adopted this dog’s breakfast approach to railway privatisation?

It would be good if everyone decided to stop using the trains then the greedy companies would have to lower the prices.

Personally I believe that train companies would make more money if they lowered their prices because more people would then use them. In addition to this they could full fill their dreams of less car congestion and less pollution.

Sadly greed rules.

“There’s not really much convincing that says the taxpayer should subsidise me traveling from Bath to London say.”

Presumably that line also stops at other stations though, some of which are in less deprived areas and provide a vital commuter route. Plus equally Bath benefits from being a choice of base for wealthy people who need to be close to London but don’t want to live there as a result.

And if you happen to be somebody who makes decisions on where to locate factories, offices etc, then the taxpayer subsidy begins to look like an investment. Cardiff business partnership has for years been lobbying for billions to be spent on cutting the london – cardiff journey from 2 hours 5 mins to 1 hour 55 mins. Apparently places within 2 hours of london get more investment than those outside of 2 hours. They have numerous case studies to support this assertion, and several businesses who located in Cardiff when the journey time was lower who are saying they wouldn’t have done so had they known the journey would be increased.

When the Train Operating Companies pay BILLIONS of pounds for the franchise and then on top of that have to pay Network Rail to use the track, then you have to think where all that money is coming from. First Group have paid £5.5 Billion for the lifetime of the franchise that they took from Virgin.

For the dumb, let me spell it out. P A S S E N G E R S.

That means ticket prices have cover the billions of pounds that TOCs have paid to the government, before they start to make some profit which they can then invest in better service.

@margin4error

Yes I’d agree with quite a lot of that, London Transport as established in the Thirties was an excellent organisation, unfortunately it too eventually fell victim to politicians of left and right and now we are having to try and re-invent a pale imitation. The secret here is having a hands off approach from government and allowing good managers to get on with doing their jobs. However there is a difference between an urban system such as the Underground and a national rail network, as Tim Worstall suggests there is a good case for subsidising commuter services but it’s much harder to find compelling reasons for doing the same for provincial routes and none at all for inter city lines. As usual everyone is ignoring freight which operates without subsidy but obviously relies on the infrastructure provided by NR, if passenger fares are capped and NR is subsequently short of finance then there will be no more upgrades to freight routes. No doubt the answer from most here would be to make up the shortfall in revenue with a direct cash input from government, so instead of taking the money out of the commuters pockets at the ticket window they take it out of their pay packets instead, I suppose it’s the progressive way.

buddyhell @13, Network Rail is a private company but owned by the government. It’s in a weird state in that it’s not on the government books for accounting purposes but everything it does is controlled by state legislation so in effect controlled by the government. The NAO has said that its public as has the Statistics Commission.

So, should passengers pay the costs of where they decide to live and work? Or should taxpayers? … There’s not really much convincing that says the taxpayer should subsidise me traveling from Bath to London say.

Would you apply the same argument to road travel?

Planeshift @ 15

It’s true that the national rail network in a small country like Britain can be seen as a whole however the distinction between main line and local services has always been there and BR itself recognised this with its successful sectorisation process in the eighties, it is possible to sort out the different parts so that any subsidy only goes to where it is actually needed. Your claim that businesses are in favour of sudsidised travel is hardly surprising, why wouldn’t they want the taxpayer to pay for a part of their business costs ? I don’t doubt that the Cardiff business partnership has been lobbying for increased funding, it’s what producer interests do.

“Would you apply the same argument to road travel?”

Sure, entirely happily. Fuel duty is vastly higher than the amount spent on the roads after all. It’s higher than the amount spent on the roads plus the costs of carbon emissions too.

Dunc @19
Actually I suspect Tim would apply that same argument to road travel, the problem here is that roads are available for everyone to use and pricing of most routes is impossible. Motorways can be segregated but then people tend to avoid them to avoid the fee but in principal the same should apply to roads as to public transport, only subsidise if there is a compelling reason to do so.

A bit of cross posting there with mine and Tim’s comments, his raises a couple of interesting questions if we hypothecate – I hope that’s the correct term – motor tax rather than go for road pricing then how is spending allocated between different parts of the road network and who decides ? I think we would find ourselves in the same position as we do with the railways with different interest groups clamouring for special attention. Further if that part of tax funding provided by the excess motor tax is removed what gets cut or if there’s no cuts how much would taxes need to rise to compensate ? That’s something that those who argue that roads get preferential treatment might like to ponder.

24. margin4error

thornavis

As it happens parts of the London Overground track are still used for freight services, so there seems to be some means of building that into the model that works quite well. Not sure of the detail of how those contracts are run.

And in regards to freight, I’m all in favour of subsidies. The fact is we massively subsidise road freight (and road passengers too) by state-funding the road network) so it seems incongruous that rail would not be the same – especially given the capacity advantages and environmental advantages of doing so.

While there is some debate to be had about whether we should subsidise particular lifestyles – the truth is us city dwellers have been subsidising the rural folk for a century and more. Be it roads, schools, hospitals, postal services, telephone cables, electricity water pipes or railways – delivery in rural areas is much more expensive per head, per passenger mile, per watt, per litre and so on than the equivelent in cities. Yet we tend to have national charges set for all of these things, meaning we subsidise either through the state or the private sector. (state for schools and hospitals and so on – private sector for electricity and water and so on.)

The question with railways is thus two-fold. It is partly about effective management of a service. And it is partly about how to price that service. The real difficulty is not confusing those two very different things.

The reason why we hear such whining about rail fares is because they are a middle class subsidy. Some of the same type of people who are only too happy to rant about meagre state subsidies paid to genuinely poor people are willfully blind to their own state subsidies. The loudest screaming does always tend to come from those who do not need the subsidy when their subsidies are threatened.

Unfortunately the British people have been infantilised to believe everything should be free. Hence why they believe they are being ripped off when they have to pay for stuff. Nothing is ever free, and if you are not paying the true cost someone else is paying your share.

Rail fares in England are only around 60% of the true cost and around 25% in Scotland. Therefore, it is non-rail users who are paying the difference between the ticket price and the true cost. Working people on low incomes are in effect subsidising the travel of people who earn a lot more than they do. Sure, rail travel in Europe is cheaper than in the UK, but it is cheaper because someone other than the passenger is paying.

