Uncharted Territory

July 12, 2012

The Pensioners’ Crusade

Filed under: Complex decisions, Economics, Inequality, Politics, Public spending, Reflections, UK — Tim Joslin @ 12:06 pm

I noted on Tuesday Nick Boles’ suggestion in a keynote speech at the Resolution Foundation (pdf) to limit certain pensioner benefits to the less well-off:

“Spending on universal benefits for the elderly (the Winter Fuel Allowance, free prescriptions, free bus travel and free TV licenses for the over 75s) reached roughly £4 billion in 2010/11.

I know that this help is vitally important for many older people – and a step away from universal provision of these benefits after the next election would need to be handled very carefully as many members of this generation are admirably reluctant to make a fuss, even when they really need help.

But, does anyone here think it would be responsible for a country in our financial position to go on giving a free TV license to Michael Winner, free prescriptions to Lord Sugar and a winter fuel allowance to Sir Paul McCartney after 2015?”

A point well made.  But, I strongly suspect, to no avail.

I diligently provided links to reaction at the BBC, Guardian, Independent and Mail which all headlined Boles’ hardly original elderly means-testing proposal, even though it would only save £1.5bn of the £8.5bn he says we need to save:

“If we are to achieve stability in our public finances AND make crucial investments in improving productivity and competitiveness, we must find a way to save at least £8.5 billion from the £145 billion we currently spend on benefits other than pensions.”

Popping into Tesco yesterday, though, I noticed that I’d jumped the gun in my headline search.  The Express is going to war on the issue.  Holy war.  Here’s their front page:

I love that capital C in Crusade.  “Upper-case there”, the editor must have ordered.  “We’re not being figurative here.  This is official.  It’ll be there in the history books alongside Richard the Lionheart vs Saladin and, of course, the Children.”

The headline’s a classic as well.  Whereas the Mail and the Independent implicitly accepted the government’s right to cut benefits, but signalled with the A-word (“axe”) that targeting elderly benefits might be a cut too far, the Express went several steps further.  “Secret Plot to Rob Pensioners”.  Hmm.  Not really “secret” is it?  Which means it doesn’t really qualify as a “plot”.  And I think most would agree that discontinuing the provision of a benefit hardly counts as “robbery” (which, strictly speaking, involves violence or the threat of violence, as opposed to theft, which doesn’t).  One might even quibble that it is “pensioners” being “robbed”.  The word “pensioners” has connotations of those struggling to get by on a meagre stipend, and the qualification for the benefits in question is on the basis of age, not – as Boles’ examples of Winner, Sugar and McCartney might suggest – dependency on an annuity.

Boles’ whole point was that benefits would only be withheld from the wealthier elderly, a subtlety somewhat glossed over in the scene-setting opening sentences of the story on the front page of yesterday’s Express:

“A THREAT to strip Britain’s pensioners of benefits such as free bus passes and prescriptions triggered outrage last night.

A key ally of David Cameron yesterday called for strict means testing of claims that also include winter fuel payments and TV licences.

But the move was immediately condemned by charities and OAP groups – and today the Daily Express adds its voice by launching a Fair Deal For Our Pensioners Crusade.

This newspaper urges readers and campaigners alike to support its demand that the Government honours its pledges to pensioners in full, and does nothing to chip away at their universal welfare entitlements. Tory MP Nick Boles caused ­fury after saying the Government could save £4billion a year by stopping better-off pensioners from getting the benefits.”

£4bn/yr is in fact the total cost of the benefits.  Boles hopes to save £1.5bn/yr.

But Cameron’s calculation will be whether £1.5bn is worth the potential electoral damage in 2015 (if the Coalition lasts that long).  He’ll be looking for media outrage at “giving a free TV license to Michael Winner, free prescriptions to Lord Sugar and a winter fuel allowance to Sir Paul McCartney”.  And not finding it.

On one side is most favourable headline to the proposal at the BBC, which reports that the “Rich elderly should lose benefits, says David Cameron ally”.

And on the other is a lot of axeing and the Express’s army of pensioners ready to march against the heathens in Downing Street.

You have to admire the Express.  They understand their constituency.  As, I’m sure, does Cameron.  This kite’s not going to fly.

July 10, 2012

Nick Boles’ Resolutions

Filed under: Complex decisions, Inequality, Media, Politics, Public spending, Reflections, UK — Tim Joslin @ 5:04 pm

Note (12:15 11/7/12): Corrected in 2nd paragraph following a communication from the Resolution Foundation – they are focussed on issues rather than party politics (like the E3 Foundation – I approve) and do not “describe themselves” as “centre-left in outlook”, as I said in the initial version of this post that they “might” do.

I wrote last time that I would try to report on events I attend. For once, I’m keeping my word.

This morning, the Resolution Foundation (RF) hosted the latest in a series of meetings making up its “Commission on Living Standards”, which constitutes a large part of the analysis and policy debate around what Ed Miliband loves to call the “squeezed middle”, that is, as RF put it, “the economic decline of low to middle income Britain”. Heck, the Commission even has its own website, full of bells and whistles. Whilst the RF seems centre-left in outlook, they are politically independent and engaged with all three mainstream political parties. Today was the turn of the Tory and Cameron loyalist Nick Boles, with Lord Adonis chipping in as responder.

