Why HS3 won’t create a ‘Northern Powerhouse’

The North of England’s economic problems are undeniable. There is relatively little wealth creation in its once-great cities. The entrepreneurial dynamos of the industrial revolution are now heavily dependent on government handouts, with public spending making up half or more of their ‘GDP’.

Even the bright spots of the northern economy are creatures of the state. The booming universities rely in large part on government-guaranteed loans and research grants. And the professional services sector concentrated in Leeds and Manchester is parasitic on costly regulations imposed on individuals and businesses. In reality it represents the destruction of wealth.

Unfortunately it’s difficult to be optimistic about the northern economy in the long term. A combination of high costs and mediocre human capital (skills etc.) means that the region will continue to struggle.

A programme of radical spending cuts and deregulation could of course reduce the costs of doing business in the North – but the short-term effect on public services and local economies is unlikely to be politically palatable. The scale of deregulation required to make a significant impact is probably impossible while the UK remains signed up to the EU and various other supranational bodies.

At the same time, long-term demographic trends are likely to exacerbate the region’s human capital problem, with increasing numbers of elderly and incapacitated, as well as young people typically ill-equipped to undertake high-skilled jobs. Those who think improved training and education can resolve the latter issue are surely deluded.

The tides of economic geography are also working against the North. The region finds itself on the periphery of a Western Europe sinking rapidly into stagnation and irrelevance as the global core shifts to the East. Indeed, even the region’s handouts may be at risk as the vast UK revenues based on Western geopolitical power and associated market-rigging eventually unravel.

In this context there is a ‘fiddling while Rome burns’ quality to George Osborne’s plan to create a ‘Northern Powerhouse’ by speeding up rail journeys between the region’s major centres. This is not, however, to deny that transport investment has the potential to deliver very substantial economic benefits.

Reductions in transport costs lower the cost of exchange, which in turn boosts trade and brings higher productivity through specialisation, economies of scale and so on. They also enable the development of agglomerations, clusters of activity that may further increase productivity and output. For example, thicker labour markets may lead to the better matching of workers to jobs and increased firm density may lead to greater knowledge sharing and to increased specialisation in supply chains.

Thus, in theory, better transport links could improve the economic performance of the North by enabling its businesses to make better use of its human capital. There could also be significant benefits from creating a larger hub in say Manchester. Improving the connectivity of the airport, for example, could increase the number of flight destinations that are economically viable, raising the attractiveness of the city as a business location.

Improved transport infrastructure in the North won’t be enough to overcome the region’s long-term structural problems, and it can’t reverse the impact of global economic trends, but it does have the potential to improve economic performance and perhaps slow down the rate of relative decline. This conclusion, however, depends on the assumption that such infrastructure would deliver a substantial reduction in transport costs in the North, which is where the government’s ‘HS3’ proposals fall short.

Indeed, the HS3 plans are likely to be useless for the vast majority of transport users in the region, and worse still will impose large tax costs and deadweight losses on the wider economy.

The core part of HS3 is likely to be an enhanced rail link between Manchester and Leeds city centres (and possibly also Sheffield), its cost estimated at roughly £10 billion. This would cut journey times from around 50 minutes to about half an hour.

The project is, however, unlikely to deliver significant results in terms of the thicker labour markets and other ‘agglomeration economies’ that are essential element to the aim of having these cities work as a single economic unit.

The main problem is the geography of northern conurbations. They are ‘multinucleated settlements’ comprising numerous smaller centres such as Stockport, Oldham, Salford, Rochdale etc. In addition, the region exhibits a high degree of suburbanisation and has experienced significant counterurbanisation.

Despite the huge government subsidies poured into inner-city regeneration programmes over the last thirty years, the vast majority of high-skilled workers reside in the outer suburbs or semi-rural villages. The gentrified inner-city districts so characteristic of London are largely absent.

The urban geography of the north suggests that a 30-minute city centre to city centre journey time would not deliver the single labour market so vital to the vision of the ‘Northern Powerhouse’. Typical door-to-door journeys would still be too time consuming and expensive for practical daily commuting. Indeed the seemingly quite large percentage reduction in travel times promised by HS3 becomes relatively small when examined in these terms.