One of many factors why crowding and economic development in the UK is lopsided towards London and the SE is because of the travel subsidy that allows the clustering and agglomeration to occur there. If the commuter was paying the true cost of their travel firms and commuters at the margin would move to less crowded areas where travel was easier. If we do not believe it would make any difference we are saying that rail fares in those areas are price inelastic. Therefore, there is no problem with raising rail fares to the true cost and saving the subsidy.

There is a compelling case why some rail routes should be subsidised. However, there is no compelling reason why routes in the wealthiest parts of the country should be subsidised. If the concern is some low income people will be unable to afford to travel then we should subsidise the passenger not the route.

26. margin4error

Richard

That’s a rather lopsided account you offer there.

Appealing to the social justice angle about poor people sibsidising wealthy people issue overlooks that obviously poor people pay less tax than wealthy people (on the whole) and thus relatively wealthy people are subsiding themselves to an extent there.

Likewise you seem completely unaware of the substitute goods available. Whacking up rail fairs may lead people to drive instead. Again, roads are used more by wealthy people (poor people often don’t have cars) and so the same is as true of roads as of rail. Why not mention this?

Also – why do you assume that the travel subsidy (be it road or rail) leads to concentration of people in and around London? Surely the reverse is true as cheaper travel diversifies where people and companies can locate?

I should thus also why you think higher rail fairs would see jobs move from London to other parts of the UK when a) companies may prefer to relocate abroad as UK costs rise, b) other parts of the UK would see rail fares rise too if subsidies were stopped, and c) rail fares are less subsidised on London commuter lines than other parts of the railways (because these are the most intensively used lines and trains – making them the most profitable, or at least least unprofitable).

Richard W: “Sure, rail travel in Europe is cheaper than in the UK, but it is cheaper because someone other than the passenger is paying.”

Is the difference in subsidies the only or main difference between rail transport in Britain and mainland Europe? Do you have links to any reports on differences in the operating costs, productivity and pay?

28. Chaise Guevara

@ 26 m4e

“Appealing to the social justice angle about poor people sibsidising wealthy people issue overlooks that obviously poor people pay less tax than wealthy people (on the whole) and thus relatively wealthy people are subsiding themselves to an extent there. ”

Indeed. This trick of presenting taxation as if there were no poor recipients and no rich payers is getting very old.

margin4error@24

Overground’s infrastructure is owned and maintained by Network Rail – it’s basically the ex Silverlink franchise plus the old East London underground line and its extension into south London, so freight has the same rights over it as other parts of NR, apart from the ex tube line it was always a part of the national rail network. This not really anything new as parts of the Underground, especially the Metropolitan were always like that.
Do we subsidise road freight ? As Tim points out motor tax more than covers the cost of roads, even if we subsidised rail freight, not a good idea IMO, it is never going to be the main provider of freight transport again. The traffic that is best suited to rail in Britain is already largely carried that way, this is primarily minerals especially coal and rail also has a respectable part of the intermodal container traffic from the major ports, beyond that it is hard to see where rail has an advantage over roads and if you want to go back to the days of small waggon loads and a multiplicity of freight yards you won’t find many railway professionals supporting you. There is scope for expansion of rail freight but that is largely an infrastructure issue and therefore part of NR’s remit, subsidising freight directly makes no sense.

For info: Figure 3.9 in the McNulty Review (2011) shows the movement in the percentage split between total revenues and government support in rail industry revenues for the period 1989/90 to 2009/10
http://assets.dft.gov.uk/publications/report-of-the-rail-vfm-study/realising-the-potential-of-gb-rail.pdf

In this debate, IMO we need less rhetoric and more hard data.

Chaise & margin4error

It’s true that the poor gain benefits from tax spending but the tax they pay is a much higher percentage of their earnings than that of the rich, I know that because the left are always telling us so, so whilst the rich can afford to subsidise themselves and probably the poor, the poor can’t afford to subsidise anyone, even themselves.

If the price of a packet of cornflakes goes up by 10p in local supermarkets, that will mean more for a poor shopper than for a rich shopper because the increase will be a larger percentage of a poor person’s income than of a rich person’s income.

According to arguments deployed here, not only should cornflakes be subsidised as an essential breakfast cereal, but so should all other essential goods and services. Bring back the 1940s.

33. margin4error

thornavis

Thanks for the update on how rail freight runs on london overground. That being the case I don’t really see how shifting to nationalised services like London Overground would result in problems for frieght across what we presently call Network Rail. I believe that was the contention that led me to note that it works just fine on London Overground. Basically we could have a nationalised service like London Overground across all of Network Rail and frieght would not be adversly hit.

In terms of subsidising the roads (a bit of a side issue) – Tim claimed that road taxes more than cover the cost of roads. But I’m not inclined to take Tim at his word. No disrespect to Tim on that front – but I can’t find a figure anywhere on the cost of maintaining our roads. There is the HA budget obviously, but the Highways Agency only looks after some of our roads. Local authorities look after far more roads. Sheffield for example, have recently signed a £2billion maintenance contract. Is there a figure for road costs that actually combines all those spends?

As for the tax issue – yep – I agree we should cut tax as a proportion of the income of the poor and raise it for the rich to make it fairer – but one can hardly allow that desire to become a stick with which to beat all public spending. Well, not if we intend to stay rational and sensible. Obviously zealots can, but who cares what zealots of any political persuation say? They tend to be wrong about just about everything, and when right it is only because the proverbial stopped clock is right twice a day.

I wouldn’t worry too much about the LA road budget.

“Councils, who are responsible for 90 per cent of the country’s road network, have been told to find £223 million from their roads maintenance budget.

But it is unclear how these savings – equivalent to 40 per cent of the total – will be found, the Public Accounts Committee has warned in a report on the Department for Transport’s spending published today. ”

Fuel duty plus VAT on it is £29 billion currently.

Roads more than pay for themselves.

35. margin4error

Tim

Although this is going quite a long way from the case for a better rail structure – your post means there must be some other area of road expenditure that is neither local authority or Highways Agency.

I say that because the deal in Sheffield that has just gone through is £2billion over 25 years. That’s £80million annually for Sheffield’s local roads. Now unless road spending in Sheffield is around 15% of all local road spending in the UK – and clearly that’s just not the case – we are still left without a figure of any meaning.