Many Resolution Foundation events are heavily trailed and reported in the media, and Nick Boles’ pitch on Raising Living Standards this morning was no exception. Trouble is, the mainstream media inevitably focus on whatever aspect they believe will catch the attention of their readers, so we have “Tories plan to axe pensioners’ benefits” in the Independent, “Limit winter fuel allowance and Sure Start, says Cameron ally” in the Guardian, the more accurate headline “Rich elderly should lose benefits, says David Cameron ally” at the BBC, not to mention the A-word again at the Mail: “Axe free prescriptions and bus passes for the better-off elderly, says Cameron ally”.

Clearly the media would rather scare the horses (check out the comments – and the voting on them – on that BBC story) than present some reasoned argument. No wonder we end up with swathes of incoherent policies.

The Independent’s report gives the best summary of the politics of the situation. Cameron doesn’t want to “axe” benefits for the well-off elderly, because he promised not to in 2010. Will he be able to avoid repeating such a promise in 2015? The question was asked this morning. Although Boles made a good point about how none of the parties faced up to the impending fiscal crisis in 2010, I’m not convinced. I reckon Paul McCartney’s bus-pass is safe for some time yet.

But Boles’ talk was not titled “Pensioner’s perks”. It was much more wide-ranging than that. Indeed, there was much more discussion in the Q&A this morning of tax credits, youth unemployment and even the comparative advantages of the German education system (better for technical students) and that in the UK (better for the academically inclined).

If there was a takeaway policy message from Boles, it was not that the government might try to claw back around £1.5bn/yr from well-off pensioners, it was that they want to find £8.5bn of savings (at 2012 prices) from the welfare budget as a whole by 2016 (by which time that £8.5bn will have inflated to £10.5bn). And my impression was that if it was up to Boles most of the saving would come from child-related benefits, especially those paid to parents (i.e. Child Tax Credits and Child Benefit), as opposed to schools, and Sure Start, which Boles seems to have it in for.

Since the hard-working families demographic is up there in electoral importance with the pensioners-who’ve-earned-the-right, it’s hard to see where any of the £8.5bn is coming from.

The strength – and weakness – of Boles’ approach is that he aims to be ruthlessly analytical. So he laid down 4 principles:
(1) Only those areas of spending that measurably increase the competitiveness of the economy should be allowed to increase faster than GDP.
(2) As implied by (1), spending on other areas (police, defence, environment etc) must fall relative to GDP.
(3) Areas of recent public-spending growth must decline relative to GDP.
(4) There should be no new areas of spending.

This leads to some overly-rigid thinking, in my opinion. For example, principle (4) seems to preclude a resolution of the elderly care issue, which has revived this week (apparently all-party talks broke down some time ago – like Adonis, I despair at the Westminster political process). And principle (1) relies on measurements, which are not simple in practice – this seems to be why Boles doesn’t like Sure Start.

During the Q&A though, it became clear that Boles has another principle:
(5) Public spending must decline as a proportion of GDP.
Boles said he didn’t go as far as David Laws, who has apparently called for a reduction in public spending as a proportion of GDP to 35%, from 45% after the financial crisis, but implied 40% was a ceiling (Osborne is trying to get it back down to around 39%, similar to the level under New Labour).

Of course, as Adonis pointed out, growth is key, and could reduce the tax-take percentage simply by increasing the denominator (GDP).

But the real weakness in Boles’ thinking is that it ascribes a cost to money that is simply paid to the Exchequer and then paid back out again. This is illogical. A perk is still a perk whether it is a free bus pass (counts towards the public spending percentage) or preferable tax treatment (doesn’t count). You could save money by taking away free bus passes for well-off over 65s or by requiring over 65s to pay National Insurance (NI). Now you or I would weigh up the pros and cons of both these measures. But Nick Boles doesn’t look at it that way. He’s wrong – the public only care about the rate of tax they pay (and to be honest even that’s irrational – they should only care when it changes, as pay rates adjust to the tax regime over time). People certainly don’t give a monkey’s whether UK public-spending is 29% or 45% of GDP – or 25% or 50% for that matter.

So Boles would be wise to reflect on the last question asked this morning, by Gavin Kelly, the RF CEO and Chair of the meeting. Gavin reckoned that the £8.5bn could be saved by requiring over 65s to pay NI (which all agree should be consolidated with income tax – it would be a bit illogical to pay insurance for when you can’t work when you’re over retirement age!) and (probably the biggie) reduce tax relief on pension contributions to basic rate tax only.

I suspect there are other tax allowances that really apply only to the better off that could be looked at – some of those for buy-to-let landlords look rather generous to me, and do we really need to allow new savings to be added to ISA tax shelters every year? Are we really serious about reducing the deficit?

It would seem to be less painful to reduce tax allowances than cut public spending. Consideration should at least be given to tax measures that don’t commit the political cardinal sin of raising headline rates of tax. Come on guys, even Brown was bold enough to raise the NI rate!