To give a practical example, take someone who lives in the wealthy suburbs of north Leeds and works in Manchester. The bus trip to Leeds station takes say 35 minutes in the morning peak, but in practice the commuter has to allow 50 minutes to give some leeway for transfers and the walking involved. The 30-minute high-speed trip to Manchester takes the total up to 80 minutes, and then the worker faces say a 10-minute walk to his office – making a total of 90 minutes or a 3-hour round trip, about three times the average.

The situation is of course similar or worse for residents of many of the various ‘satellite’ towns and villages in the region. It should also be noted that employment hubs, such as the universities, main hospitals and Salford Quays are often a considerable distance from the city centre stations, increasing travel times further.

Such long journeys would be unacceptable and/or impractical for the vast majority of potential commuters, effectively adding 40 per cent or more to the length of the working week. Moreover, the cost – about £3,500 a year based on current fares and possibly much more if HS3 charged a premium – makes this option prohibitive for many workers.

Urban planners might attempt to address at least the travel-time problem by encouraging more high-paid workers to live in city centres through adopting policies of restricting suburban development and driving it instead into high-density tower blocks close to rail hubs. At the same time, businesses could be forced or nudged to locate near the stations. This could perhaps get door-to-door round trips to just under 2 hours.

But even if Kowloon densities were achieved, say of 100,000 residents in the square mile around each HS3 stop, this would still represent less than 3 per cent of the total population of Yorkshire and Lancashire – and in reality only a fraction of the residents would be trans-Pennine commuters. This hardly suggests a transformative effect on the regional economy. Such high-density environments also create numerous costs and problems, such as anti-social behaviour and congestion, the so-called diseconomies of agglomeration. Moreover, it’s difficult to see how they would appeal beyond quite limited niche groups.

It therefore seems likely that HS3 will prove a costly failure in terms of uniting the labour markets of Leeds, Manchester and Sheffield. Worse still, the North will have to contribute a significant share of the tax bill for the scheme and suffer a proportion of the resulting wider economic losses. Even if London and the South-East pay much of the cost, this will still have a negative knock-on effect on northern economies.

HS3 will also be useless in terms of freight transport in the north, further diminishing its potential to deliver many of the vaunted competition and specialisation benefits. This also applies to many businesses that rely on cars and vans to carry their equipment, such as construction firms. Faster rail links are only likely to benefit a small number of sectors, particularly professional services, which as mentioned earlier is typically parasitic on other businesses and typically contributes little to wealth creation.

Indeed the relatively short distances between the major northern cities and their dispersed, multi-nucleated nature makes rail freight impractical and uneconomic apart from a handful of niche markets. It’s far cheaper to load cargo on to lorries for fast, door-to-door convenience. Unsurprisingly given this fundamental obstacle, there is very little rail freight traffic on the trans-Pennine routes between Leeds, Manchester and Sheffield – with the exception of bulk limestone from the Peak District quarries.

Accordingly, if reducing freight costs were a major component of the government’s strategy, resources would be allocated to the road network rather than HS3. While some vague plans have been mooted and incremental improvements announced, it’s clear that fast rail links are the main priority.

Such modal bias is particularly misguided because it would be possible to fund trans-Pennine road improvements – such as a fast Sheffield-Manchester link – with private investment at no cost to the taxpayer, with construction costs covered by future toll revenues. Yet our politicians seem to prefer uneconomic big government projects like HS3. Indeed they often go out of their way to obstruct non-state initiatives to improve infrastructure, by imposing strict planning restrictions, for example.

Something is clearly very rotten in the state of British transport policy. HS3 is just the latest example of politicians wasting taxpayers’ money on ill-conceived projects that fail to deliver their objectives. Transport investment should be about maximising economic returns by allocating scarce resources in the most cost-effective way, but instead it has become a PR-driven process of grabbing headlines, ‘buying’ votes and paying-off special interests.