I should stress of course that it may well be that our roads cost less than is raised in road taxes. One would hope so given the poor state of the UK’s roads which in itself suggests we should invest more heavilly to stay internationally competitive.

It just feels wrong to assume without the figures.

36. Chaise Guevara

@ 31 thornavis

“It’s true that the poor gain benefits from tax spending but the tax they pay is a much higher percentage of their earnings than that of the rich”

Wot m4e said in the last paragraph of post 33. I’ll also add that, while the rich may pay a scandalously low percentage of their earnings as tax, I expect middle-earners, who can afford to subsidise such things, pay a larger percentage than the poor.

So why don’t we raise the tax-free earning quotient by a few thou, create a new higher tax bracket, and replace council tax with something means-assessed? We could also look at reducing VAT and replacing the shortfall using income-based sources.

There are other ways we could improve our national finances (cutting military spend, legalising drugs etc.), but at this point I’m probably wandering off-topic.

margin4error @33

“Thanks for the update on how rail freight runs on london overground. That being the case I don’t really see how shifting to nationalised services like London Overground would result in problems for frieght across what we presently call Network Rail. I believe that was the contention that led me to note that it works just fine on London Overground. Basically we could have a nationalised service like London Overground across all of Network Rail and frieght would not be adversly hit.”

Perhaps I wasn’t being very clear, nothing new there, I wasn’t claiming that re-nationalisation or publicly owned franchises, which we already have, would cause problems for rail freight, at least not in the way that you are talking about, rather that capping passenger fares would lead to a shortfall in revenue for NR which would result in a cut back to such schemes as the gauge enhancement work that allows larger containers to be carried, which is essential if rail freight is to continue to compete. The tax issue is separate but obviously germane to the question of rail funding, I’m afraid it’s undeniable that rail is largely a transport mode for the better off. Some local and commuter lines carry quite a lot of lower paid people but generally the poor either use buses or don’t travel and the less well off buy a car whenever they can. So it is perfectly reasonable to argue that those who can afford to pay for rail travel should expect to do so. As Bob B points out once you start arguing that a service should be subsidised to help the poor there’s no end to what you can find to subsidise. No one has yet explained why railways are so special that they must automatically receive state funding or why commuters are so special that they must have their travel expenses capped, can someone give me a reasonable explanation ?

38. margin4error

Chaise

Way off topic now – but council tax is means tested.

I appreciate of course people can trott out the proverbial impoverished granny in her mansion to pretend it is horribly unfair by overlooking her council tax benefit. But a tax that is easy to price against a good measure of wealth (size of house) and that is hard to avoid (because, well, homes are hard to hide) is remarkably rare.

Some people (mostly those with accumulated wealth) tend to dislike taxes on accumulated wealth like property tax or inherritance tax. They prefer taxing income and thus discouraging work. But council tax is means tested. It is, in fact, the only tax I believe that has a benefit attached specifically to make it so.

26. margin4error

” Appealing to the social justice angle about poor people sibsidising wealthy people issue overlooks that obviously poor people pay less tax than wealthy people (on the whole) and thus relatively wealthy people are subsiding themselves to an extent there. ”

I am not appealing to the social justice angle. It is just a fact that if a rail fare is below the true cost someone else is making up the difference i.e. non-rail users are paying for rail users. It ain’t the tooth fairy that is paying. They also gain the least from society which is why they pay less tax. I suspect you do not mean it but you are straying close to the Wall St Journal line that people who do not earn enough to pay tax are ‘ lucky duckies ‘.

” Likewise you seem completely unaware of the substitute goods available. Whacking up rail fairs may lead people to drive instead. Again, roads are used more by wealthy people (poor people often don’t have cars) and so the same is as true of roads as of rail. Why not mention this? ”

I think I know what substitute goods are, which is why I believe in a national system of road pricing. We have a terrible blunt instrument system of fuel duty which sees people driving on uncongested roads paying the same duty as the drivers who cause congestion. A national system of electronic road pricing would sort that out. Polluter pays as they say. I know people stuck in traffic jams are paying more fuel duty as their engine runs without actually moving but the system is highly inefficient because the price mechanism is not being allowed to work.

” Also – why do you assume that the travel subsidy (be it road or rail) leads to concentration of people in and around London? Surely the reverse is true as cheaper travel diversifies where people and companies can locate? ”

Why would I not assume that a subsidy leads to more of something? Do you really believe that if we subsidised gin that the consumer would be indifferent to the consumption of gin? Moreover, if travel subsidy does not exacerbate congestion where there is the greatest concentration of people. Why would we object to people bearing the true cost of the congestion that they cause?

” I should thus also why you think higher rail fairs would see jobs move from London to other parts of the UK when a) companies may prefer to relocate abroad as UK costs rise…”

That is just a variation on we will all move abroad if you increase taxes on us argument.

” other parts of the UK would see rail fares rise too if subsidies were stopped…”

I am not against rail subsidies per se, just against them for areas which do not need them. I have no objection to giving subsdised or free travel to certain categories of people. However, our current system can only lead to an inefficient use of resources. We know where the most subsidised areas are because they are also the most congested. One of the substitute ways workers could reduce their travel costs if things were priced properly is to move closer to their place of work or work from home. They can’t do that in congested areas because they can’t afford the high house prices caused by the area being congested by people.

” rail fares are less subsidised on London commuter lines than other parts of the railways (because these are the most intensively used lines and trains – making them the most profitable, or at least least unprofitable). ”

The subsidy is in the value of the rail service to the commuter compared to the cost. Have a look what happens to land prices in that area when a new station is built. The huge increase in land prices infers that there is a subsidy to rail commuters.

chaise @ 36

Well one man’s scandalously low is another man’s daylight robbery, this is what all the argument is about with tax or a lot of it anyway. Who decides what is ‘fair’ and who decides what the tax money gets spent on ? If you start from the assumption that there is something wrong about the rich paying a smaller proportion of their income in tax than the rest of us then you have already pre-judged the issue and determined the answer, just as I have if I start from the premise that taxation is essentially a form of extortion and that an individual’s money is theirs to do with as they see fit and no one else has the right to take it because inequality offends them. That’s why we have differing political parties and ideas and which one gets to win out is what the political battle is all about, there’s no cosmic yardstick we can go to to decide which one is correct. That much we all know, on the question of specifics and given that we have a system that involves taxation and paying for stuff we all use thereby, then it’s a good idea if, as Bob B says, we get ourselves kitted out with some actual facts and on this particular question of rail fares and subsidies there are far to many people who aren’t interested in doing that – not including margin4error who is actually interested in a proper discussion which makes something of a refreshing change here.

