HS2: subsidies breeding more subsidies

The rail industry depends on a very high level of state support. Much of the sector would not be viable without vast taxpayer subsidies and other special privileges.

The government supports the railways in several ways, including:

  • Providing direct subsidies from the taxpayer of about £6 billion a year (not including London Underground or light rail). This is equivalent to approximately 70% of fare revenue and represents a major distortion of the transport market.
  • Guaranteeing Network Rail debt, which has now reached an astounding £38 billion, larger than the national debt of Nigeria, a country of 180 million people. Big increases in such borrowing have enabled the government to hide the true level of taxpayer support by passing some of the costs on to future generations.
  • Imposing price controls on many rail fares, thereby increasing overcrowding, particularly on peak-time commuter services into London from satellite towns such as Milton Keynes.
  • Exempting rail fares from VAT. By contrast, tax is charged on road fuel at a rate of approximately 150%.
  • Adopting planning policies that push new development into areas adjacent to railway stations (for example, Stratford City), while restricting more spatially dispersed car-friendly growth. Also locating large public sector employers around rail hubs, including much of the civil service.
  • Funding ‘business’ rail travel by public sector workers and government contractors.
  • Suppressing competing modes such as road and air transport through high taxes, heavy regulation and restrictions on new capacity.

The artificial nature of the rail market raises uncomfortable questions for advocates of new rail infrastructure such as High Speed 2. Massive taxpayer support, regulated fares, discriminatory tax treatment and distortionary planning policies mean that the case for HS2 is grounded on levels of demand that have been hugely inflated by state intervention.

Existing subsidies are breeding future subsidies, with the UK’s transport sector and economic geography becoming ever more maladapted and distorted in the process.

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Why taxpayers should be angry about rail policy

Taxpayers have far more reason to be angry about rail policy than passengers. They pay about £6 billion a year to support the railways, even though most of them rarely use trains. And it makes little economic or environmental sense to subsidise long-distance commuting, which encourages inefficient travel patterns and energy intensive lifestyles.

The argument for subsidies on grounds of fairness is also weak, as rail commuters are on average far richer than the general population. Measures that froze rail fares or limited increases to the Consumer Price Index would benefit this affluent minority at the expense of taxpayers and the wider economy.

Moreover, stricter price controls would exacerbate overcrowding problems, putting pressure on the government to fund hugely expensive infrastructure projects to increase capacity.

Regulating fares is therefore not a sensible way to cut travel costs. Instead the government should reverse current policy and give train operators more flexibility to vary fares to address congestion problems, for example by introducing ‘super-peak’ pricing and offering large discounts to passengers who avoid travelling at the very busiest times.

 

A shorter version of this letter was published in the London Evening Standard on 8 December 2014.