High Speed 1: how taxpayers were taken for a ride

Eurostar 203High Speed 1 (HS1) would never have been built if the decision had been made on commercial criteria, or indeed on rational economic grounds. While the high-speed-rail lobby promotes the scheme as a success story, it was in fact a financial failure, marked by cost increases, repeated bailouts, disappointing passenger numbers and failed objectives.

The cost of the final HS1 scheme was far in excess of original estimates. In November 1985, British Rail’s preferred high-speed option was costed at about £1 billion in 2015 prices, while the final cost of the project has been estimated at approximately £11 billion in current prices.

Moreover, after the line opened below-forecast passenger numbers meant that the operator, Eurostar, had to be bailed out by the Department for Transport. Further government support for the struggling route was obtained via the access charges for (subsidised) Kent commuter services.

In addition to substantial operating subsidies, HS1 appears to have been artificially supported by the manipulation of the rail market. Some services from Kent stations to convenient London termini such as London Bridge, Cannon Street, Charing Cross and Victoria have been cut, while others have been slowed down, in an apparent attempt to drive passengers onto HS1. Commuters across the Southeastern franchise area also faced steep increases in fares to pay towards the high-speed services, whether they used them or not.

Many of the objectives of HS1 have also yet to be achieved. Plans to run international services from Stratford in London and through services to the Midlands and the North did not materialise due to low demand. At the time of writing, Eurostar trains do not stop at the £250 million Stratford International station. And notwithstanding exceptional traffic during the 2012 Olympics, it appears that the stop is only lightly used by commuters from Kent, often handling fewer than 1,000 passengers per day in each direction.

HS1 also provided a rationale for the construction of additional transport infrastructure at further expense to the taxpayer. A £250 million (2015 prices) extension to the Docklands Light Railway (DLR) was constructed largely to improve the accessibility of Stratford International. The line also provided a major justification for the redevelopment of Kings Cross St Pancras Underground station, at an additional cost of roughly £1 billion (2015 prices).

It should also be noted that much of the ‘regeneration’ along the route has been state-funded. The subsidised public sector and ‘crony capitalists’ dependent on government privileges dominate the post-Olympics redevelopment at Stratford. Major tenants will include the bloated bureaucracies of Transport for London and the Financial Conduct Authority.

Similarly, the government has sought to kick-start the stalled redevelopment of Ebbsfleet – a highly undesirable site, much of which is at risk of flooding – with the injection of at least £200 million of public funds.

The development of land near Kings Cross – also partly government funded – could well have been viable without the link, given the artificial scarcity of opportunities produced by strict planning controls in Central London. Indeed, the redevelopment of such areas may be delayed by the uncertainty and planning blight associated with major transport schemes.

Even if one makes highly optimistic (and questionable) assumptions about the wider economic gains from HS1, it is clear that the project represented very poor value for money compared with alternative investments in transport infrastructure. Indeed, when the deadweight losses from the tax bill and off-balance-sheet spending are included, it seems likely that the costs of the scheme have outweighed the benefits.

 

This analysis of High Speed 1 is partly based on research published in The High-Speed Gravy Train: Special Interests, Transport Policy and Government Spending.

Eurostar sale backed by government subsidies

The sale of Eurostar is a terrible deal for the taxpayer. It is only possible because the government subsidises loss-making high-speed commuter services to Kent and this funding now pays a high proportion of the infrastructure costs of High Speed 1. According to a 2012 National Audit Office analysis:

‘Under the new track access charging regime, access charges paid by Eurostar were reduced to the levels being paid by the domestic operator. A greater proportion of overall charges (60 per cent of HS1 Limited’s forecast access charge income over the 30-year concession) is now paid by the domestic operator because it uses more of the capacity of the line. To support domestic high speed services, the Department pays additional subsidy to the domestic train operating company. The Department forecasts that additional subsidy payments will amount to almost £110 million in 2011-12. If this level of subsidy in 2010 prices was to continue until the end of the concession in 2040, we estimate that the present value of subsidy payments will be some £2,100 million but the actual level will depend on the outcome of future franchise negotiations.’

The NAO report also reveals that five years ago, taxpayers also spent around £800 million (in current prices) bailing out Eurostar and its parent company. The massive losses accrued since the service started in 1994 were effectively written off. Passenger numbers have been over 60 per cent lower than originally forecast when the line was approved.