41. Chaise Guevara

@ 38 m4e

It’s vaguely means-tested. Not means-tested enough. Aside from the old-granny-in-big-family-home routine, the differences between brackets are not big enough, and as far as I’m aware there’s no way to avoid it due to low income (e.g. owning your house but being made redundant). Also it has silly quirks, like working people who house-share with students getting shafted (as I can attest).

42. margin4error

Richard

I think I’ve found the source of conflict between our views.

You seem to think that congestion is caused by subsidy. “We know where the most subsidised areas are because they are also the most congested.”

What makes you think that true?

I ask because if it is true (in effect, subsidies and state rail expenditure determined by an escalating per-passenger basis) then you are right – it would mean that the subsidy on each fare would be greatest in areas of high concentration of use. That in turn would make those places artificially cheaper to live and work – and so would concentrate more people in those places.

I suspect though that the rail subsidy and state rail spending is not tied to the density of usage – and is in fact tied to total operation of the infrastructure. This being the case, the opposite would be true – with the subsidy of each fare being biggest on lines with the least dense usage – drawing people to those places by their artificially low cost – while the most densely used lines would have the smallest subsidy (if any) and with the subsidy being smallest for each user on the most congested lines.

The first scenario would make you spot on – the second scenario would make you utterly wrong.

But I must admit – I don’t actually know and can’t find how state spending is distributed between lines.

43. margin4error

Chaise

A man made redundant wouldn’t pay it – the council tax benefit would cover it, which is a very good thing. And I’d be all in favour of making council tax bigger as it is a very fair tax compared to just about every tax we have in this country, it is also about the easiest tax to collect or enforce, and it is pretty much our only hypothecated tax (in that government can’t stop the local council getting it). So bigger bracket divides that saw it raise in level while other taxes fall would be good.

How does a worker in a house with a student get shafted?

44. Planeshift

“A man made redundant wouldn’t pay it – the council tax benefit would cover it, ”

Not in all cases. If the man has a partner even working part time for min wage, then the means test for the benefit means they’ll pay full whack. Plus it tends to take months to get approved, so somebody doing casual/infrequent work, or who has just been made redundant will often face shortfalls and have to frequently apply/re-apply.

This is before you factor in the overall budget has been cut by 10% and will be devolved to local authorities and the devolved parliaments to run their own scheme however they see fit, with the only stipulation being that pensioners are protected. So we are going to face the situation of having numerous different schemes run by local authorities – many of whom haven’t realised they have 6 months to decide how to run it and set up the system to do so in a manner compatible with universal credit. It’s going to be chaos and lead to the tories having another poll tax on their hands.

45. margin4error

Thornavis

Thanks for that – much clearer now. And yes, that makes sense that if fares are capped, the subsidy of some sort would need to be large enough that it maintains the investment that facilitates rail freight. And that would be a political issue so would be far from guaranteed.

I’ve not got too into the “things should be subsidised for the poor” discussion as I tend to be universalist in approach. If something is of social value it should be subsidised. If it isn’t it shouldn’t.That has little to do with the wealth of the recipient.

As such your question about why rail should be subsidised is an important one.

And I’d suggest the followng answer.

Rail-usage supports the creation of a concentration of an big industry in one place. This has significant economic value for the industry as a whole as recruiters and other specialised service providers establish themselves within that concentration. (The city of london is obviously a good example of this),

Now we could do the same using roads – but cars need storing once people are work – and land is often at a premium when you have hundreds of thousands of people going to a specific location, pushing land prices up and making the location less internatinally competitive.

So basically – you need rail travel to achieve this. And you need to achieve this to be internationally competitive. (Banks could just as easilly have formed their global cluster in Madrid or Frrankfurt or wherever.

And here’s the reason for the subsidy. Since rail is the only practical means of sustaining such a cluster – it is also a cost to that cluster (in raised wage demands as fares rise). And we need to be competitive.

Of course if no one else in the world subsidised rail fares – that would not be an issue. But they do. So we should in order to maintain competitiveness and keep our clusters going. (also – please note, I’m using the City as an example of a cluster to illustrate a phenomenon. I’m not “arguing” that cutting the subsidy would make banks move to Hong Kong.

Of course I could have gone with the environment as a reason. No less valid. Just not as interesting.

46. margin4error

Planeshift

I had assumed the point of the example of a man who lost his job was to highlight a situation where some one couldn’t pay. Obviously if his wife is working it’s a rubbish example since they can pay and should pay.

And hey, the system could be made more efficient and quicker – but that’s true of everything in the world. One would hardly use that fact to conclude everything from I-Phones to Botswana should be scrapped.

47. Chaise Guevara

@ 40 Thornavis

That was quite a lot of obvious, if you don’t mind me saying. Absolutely any debate should be informed by facts, and certainly that’s vital if you’re considering the fine detail of spend on train services and who should pay.

However, I thought we’d got onto the broader topic of whether taxation itself, plus our specific tax system, is “fair” – which is a matter of opinion but should be informed by fact, as you say. What facts do you think we should be taking into account that we currently aren’t?

margin4error @45

“Rail-usage supports the creation of a concentration of an big industry in one place. This has significant economic value for the industry as a whole as recruiters and other specialised service providers establish themselves within that concentration. (The city of london is obviously a good example of this),”

I think that’s to vague to be much use really and it makes several assumptions that are open to question such as whether it is either necessary or desirable to have these clusters and whether the whole argument isn’t circular.The existence of rail transport within London does indeed help it to work efficiently, that’s been obvious for a long time, it doesn’t follow from that there’s any need to subsidise fares, subsidy to the infrastructure is another matter and that should be recoverable as much as possible from the farebox, again that is always what publicly owned transport has tried to achieve. The argument being put forward above however is that it is the passengers who need the subsidy, not just for commuting but for all rail travel, there is no rational grounds for this and why just rail, where is the equivalent fuss about buses ? These have suffered far more from cuts and fare rises but then it isn’t the metropolitan chattering classes who use them is it ?

