Is It Bullshit? 'Sadiq's Fares Freeze Will Cost £1.9bn'

Rachel Holdsworth
By Rachel Holdsworth Last edited 22 months ago
Is It Bullshit? 'Sadiq's Fares Freeze Will Cost £1.9bn'

During this election campaign, we'll be examining some of the candidates' claims for the whiff of bullshit.

The claim

Zac Goldsmith says Sadiq Khan's promise to freeze fares for the four years of his mayoralty, should he win, would cost Transport for London £1.9bn.

Is it bullshit?

The short answer to this one is: very probably. It all comes down to economics. Stay with us — we need to talk inflation.

Goldsmith's claim is, to be fair, based on TfL's own business plan. TfL has projected its fare income for the next five years. Fare rises are calculated by a formula set by the government, which is RPI inflation + 1%. TfL has assumed inflation will be 1.9% for 2017 and 3.5% each year until 2021 (so one year past the end of the next mayor's term, but Goldsmith is taking the figure from the full plan).

The thing is, the last time inflation was as high as 3.5% was April 2012. The last time it was even as high as 1.6% was December 2014. The Bank of England doesn't expect CPI inflation — which is generally slightly lower than RPI — to not hit 2% again until early 2018.

So it's very unlikely that TfL would be able to raise fares high enough to bring in the £1.9bn it's planning for. (This would be offset by costs being lower.)

But it's not that simple

Just because a £1.9bn black hole is highly unlikely, it doesn't mean Sadiq Khan is right. Mike Brown, TfL's commissioner, appeared in front of the London Assembly in February. He explained that if RPI stayed at 1%, then RPI + 1% would lead to a loss of income of around £900m. Sadiq Khan claims the freeze would cost £452m. How's he coming up with that?

Mike Brown provides a reasonable theory: he told the London Assembly that an RPI-only increase would cost £450m over four years. For the last three years, fares have gone up by RPI only — but that's because central government has handed TfL money to keep fares down. That's decided on a year-by-year basis and there's no guarantee TfL will get the money again.

Is the fares freeze possible?

Anything's possible. What matters are the consequences. Sadiq Khan is currently going around telling everyone that Mike Brown agrees with him. Brown told LBC that Khan's costings are "perfectly legitimate" — and they are, if inflation stays flat and the government plays nice.

But it's more likely that the freeze would cost somewhere in the region of £900m (and more if inflation starts to rise, which it probably will do before 2020).

Khan says he'd pay for this by creating new regular income streams by building houses on TfL land and creating a commercial arm that would operate public transport in other cities. Both of these would take time to start generating money.

He also plans to cut costs. He says TfL is "flabby" and that it spends millions on consultants. We're sure there are efficiencies that can be found within TfL; but it's one thing to do a review and see what can reasonably be cut, it's quite another to arbitrarily impose a figure and then find cuts to meet it.

It's also worth noting that TfL has been making savings for several years already, to cope with reductions in money it gets from central government. Closing ticket offices might have been billed as changing the way staff interact with passengers, but it's also a lot to do with cutting costs.

Would a freeze affect investment? Probably, though it might not be obvious. As this Citymetric article notes, the cuts have the potential to lead to a scenario where TfL "skimp[s] on everything behind the scenes and hope[s] the cracks don’t show before the next election".

We'd also point out that the £886m loss TfL suffered because of the inept contract with Bombardier to upgrade the sub-surface lines — and yes, you're right to note that's enough to fund the fares freeze — was partly because TfL didn't have enough highly paid, highly experienced staff to spot they were being sold a pup. If Khan plans to slash spending on top quality people then he has to accept the possibility of more cock-ups in future. In the words of the old adage: buy cheap, buy twice.

But is it bullshit?

We reckon both candidates are talking out of their arses on this one.

Last Updated 12 April 2016

Spartacus

Sympathise with your position, generally all candidate cost assumptions are bullshit. However I think you've misplaced some emphasis in this article that personally makes me very concerned about a Khan mayoralty.

"...government has handed TfL money to keep fares down. That's decided on a year-by-year basis and there's no guarantee TfL will get the money again". This is not the case, the comprehensive spending review concluded in September and results in the phased withdrawl of all TfL's revenue/general subsidy (not capital). Over this mayoral term that is a loss of £2.1 billion vs. contracted expenditure, planned investment and operations. The starting line is -£2100m.

That plan with the big hole, as you stated, also assumes 2.9%-4.5% fare inflation over 4 years. Whether or not TfL "would be able to raise fares high enough" is very much the debate about mayoral policy we're having. But Khan's freezes will evaporate this forecasted income IN ADDITION to the -£2100m loss of subsidy over the next 4 years.

In that sense, the actual cost of such freeze is not my concern, rather that TfL have a significant funding crisis beginning now that Khan's policy will either make worse, or much worse.

This is not an abstract concern: Low inflation will only partially offset some contracts and certainly not the majority of cost which is in-house. TfL is flabby but also defensive, unionised and resistant to change. Operations are already (broadly) running at maximum capacity and demand (population) is growing ~8% p.a. There is nothing new under the sun at TfL: direct operations (of other cities or bus routes) are too expensive to compete and were previously removed, consultancy services are niche, an unknown and a net cost in short term, commercial development of land is ongoing but billions in profits are already costed into the business plan.

The investment plan is the most flexible and easiest area to not spend money (delay, degrade, cancel programmes, etc.). This is the same investment plan trying to deliver (certainly the expensive bits) capacity that is needed now and criticially needed over the next 4 years.

A funding crisis solved by scrapping investments and "sweating assets"? Doesn't sound like a labour policy, sounds like the failures of the 70s. That's the story you should emphasise.

Stating the obvious

Rachel Houldsworth in "anyone who says anything bad about Sadiq Khan is talking bullshit" shocker

Harry

This fails to take into account the extra revenue generated by the lower prices. If prices are lower, more people will use the tube more often.