It seems highly unlikely that Eurostar would have been commercially viable without these bailouts and hidden subsidies. Indeed, the sale may be viewed as a form of government borrowing in the sense that it relies on ongoing taxpayer support for the route over the long term. The receipts are of course miniscule compared with the estimated £11 billion total cost (in 2015 prices) of High Speed 1.

 

An earlier version of this article appeared in City AM.

Britain’s rail policies defy economic logic

Britain could teach the world how not to run a railway. A combination of vast subsidies and overcrowded commuter trains means both taxpayers and passengers get a bad deal.

Privatisation should have delivered a dynamic free-market industry that improved services and cut costs. But the government wouldn’t give up control; it suffocated rail firms with regulation, choking off innovation. Worse still, an artificial structure was created that separated track from train, overturning almost two centuries of railway tradition and introducing layer upon layer of bureaucratic complexity.

Subsidies ballooned, more than doubling in real terms compared with the pre-privatisation era. Government support is now running at around £6 billion a year, meaning taxpayers now fund roughly 40 per cent of rail spending. Network Rail debt is forecast to hit £50 billion in 2020, a massive liability for future generations.

But the big winners from such largesse are not passengers. Armies of highly paid officials, lawyers and consultants have prospered as a result of the labyrinthine rules.

More positively, there has been a big rise in passenger traffic on the railways – and not just because anti-car policies have forced more travellers to use public transport. But with this growth in demand has come congestion.

Rush-hour commuter services into many major cities now suffer severe overcrowding. In the worst affected locations, the problem has gone beyond the problem of standing-room only. Passengers must often wait for the next train as they cannot physically fit into the carriages.

This is not how a market is supposed to operate. Businesses would normally take urgent steps to address such drastic declines in the quality of service. But the rail network is not a normal market, and train operators’ room for manoeuvre is severely limited.

The obvious solution to overcrowding is to vary fares in order to incentivise passengers to use less busy trains, thereby relieving the pressure in the peak hour. This is common practice in other sectors, such as airlines. However, on the most important commuter rail routes it is not permitted.

In the same way that Soviet apparatchiks determined the price of bread – creating shortages and long queues in the process – the government imposes price controls on the rail industry, and with similar results. In practice, someone travelling on a packed train at 8am typically pays the same as a passenger on a much quieter service at, say, 9am. Only later on, when off-peak tickets become available (usually at 9:30am) do prices drop.

This rigid regulated price structure has been disastrous. Not only has it produced sardine-like conditions for commuters; it has also created strong political pressure for the government to spend enormous sums increasing rail capacity to deal with the problem.

The amounts involved are astounding. The total cost of just two schemes in the South-East, Crossrail and Crossrail 2, is likely to reach £50 billion, enough to build roughly 1,000 miles of brand new six-lane motorway. In addition, overcrowding on the southern section of the West Coast Main Line has been used to justify the hugely expensive High Speed 2. As well as imposing a large burden on taxpayers, such London-focused, rail-centric spending is draining investment from better-value road schemes in the North of England.

Building new rail capacity is an expensive and complicated solution to a problem that in many cases could be solved relatively simply by allowing train operators more flexibility to smooth demand. It is far cheaper to make better use of existing infrastructure than to construct brand new lines.

The economic logic for deregulating fares is therefore compelling. Operators could then charge ‘super-peak’ prices on the very busiest services while offering cheaper tickets on quieter trains. This would not just benefit taxpayers by reducing the need for new infrastructure, it would also benefit many lower-paid workers such as cleaners and shop assistants, who often travel outside the peak hour but before current off-peak fares begin.

Flexible pricing could also encourage employers to alter their work patterns. For example, there are few good reasons why universities could not shift to a later schedule, allowing students and employees to benefit from lower travel costs.

Clearly, there would also be losers from deregulating fares. While many peak-hour commuters would rather pay more to avoid the crush, others might prefer overcrowded conditions to higher prices. The answer here is surely to offer more choice, for example by providing cut-price, standing-only carriages – effectively reintroducing third class.

