The problem with price freezes

Welcome back to our continuing series, “Andy Burnham Doesn’t Add Up”, in which we apply about five minutes of critical thought to the Labour leadership hopeful’s latest idea and see what remains of it.

Today’s subject is his proposal to impose a national cap of £2 on bus fares in England. According to the Daily Telegraph, this is to “to help the jobless” and is described by Burnham as “a brilliant way to get people back to work and connect communities”.

Now we don’t have all the details of this yet, so this isn’t a proper dive into the guts of the proposal. But freezing fares is a very obvious temptation to any politician who finds themselves in charge of a transport network, and it has its downsides.

In fairness to Burnham, affordable public transport is, on its own terms, obviously a good thing — especially, and this is important, in cities. In urban areas, a public transport network has a large base of potential users and the more people you can divert onto it, the fewer are making demands on the roads, which are generally a much less efficient way of getting people about.

(Now that isn’t the slam dunk some advocates of public transport sometimes treat it as. There are other metrics than efficiency to consider, such as the fact that cars can transport passengers and goods and, most importantly, get you exactly where you want to go. But given the finite capacity of urban roads, efficiency is important.)

Even in cities, however, freezing fares is a two-edged sword, for several reasons.

First, fares are generally the revenue stream of first resort for most public transport systems, funding repairs and maintenance if not improvements, which tend to be funded separately. Freezing fares thus means strangling the flow of revenue into the network (especially at a time of relatively high inflation). That means either that the network ends up starved of funds or that another body has to pick up the shortfall. In London, Saqid Khan’s fare freezes meant diverting hundreds of millions of pounds from other parts of the budget into TfL.

But at least Khan had direct access to those funds; Burnham would have to contend with the Treasury. And in modern Britain’s abysmal fiscal conditions, the only way to reliably fund anything that isn’t pensions, welfare, or the NHS is to somehow secure it a revenue stream that doesn’t involve the Treasury. (This is how water privatisation managed, despite being otherwise catastrophically mishandled, to increase investment in water infrastructure severalfold on the nationalised era: water companies were obliged to reinvest revenues, and the money never touched the Treasury.)

And if all that is true in urban areas, it becomes an especially acute problem in rural ones. At present, England’s bus network consists of private companies operating most routes on a for-profit basis with local authorities, with central government support, subsidising ‘socially necessary’ routes. A fare freeze risks more routes becoming unprofitable, requiring either that they be designated “socially necessary”, and thus subsidised, or cut.

Inflation makes this an especially thorny problem because the year-on-year impact of a freeze will be more significant, as would the eventual price shock entailed by any later decision to let prices equalise upwards. As people tend to react very badly to the extremely tangible hit of a price increase, that creates the same problem for government we see with the pension triple lock or the energy price cap: an increasingly expensive position from which it is politically impossible to resile.

So if Burnham freezes fares, he is going to have to either oversee cuts in the bus network (which is presumably not the plan) or somehow wring the extra cash out of the Treasury, which if he intends to stick to the fiscal rules means finding cuts elsewhere or raising taxes even more …

Unfortunately, however, an overall freeze would nonetheless seem the best way of trying to deliver the chosen policy objective (make life easier for jobseekers). An alternative such as a jobseekers bus pass would be more targeted and thus less distortive and more affordable — but it would also create yet another disincentive to actually getting a job, as losing your pass would increase the real marginal tax rate created by withdrawing benefits.

But what am I saying? This isn’t even going to be in the top ten most frightening fiscal problems facing a Burnham ministry, and the odds of that ministry lasting long enough for the slow decay of the national bus network to become a problem seems very remote indeed. Nonetheless, it is significant that we are being presented with a supposed messiah figure and this is the best he’s got.