Chaise @ 47

“That was quite a lot of obvious, if you don’t mind me saying.”

No I don’t mind you saying, It’s often worth stating the obvious I find since to some it isn’t as obvious as you might think. Actually I was only digresing to the whole tax question because it is of relevance to the subject at hand which is rail fares and subsidies. People seem to be assuming that there’s some kind of moral imperative to subsidise rail travel and that it’s all bound up with doing down the poor, hence that rather daft video, I was arguing that it isn’t. Which is where the facts bit came in, railways are one of those subjects that are constantly being misunderstood because people don’t grasp some basic facts about them never mind have any in depth knowledge, one of my pet hates is those who bang on about how terrible the Beeching plan was without any idea of why it came about. That tends to be a leftist or vaguely radical ( like Ian Hislop ) position. The rightist position tends to be crass stuff about how railways are nineteenth century technology or some nostalgic drivel about the Great Western Railway – you can always spot someone who doesn’t know a lot about railway history the GWR is the only pre nationalisation company they can name. Anyway I digress again, my main beef was not so much with the comments as with the main post which is light on facts and strong on empty rhetoric.

50. Robin Levett

@Richard W #39:

The subsidy is in the value of the rail service to the commuter compared to the cost.

That is an absurd definition of a subsidy; which, more sensibly defined is the difference between the cost to the TOC and the price charged to the passenger.

Have a look what happens to land prices in that area when a new station is built. The huge increase in land prices infers that there is a subsidy to rail commuters.

No; it means that the rail company has provided a cheaper alternative to road travel.

The figures in this article are instructive:

http://www.bbc.co.uk/news/magazine-16390608

Essentially, the highest season ticket prices in the country are on commmuter lines into London. London is also the 800-pound gorilla of rail travel (approaching half of all rail travel is in London/South East) , and its commuter lines have the highest load factors – see:

http://www.networkrail.co.uk/CurrentPassengerDemand(Final).pdf

Look at tables 8,9 and 10.

Your definition of subsidy would imply that the trains bringing in the highest income for their operators by comparison with their cost are the most subsidised. That is an odd definition of subsidy.

51. Chaise Guevara

@ Thornavis.

That’s fair. I confess I’m no expert on rail myself, which is why I’ve mainly be sticking to the conversation about the principles of taxation.

(Although I do think trains need to be cheaper, and if that can’t be achieved through efficiency, nationalisation or regulation, there’s a good chance it would require subsidies.)

Well I think I’ve delighted everyone long enough with my forensic insights into the rail industry so I will leave it there. Just one final thought, if train travel becomes cheaper and who doesn’t want cheap stuff ? Then it will also become yet more popular and crowded, so we will need more trains and better infrastructure, which costs money which needs to come from farebox or subsidy and off we go again.

53. Charlieman

@27. Bob B: “Is the difference in subsidies the only or main difference between rail transport in Britain and mainland Europe? Do you have links to any reports on differences in the operating costs, productivity and pay?”

One point to establish (apologies if anyone has made it) is whether any rail network (UK or EU) operates without tax payer subsidy. My guess is none or thereabouts.

Assuming my guess to be true, we can return to Richard W’s point that the tax payer subsidises rail transport. On an efficiency basis, we can question whether the operator is doing the best possible job at running services but we also have to acknowledge that they cannot operate solely on ticket revenue. Thus Bob’s questions are irrelevant in the over all view. The tax payer is almost always paying a subsidy, the difference being how much.


On the social justice topic, let’s look at season tickets. If you can afford to pay for 12 months up front, you get a discount of, say, 25%. For six or three months you get a lesser discount. If you can only afford one month, you get screwed 12 times a year. The poorer you are, the more it costs to get to work per diem.

We can see lots of business reasons why longer term season tickets might be discounted to a modest degree — transaction costs, for example — but I perceive a further one: the people who make decisions are the people who are likely to buy a long term season ticket.

54. Margin4error

Thornavis

I’m not sure that subsidies are paid to reduce fares. I thought the subsidy being discussed is effectively the state contribution to maintaining and upgrading the infrastructure – which is deemed to be a subsidy to those using the rail system since they don’t have to pay that extra sum on their fares. (And as I’ve said, I tend not to worry about whether a specific individual deserves something – more whether there’s a case of it being a public good and thus worth spending public money on)

But thanks for the conversation. It has been an interesting one.

55. Margin4error

Charlieman

Although mine has only been for my london underground ticket – I’ve never worked anywhere that doesn’t do season ticket loans. Indeed I’ve never been able to fathom why any company wouldn’t do it. Maybe that is something that good managers do and bad ones don’t.

56. Charlieman

@27. Bob B: “Is the difference in subsidies the only or main difference between rail transport in Britain and mainland Europe? Do you have links to any reports on differences in the operating costs, productivity and pay?”

Doh, forgot to mention something. Operating costs and productivity will always be dependent on modernity of technology.

Blackpool Council ran their tram system for years on the basis of second hand kit bought in the 1950s, and they had to balance the cost of maintaining that legacy kit with the cost of updating. In 2012, Blackpool Council introduced a new tram fleet and a substantially renewed service.

With most technology, whoever is using the newest stuff AND gets it to work will achieve the best productivity. Perhaps. Sometimes it may be better to use tech that is more established.

My point is that it is difficult to compare the efficiency (operationally or economically) of a new rail/tram network built from ground up to an established public transport system in continual change.

margin4error

You’re welcome I’ve enjoyed it too.

58. Charlieman

@54. Margin4error: “Although mine has only been for my london underground ticket – I’ve never worked anywhere that doesn’t do season ticket loans. Indeed I’ve never been able to fathom why any company wouldn’t do it. Maybe that is something that good managers do and bad ones don’t.”

Thanks, M4e. Perhaps somebody might chip in as to whether season ticket loans are a London thing, because the concept is strange to me.

By definition, though, a season ticket loan is an advance to the employee on assumed future earnings. The advance comes from the pot of money that pays the wages and NI of workers, and the employer is paying a cost on it; if the loan did not exist, there would be more in the pot to pay to workers directly.