A bigger obstacle to a change in policy is a far more powerful group of losers – the vested interests that profit from unnecessary public spending on new rail projects. Key beneficiaries include the bloated government agencies in charge of planning the schemes, and the firms winning the lucrative contracts to build the infrastructure and supply the trains.

Britain’s rail policies certainly defy economic logic, but they also allow various influential groups to make vast amounts of money at taxpayers’ expense. This means reform is unlikely.

YP February 2015

Unless otherwise indicated, all articles on this website are written in a personal capacity.

The dangers of hyperinflation in Ukraine

?????????????????????????????????????????????????????????????????????????????????????????????????????????The Cato Institute’s Steve Hanke has estimated that Ukraine’s inflation rate is now running at 64.5% per month – well above the 50% per month that is usually used as the definition of hyperinflation. If this continues, the political and economic consequences are likely to be horrific.

Worryingly, an analysis of current conditions in Ukraine and a comparison with previous episodes of hyperinflation suggest the country is highly vulnerable to such a scenario.

 

The hyperinflation process

While the political economy of hyperinflation is often complex (see below), in simple terms it is caused by governments creating large amounts of money. Instead of funding public spending through borrowing from investors or collecting taxes, governments print money or create it electronically.

Expectations then come into play. As governments rapidly debase the currency, individuals lose confidence in the money. More and more people expect its purchasing power to decline. They try to reduce their cash holdings to limit their losses from its depreciation.

Money then becomes like a hot potato. People try to pass it on as quickly as possible. The velocity of money explodes as it circulates far more rapidly through the economy.

There is a ‘flight to real goods’ as money is exchanged for items expected to more reliably hold their value, such as cigarettes and tinned food. This results in what Mises termed a crack-up boom.

Eventually, the transaction costs of using the money rise to such an extent that it is rendered useless and new forms of money, such as gold, foreign currency – or even cigarettes – are used instead, along with barter.

In the meantime, high rates of inflation have made economic calculation almost impossible, and huge malinvestments have taken place. The later stages of hyperinflation and any subsequent stabilisation, are generally marked by a painful adjustment process as these malinvestments are liquidated, and governments slash spending and/or raise taxes.

The Weimar Republic

Only by looking at the detail of particular episodes of hyperinflation does one begin to appreciate its horrors.

The first sign of trouble in Germany was when it went off the gold standard in 1914. The government then borrowed and printed money rather than raising taxes to pay for the war.

By 1917, the amount of money in circulation had risen five fold. The main surge in prices came after the war ended, however. The people had been hoarding cash during the conflict, for security, and because many goods were unavailable.

Then, in 1919, this money came flooding back into the economy – prices rose by around 300% that year.

It was then that people lost confidence in the currency – this mindset not helped by the Treaty of Versailles and the hefty reparation payments imposed on Germany. The flight to real goods began, and the hyperinflationary process accelerated.

There was also a problem for a government committed to maintain, as far as possible, its spending levels, in that high inflation made it in some ways even harder to collect tax to balance the budget. Eventually they ended up adjusting taxes by the month. But another problem was that companies would deal in foreign currencies using foreign bank accounts, to avoid holding Marks, making tax avoidance easy. The increased use of barter also didn’t help the collection process.

Germany also faced enormous instability, and this perhaps partly explains politicians’ unwillingness to exact big public spending cuts and their preference to use the ‘hidden tax’ of inflation to fund expenditure. There were hundreds of political assassinations and both the communists and national socialists threatened the nascent democracy, while the French were trying to break the country up by establishing a Rhenish republic.

Indeed it was after the French invaded the Ruhr in January 1923 – Germany’s industrial heartland – in retaliation to default on war reparations – that inflation accelerated to the level that has become the stuff of legend.

The German government lost a major source of revenue, but insisted on funding the Ruhrkampf, the struggle against the French occupation, and kept paying out dole for unemployed workers in the Ruhr.

Even at the end of 1922, the cost of living had risen by 1500 times since the war, while wages had gone up around 200 times.

But the worst was yet to come. The cost of living index, fixed at 1 in 1914, had risen to an average 15 million by September 1923, 3,657 million in October and 218,000 million in November – when the Mark was finally abandoned.

By this stage, only 1% of the government’s budget was funded from tax receipts, the rest through printing money.

In the last months of the Mark, people would queue outside banks with buckets and wheelbarrows because so much currency was required to buy basic goods. Local authorities and large firms were allowed to issue their own notes in lieu of Marks, to address the shortage. Around 300 factories were employed to print notes.

In the worst period, a cup of coffee that had cost 5000 Marks would cost 8000 Marks by the time it had been drunk. Diners’ restaurant bills would rise as they ate. Newspapers would list new prices for tram and taxi fares every morning.

Thieves would steal baskets and suitcases full of money, but leave the money and keep the containers.

It played hell with economic calculation and many businesses shut down in the last months.

Wider social effects

Another result was widespread famine in the large cities. Malnutrition was endemic and disease rife, particularly TB among children.

Although the harvest had been good, farmers were unwilling to exchange food for worthless currency. So the cities starved and the inhabitants ate rats and dogs to stay alive.

In contrast, farmers were doing rather well. Their fixed rate mortgages had dwindled to nothing. They could barter food for luxury goods from the urban middle classes, so farms would boast cars, expensive jewellery, fine furniture, grand pianos etc.

Of course, the urban middle classes saw their wealth destroyed by the inflation, and ended up selling valuables for essentials. Those relying on savings income were in a particularly poor position, and often ended up in the soup kitchens.

As an aside, it was very difficult to protect one’s wealth. There was a mania to invest in shares, and companies did well initially in the ‘crack-up’ boom, but by 1923 most shares were trading at a tiny fraction of their 1914 values, measured in pounds, and dividends had declined even more. In terms of purchasing power, shareholders were looking at a loss of 90% plus, much better than cash or government bonds, but still an absolute disaster. Rental property was also a disaster since rent controls stopped landlords raising rents in line with inflation. By 1923, foreign students with dollars were able to buy rows of houses in Berlin using their allowances.

Gold and foreign currency were far better inflation hedges, and both were in high demand during the hyperinflation, though even with these you would tend to lose significantly in terms of purchasing basic goods. Possession of such goods, such as coffee, sugar and fuel, not to mention food-producing land, was perhaps the surest insurance policy.

In the initial stages, the working classes did a bit better than the middle classes.

They received more frequent wage increases thanks to the political power of the unions, but eventually they lost out as factories and coal mines closed down, and millions ended up unemployed on a pittance of dole money.

Entrepreneurs, particularly currency speculators often did well, and those who could obtain foreign currency could pick up assets at bargain prices in the later stages of the inflation. There was great resentment at their success, while most people were borderline starving.

Urban unrest

Given this boiling cauldron of suffering and resentment, it is unsurprising that there was significant urban unrest. Linz in Austria, which was also affected by hyperinflation, was plundered by a raging mob, with shops looted. They didn’t just steal, they also smashed up fittings and furniture. Food shops were looted in Berlin and there were numerous riots in just about every city in Germany. Parties of workers raided farms, slaughtering animals and tearing the meat from their bones, before torching the buildings.

State of emergency

Predictably all this unrest led to a government crackdown, and in September 1923, seven articles of the constitution were suspended and a state of emergency introduced.

There could now be restrictions on personal liberty, freedom of expression, freedom of the press and freedom of association. The army and the police could interfere at will with postal, telegraph and telephone services, indulge in house searches, and confiscate property.

Incitement to disobedience could be punished with imprisonment or a fine of up to 15,000 gold marks. If lives were endangered the punishment would be penal servitude. Death would be the penalty for the ring-leading of armed mobs, treason, arson or damage to the railways.

The parallels with Ukraine

Unfortunately, these are the kind of developments that could afflict Ukraine if hyperinflation continues to take hold. Worryingly there are striking parallels with the situation in 1920s Germany.

In particular, the Ukrainian government faces an existential crisis combined with a collapse in tax revenues, meaning there are strong incentives for policymakers to attempt to maintain some semblance of political stability by printing money to buy-off various interest groups – in the short term at least.