As with season tickets, mentioned above, long term discounts or loans benefit long timers in the job, or those with a current account balance. Where you have worked, M4e, were those “benefits” offered to cleaners and temps?

Richard Branson and Rupert Murdoch have both built their empires on enormous levels of State favouritism, not least from Margaret Thatcher. That is why they are now behaving like spoilt children. However, as with Philip Hammond’s remark about G4S, which enjoyed a very special relationship indeed with the last Conservative Government and which obviously enjoys the same with this one, an important and positive point can now be made.

You were the ones who wanted all the blue-collar work contracted out. It is still being done at public expense, of course. Just no longer by staff (although they are very often the same people as before) who have to be paid and treated properly. Central and local government contracts are one of many examples of how there is not really any such thing as “the private sector” in the sense that is usually meant. It exists only because of numerous forms of central and local government action. It therefore has vast public responsibilities, to which it is very high time that it was held.

Here in the North East, we can almost smell the difference between highly unionised people with national pay bargaining schemes, and not. But that difference did not used to exist. It ought not to exist. I shall tell you why not. Even leaving aside the private sector’s obvious dependence on education, healthcare, housing provision, transport infrastructure and so on, take out bailouts or the permanent promise of them, take out central and local government contracts, take out planning deals and other sweeteners, and take out the guarantee of customer bases by means of public sector pay and the benefits system, and what is there left? They are all as dependent on public money as any teacher, nurse or road sweeper. Everyone is.

And with public money come public responsibilities, including public accountability for how those responsibilities are or are not being met, accountability and responsibilities defined by classical, historic, mainstream Christianity as the basis of the British State and as the guiding inspiration of all three of this State’s authentic, indigenous, popular political traditions.

These days, as a pensioner, I pay taxes but hardly ever get to travel by train and I’m really worried about the price of cornflakes with all the news about rising world cereal prices because of drought conditions this summer in America’s mid west:

“The US Department of Agriculture (USDA) has slashed its forecasts for corn production and predicted sharp price rises, due to a drought and heatwave destroying much of the country’s crop. It now thinks that this year’s corn yield – the amount produced per acre – will be the lowest since 1995-96.”
http://www.bbc.co.uk/news/business-19213550

What I want to know is whether our government will be subsidising cornflakes and bread to keep prices down.

@58. David Lindsay: “Richard Branson and Rupert Murdoch have both built their empires on enormous levels of State favouritism…”

Err, no.

Richard Branson appeals (as a tax thief, see Tom Bower biography) to a sector of the UK populace. He presents the argument, that you can get rich without defecating on workers or tax payers. Branson’s folly is that he defecates.

Rupert Murdoch is very different. UK governments do not trust Branson — thus, no national lottery contract — and nobody trusts Murdoch. Murdoch is dependent on corporatism.

There is an encouraging bright side to Sir Richard Branson’s threat to permanently withdraw from engaging in Britain’s railway industry that will leave him more time, scope and finance to redeploy his unflagging entrepreneurial inclinations in the promotion of alternative travel modes:

In 2005, Sir Richard Branson of the Virgin Group announced the creation of Virgin Galactic and his plans for a 9 seat capacity SpaceShipTwo named VSS Enterprise. It has since been completed with eight seats (one pilot, one co-pilot and six passengers) and has taken part in captive-carry tests and with the first mother-ship WhiteKnightTwo, or VMS Eve. It has also completed solitary glides, although the hybrid rocket motor has not yet been fired. Four more of each have been ordered and will operate from the new Spaceport America. Flights have been scheduled for 2011 driven by a “safety-driven schedule”.
http://en.wikipedia.org/wiki/Sub-orbital_spaceflight

The company started by UK billionaire Sir Richard Branson is primarily focused on taking fare-paying passengers into space.

But the technology being developed to take up people could also be adapted to send aloft smaller Earth observation and communications spacecraft.

The company started by UK billionaire Sir Richard Branson is primarily focused on taking fare-paying passengers into space. [BBC website 11 July 2012]

We wish him well.

No corporation better encapsulated the seamlessness of the 1960s, the 1980s and the Blair Years than Richard Branson’s Virgin.

The beginning of its end is the beginning of the end of, almost literally, one hell of an era.

64. James Reade

Such a shallow view of how markets work. Restricting what companies can do with their pricing is not protecting customers – if anything, it makes the customer experience worse since.

If you can’t make an investment to improve a product and as a result raise the price, why bother? To make a loss on the investment?

As a result, we get a poorer general system as a result, and the consumer is certainly not “protected”.

65. margin4error

charlieman

Don’t know why season ticket loans are a london thing. Didn’t know they were. Maybe the culture of communiting by train is weaker in other parts of the country so it is less useful to companies. But yes, everyone has the option of a season ticket loan at my company, whatever their status. Temps are presumably an exception as they are only around for a few weeks, making an annual season ticket paid off through twelve monthly paychecks a bt redundant. (If some one leaves, the ammount due on the loan still has to be paid).

As for the money coming from the pot to pay staff – yep – a season ticket loan is just a good way to make the wagebill go further to keep staff happy. london underground annual season tickets are about 15% less than twelve monthly season tickets. So the company is providing staff with 15% more reward than the actual ammount being handed over. That’s not a bad thing to do in a competitive market.

Also – on a slightly unrelated point – my season ticket loan has never gone into my current account – it is always a cheque made payable to LUL. So not sure how not having a bank account would impact.

66. margin4error

Bob B

yes – the UK state will be subsidising your cornflakes.

Through direct funding to build and expand ports, and by building roads and rail (and maintaining those roads and rails) connecting ports to places where goods are sold to consumers – the state subsidises your conflakes.

Likewise through street lighting and late night policing the state subsidises late opening of shops, who can thus get more time use out of their costly assets – further subsidising your cornflakes.

And don’t forget our massive subsidies to farmers who, if they produce cereal crops are directly subsidising your breakfast every day.

Those and many other subsidies feed you your breakfast of choice Bob.

M4E: “yes – the UK state will be subsidising your cornflakes. ”

But the government will be needing to increase all those subsidies as world cereal prices increase to prevent rises in supermarket prices of cornflakes and bread. Can we rely on the government doing that? Btw what should the government be doing about world fuel prices so consumers don’t have to pay any more when the prices rise?