The strong presence of potentially destabilising far-right groups in both the government and the military is an especially disturbing aspect of the current situation. And as in Germany, there are also some groups that could potentially profit from a hyperinflation episode.

Ukraine’s corrupt oligarchs, several of them holding political office, own vast assets abroad, and, unlike ordinary Ukrainians, are to a large extent insulated from the currency collapse. Along with overseas investors with hard currency, they may find opportunities to buy valuable Ukrainian assets at bargain prices during the crisis. Of course, this assumes that hyperinflation does not result in the nightmare scenario of some form of totalitarian regime coming to power.

Given the obvious risks, it is absolutely vital that the Ukrainian government changes course quickly before hyperinflation becomes entrenched. This perhaps means enacting spending cuts and doing as much as possible to de-escalate the political crisis and restore confidence.

Further reading:

When Money Dies by Adam Fergusson

Human Action by Ludwig von Mises

Unless otherwise stated, all articles on this website are written in a personal capacity.

New rail links can’t solve London’s transport crisis

Busway 205London’s population is forecast to hit 10 million in 2030 and it’s difficult to see how the transport system will cope. Already a high proportion of commuters endure severe overcrowding, standing in jam-packed carriages or even struggling to find enough space to get on trains.

The government sees additional rail capacity as the best way to address rising demand. But this is unrealistic. With further spending cuts needed to reduce government debt, there is no way the Treasury will be able to fund the scale of investment required.

Part of the problem is that rail schemes in London are hugely expensive. The proposed Crossrail 2 scheme, which will add relatively little to the capital’s transport capacity, is predicted to cost an astounding £27 billion. Many more big projects would be needed for the network to accommodate the projected additional numbers of passengers. This is simply unaffordable. Public transport subsidies already cost taxpayers £12 billion a year, with roughly half of this spent in London.

An alternative strategy would be to manage demand by raising fares. Yet despite the economic logic, fare hikes have become politically toxic. Even rises of just 1 per cent above inflation are now deemed unacceptable.

Future governments will therefore face a difficult predicament. They won’t be able to afford to increase rail capacity to cope with growing demand and they will struggle to manage congestion with fare increases due to political constraints. But fortunately there is a potential solution if policymakers are prepared to think outside the box and take a more flexible approach to the use of transport infrastructure.

The rapidly growing cities of Latin America and Asia have faced similar issues: rising demand but severe budgetary constraints. But rather than investing in hyper-expensive rail infrastructure, local governments have often decided to build much cheaper high-capacity busways instead. From Istanbul to Mexico City, these busways carry vast numbers of commuters while offering cheap and affordable fares.

So, why not do this in London? One apparent reason is the lack of space, the city lacking the wide boulevards used for busways elsewhere. But London does have an extensive rail network with often vast corridors reaching right into the centre. This raises the question, would some of these routes deliver better value for money if they were converted into busways?

There is certainly strong evidence that this would bring a major increase in capacity. A single bus lane in New York’s Lincoln Tunnel carries up to 30,000 commuters in the peak hour, compared with a figure closer to 10,000 for a typical railway track entering Central London. And on former railway routes managed to avoid congestion, the potential capacity of busways would be much higher.

There could also be a big reduction in fares. Operating costs are likely to be much lower than on comparable rail routes. Busways are far simpler to manage and maintain.

Concerns about journey times can also be dismissed. On the shorter commuter routes where busways would be most appropriate, a combination of more direct services and increased frequency would deliver faster door-to-door travel times for the vast majority of passengers.

While busways may not be the best option in every location, the next government should not set transport infrastructure in stone. A more flexible approach may be the only way to avoid a severe capacity crunch.

For more details see Paving Over the Tracks…a better use of railways?

An earlier version of this article was published in City AM, February 2015

Unless otherwise stated, all articles on this website are written in a personal capacity.

Oxfam completely wrong on global inequality

In this television debate, I argue that current concentrations of wealth are largely the result of pervasive state intervention, including bailouts, quantitative easing and monetary inflation more generally (explained in more detail here). Oxfam’s proposals to address inequality by further expanding the role of government are likely to be counterproductive. High taxes and heavy regulation trap the poor in poverty.