68. margin4error

Bob b

You can indded rely on government boosting your cornflakes subsidy. Just look at the National Infrastructure Plan. Huge ammounts of proposed spending to bring down the long term cost of your breakfast. The same is being mirrored across Eastern Europe where so much farmland is being better connected to your local shops by road, rail and ports at state expense (including ours as EU members). And don’t ever forget the regular stepping up the CAP. Your subsidised breakfast is getting all the more subsidised year by year.

Oh, and obviously never fret about energy not getting its subsidy either. It’s what the Ministry of Defence is for. Iraq is now more maliable and pumping out oil again, and Libya will be on-stream in a couple of years. Energy has always got the biggest bang for its subsidy buck. 😉

And of course that wonderful fuel subsidy even further subsidises your breakfast, you lucky cornflake-lover.

M4E

So with all that government subsidising going on, I can rely on the prices of my daily cornflakes and bread not rising however bad the drought in the corn fields of the mid west states in America? How come all the complaints about gas prices for home consumers and petrol prices for motorists?

70. margin4error

Bob B

Government will continue to make sure your breakfast is cheap. But cheap is relative to the real cost of providing you with a bowl of cornflakes – it is not a fixed and absolute price. Zimbabwe tried the latter a few years ago and it didn’t work out too well. Competent governments understandably won’t repeat the same mistake by fixing a price for your bowl of cornflakes.

And in terms of complaints about energy prices – I’d imagine they complain because people don’t like paying bills – even subsidised ones. I certainly don’t.

But having said all of that – I’d imagine you are not as stupid as your questions suggest and that you actually know both those answers. As such I assume you are trying to use tangential tidbits to make some sort of point about your cereal subsidy.

You could instead just say whatever your point is.

You might find this quite an interesting contribution to the debate:

http://www.igreens.org.uk/great_road_transport_subsidy.htm

Admittedly it is quite old but probably mostly relevant.

buddyhell @ 13:

“Have you ever wondered why no other country has adopted this dog’s breakfast approach to railway privatisation?”

And have you ever wondered why no other country has adopted our approach to health care?

No; I thought not…

Over the last 25 years, UK train fares have generally increased inline with UK average salary growth. This is very different to the trend with RPI were train fares increases much faster. From all the news headlines recently, you would have thought that train fares were racing ahead from wages for the last 10 years. It was only since 2010 that train fairs have consistently increased faster than wages, mainly due to average wage growth slowing significantly.

So relative to wages on average train fares are only slightly more expensive as they were in the late 1980s, as it can be see from the chart which show the relative compounded growth of average train fares and average wages since 1987 at the reference below.

Reference: http://www.inflationarypressure.com/customchart1987/Graph%20of%20price%20of%20Rail%20Fares%20against%20Average%20Earnings%20Index%20showing%20inflation.html

M4E “You could instead just say whatever your point is.”

Ye olde political presciption for Tax and Spend has evidently been transformed to the more populist Tax and Subsidise.

As this unfolds, the prices that consumers pay for goods and services will have little systematic relationship to the underlying resource costs of producing those good and services. Market failure will become pervasive.

75. margin4error

Thanks Graham – that’s an interesting paper.

Bob B

But you said you wanted cheap cornflakes. It was you who was asking for a subsidy. A subsidy that you get so your cornflakes cost less.

And you presumably know that market failure is not exclusively caused by subsidies. You are, I would hope, not that dumb. So it might be that you are right to demand and get your subsidy to resolve the market failures (externalities if you prefer) associated with your breakfast.

Or you might be wrong. But that case needs making too. Simply pretending all subsidies are a problem is dumb. It requires an utter ignorance of basic economic concepts that can be learned in a few hours of reading an economics GCSE textbook – and it is usually born of zealotry rather than anything useful. (Zealots are rarely right about anything as they treat their zealotry as a faith to be served, and thus its own end – and thus ignore the means of achieving real ends).

I don’t know the externalities specific to your breakfast – but with railways several have been discussed above that help to illustrate. There’s the environmental aspect (economic pricing is not good at handling pollution of the earth, or of people’s lungs) and the issue of the high cost of providing storage space for alternative means of transport (primarilly cars) in dense and high value commercial hubs.

These are market failures that subsidies may be a valuable tool in correcting. They may not be. But that requires analysis and debate. As does the subsidy you get for eating cornflakes.

That is never aided by silly zealous nonsense about subsidies being bad. Some may be bad. Some may be good. But pretending they are inherrantly a problem is a bit like pretending all cars are red. It is so clearly and apparently not true to anyone with their eyes open that it exposes the person claiming it as an idiot.

76. Gary Kilroy

We need to stop thinking of railways as an entity that is required to make a profit. The railways make a profit for the exchequer by allowing hundreds of billions of pounds of business to take place. If the government needs to subsidise the railways then so be it. What we need to find out if just how much of GDP is dependant on having an effective railway system. Our cities simply would not function if it were not for the railway network. Rail subsidy is now running at about £4 billion per year but this subsidy allows business to take place that would bring in tax revenues of several times that amount. So although the network itself might not be profitable when you take into account the wider economic benefits it is hugely profitable to the nation. We need to stop thinking in such narrow terms of profit and loss.

77. margin4error

Gary

Actually – thinking in terms of profit and loss are crucial. It’s the “narrow” bit people get wrong. A company that makes cans for coca cola and for Fosters doesn’t focus only on its profit and loss for coke cans. It also weighs up its profit and loss on Fosters.

As a country – a government and a populace – we are very bad at that. We see a subsidy to the railways and we hate all that money going to some private companies. But at the same time we see unemployed people and we hate all that money being spent to house and feed them. We don’t equate the two very well.

Yet good quality and inexpensive infrastructure is a competitive advantage in the globalised world (a competitive advantage we are terrible for, given our WEF ranking of 28th in the world on this). And being a competitive advantage it enables more companies to set up here, or more companies here to expand and generate jobs.

If we could encourage more rational and comprehensive thought we might arrive at better conclusions. But sadly people tend to focus on whether individuals concerned (people paying train fares, people claiming benefits while unemployed) “deserve” the subsidy.

Frankly, who cares if they deserve it? If it makes the country better off – that’s what really matters.

“Yet good quality and inexpensive infrastructure is a competitive advantage in the globalised world (a competitive advantage we are terrible for, given our WEF ranking of 28th in the world on this). And being a competitive advantage it enables more companies to set up here, or more companies here to expand and generate jobs. ”

Going vastly off subject there but…..

So, we’re 28 th in infrastructure you say? Yet we’re what, 6 th or 7 th in GDP? About the same in GDP per capita?

So, infrastructure is capitla, GDP is income. We’re creating more income from lower capital then. The UK economy is thus more efficient than many others…..

79. margin4error

Not really Tim.

As a hint for the future you should probably look up real numbers rather than make up numbers. You don’t have to – but you risk looking a bit stupid otherwise.

IMF ranks us 22nd for GDP per capita in 2011. Of course since then our economy has shrunk and we have discovered our population was significantly larger than we had thought (thanks to newly released census data).

World Bank – likewise – 26nd in 2011 (with the same caveates applied as to the IMF figure).

CIA World fact book – 25th in 2011 (and again, the same caveates apply).

For PPP GDP per capita the equivelent figures are 22nd, 22nd and 26th – though again, the same caveates apply here too.

That said – if we were getting more income from our capital than most countries (the real figures rather than your made up ones suggest this is unlikely, but lets run with your imagination anyway) – that doesn’t mean further funding of infrastructure might not be a good idea.

We might perform well for a low tax base and stable political and legal system – and as such each improvement in competitiveness by improving those may hold a higher marginal cost than improving by bettering our infrastructure. It’s a bit like a football team with rubbish defenders but a great striker force – which would probably be best of spending its money improving its defence rather than further improving the strike force if it wants to gain most points in the upcoming season.

Hope that’s helpful.

As others have said. The people demanding that the railways ‘pay their way’ are missing the point. Having efficient transport infrastructure allows the rest of the economy to function smoothly and efficiently, it is in a sense a pillar upon which the rest of the economy stands and allows it to function. Whatever the (relatively small in relation to our overall GDP) subsidy we pay for the railways is most probably repayed many times over by the tax revenue generated by the economic activity that it enables.

“Having efficient transport infrastructure allows the rest of the economy to function smoothly and efficiently, it is in a sense a pillar upon which the rest of the economy stands and allows it to function. Whatever the (relatively small in relation to our overall GDP) subsidy we pay for the railways is most probably repayed many times over by the tax revenue generated by the economic activity that it enables.”

Quite possibly. Two points:

1) We have a method of working this out. Called a cost benefit analysis. So, we should do one perhaps? The answer of those that have been done is usually that commuter rail in dense urban environments deserves subsidy. The rest don’t.

2) “Having efficient infrastructure allows the rest of the economy to function smoothly and efficiently, it is in a sense a pillar upon which the rest of the economy stands and allows it to function. Whatever the (relatively small in relation to our overall GDP) subsidy we pay for the is most probably repayed many times over by the tax revenue generated by the economic activity that it enables.”

Banking is an important infrastructure, should banks be subsidised? Roads are an important infrastructure, supermarkets are, etc etc….should they all be subsidised?

If First Great Western gets taxpayer cash, why doesn’t Barclays or Tesco?

@80 Tim Worstall

We have a method of working this out. Called a cost benefit analysis. So, we should do one perhaps? The answer of those that have been done is usually that commuter rail in dense urban environments deserves subsidy. The rest don’t.

Which cost benefit analysis’s were these, and what were the criteria being used? The government has recently approved the reopening of a railway line in rural Buckinghamshire that was closed under Beeching. They wouldn’t have done that if it didn’t have a strong business case.

http://en.wikipedia.org/wiki/East_West_Rail_Link

Banking is an important infrastructure, should banks be subsidised? Roads are an important infrastructure, supermarkets are, etc etc….should they all be subsidised?

Unless you hadn’t noticed. We just bailed out our banks to the tune of billions because our economy couln’t function without them. So in effect they are being subsidised. Roads are subsidised through our taxes. Supermarkets have a business model which means they can look after themselves. But in some ways you could argue that they do get subsidy in the form of free roads and railways provided by the taxpayer. I wonder how profitable they would be if they had to pay the full cost of their transport infrastructure?

And if, hypothetically, as a thought experiment, all of the supermarkets suddenly went bankrupt and threatened to close. Would the government not have to step in and bail them out or nationalise them like they did with the banks?

@80. Tim Worstall: “1) We have a method of working this out. Called a cost benefit analysis. So, we should do one perhaps?”

That sounds like the setup for a “how many economists to make a decision” joke.

If you don’t like the answer from one economist or accountant, ask the same question to another one. Consequently, lots of people are asked the question.


For simple stuff within a company, one person can perform the cost benefit analysis. For more complex stuff, different people reach different conclusions.

For HS2, high speed rail, no single person will analyse it and the judgement will be delivered after examining loads of analyses. Whatever the determination, however, there’ll be shed loads of new data and commentary. To be rubbished in three months after HS2 is or is not built.

84. margin4error

Tim W

Given you made up numbers for GDP growth in #78 – would you be so kind as to link to a cost benefit analysis showing what you have claimed.

I ask you to only because I suspect you may be lying again.

would you be so kind as to link to a cost benefit analysis showing what you have claimed.

Well, in the HS2 cba, as George Monbiot has reported, the major benefits are in shorter travel time.

There’s a problem with this approach though. We still calculate this as if time sent on a train is unproductive time. Thus the cost of a train ride includes the value of the time of those on the train. Around £50 an hour for first class passengers (a remembered number, not an accurate one).

Which means that cutting the journey time produces benefits of number of first class passengers x £50 x fraction of hour shaved off journey.

The problem with this is that in the 60s travel time probably was dead time. With mobiles and laptops it isn’t now.

86. margin4error

Tim W

So is that a no then? – You won’t tell us which CBA finds that? Why not?

Seriously – You were quite explicit. You said “The answer of those that have been done is usually that commuter rail in dense urban environments deserves subsidy. The rest don’t.”

Great – information is a brilliant thing. It helps inform discussions and ideas and policies and so on. So share. point us in the direction of one such CBA.

Just one that you’ve read. We’d really apreciate it. Well, I would.


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