Let’s hope ideology doesn’t trump pragmatism in the Coalition’s forthcoming Spending Review. Perhaps they should start by renaming it a Budget (or even Deficit Reduction) Review. Or simply reclassify tax allowances as “spending”!

September 16, 2011

Off the Buses in Ealing

I reported yesterday that TfL is planning to increase fares on average by RPI+2 each year until 2018, and Travelcard prices by RPI+3 over the same period, the supposed justification being that rail fares are to rise by RPI+3. I briefly discussed the implications of this discrepancy, but had a subsequent conversation which led me to consider a different case.

I don’t know about you, but I always feel short-changed if I buy a season pass for a transport network and then find I’d have been better off paying for each journey individually. How likely is this to happen for someone living in Ealing, but working in central London a) now and b) in 2018?

Case 1: A morning and evening peak commuter
This individual uses the tube during the morning and evening peak and sometimes catches a bus back from the station.

In the following table I’ve ignored inflation and just increased costs by 2 or 3% p.a. So in today’s prices a zone 1-3 Travelcard will cost £41.55 in 2018, compared to £34.80 in 2012.

Year   Travelcard cost       Less 10 peak tube fares      Bus fare cost         No. bus fares to break even
2012         34.80                     34.80 – 10*3.10 = 3.80         1.40                             3.80/1.40 = 2.71
2018         41.55                     41.55 – 10*3.49 = 6.64         1.58                             6.64/1.58 = 4.21

So whereas in 2012 our peak commuter would only have to catch the bus 3 times in 2012 to avoid feeling cheated on a weekly Travelcard, he’ll have to catch it 5 times in 2018. If, like me, he walks to and from the station most of the time, he’ll be in a bit of a dilemma by 2018 as to whether or not to buy a weekly Travelcard.

Case 2: A morning peak and evening peak/off-peak commuter
It gets even worse in the case I actually discussed yesterday. The evening peak is from 16:00 to 19:00, so many people working in London may not actually travel home until off-peak fares apply. If this happens 3 times in a week, then the calculation changes somewhat:

Year  Travelcard cost     Less 7 peak, 3 off-peak tube fares     Bus fare cost   No. bus fares to break even
2012        34.80               34.80 – (7*3.10 + 3*2.60) = 5.30              1.40                     5.30/1.40 = 3.79
2018        41.55               41.55 – (7*3.49 + 3*2.93) = 8.33              1.58                     8.33/1.58 = 5.28

By 2018 this commuter will need to use the Travelcard on more than one bus each work-day (or for leisure journeys) to justify the expenditure.

Personally I feel the Travelcard should be a better deal. In London, it seems, regular tube users are likely to pay as much per journey as occasional travellers. And it seems unfair for commuters to have a dilemma as to whether to by a season ticket or not – I haven’t even discussed the effect of Bank Holidays, leave, sick-days and occasional home-working. This is the opposite of the case for main-line rail commuters who get a tremendous deal compared to the occasional traveller.

From TfL’s point of view inflating the cost of Travelcards relative to pay as you go (PAYG) fares may also not make sense in the long-run. The result may be that more of us in suburban London stop buying Travelcards and instead cut out as many bus and tube journeys as possible. As I said yesterday, “maybe it hasn’t occurred to TfL that people might consume less of their product when they put the prices up”.

September 15, 2011

Off the Buses

Boris has announced the 2012 London Transport fare increases already. Do we always get an announcement at this time of year? Or is our leader trying to get the bad news out of the way as long as possible before the mayoral election in May 2012? I note that the last time I visited this topic was in January this year when the last fare rises actually came into effect. With a bit of luck there’ll be a double whammy with negative stories now and in January 2012.

Let’s get the ball rolling with a negative story, then.

The BBC provides a link to the documents issued by the mayor. I only looked at the first one (pdf), which seems to tell me everything I need to know.

It turns out that TfL has a Business Plan based on fare rises of RPI+2%. News to me, most likely totally unjustifiable, but certainly worthy of discussion.

First, are we to believe that TfL’s costs rise faster than general inflation? This seems unlikely, though we do know that many of their employees are extraordinarily privileged to the extent that they apparently deserve a bonus just for doing their job during the Olympics. A lot of people will be working then, and the vast majority will be paid their normal salary, and would expect nothing more. I don’t support the present government, but I was rather hoping they might look at strike law with a view to stopping Londoners being continually held to ransom.

Second, on the customer side, how is it possible to bear continual above inflation rises in transport costs? I’m thinking of low-paid workers travelling into central London. The cost of a weekly Travelcard (tube and bus) season in 2012 will be £34.80 to zone 3, £42.60 to zone 4, after rises of 8.1% in each case. That’s about £1 per hour of work! Surely the minimum wage for central London needs to be higher than elsewhere to compensate? Assuming your pay rises roughly in line with inflation (which is doing well these days), then, if you have to spend more on transport, you have to spend less on something else. That is unsustainable. TfL is not like national rail, which, as the Transport Secretary pointed out this week, is now a service for the wealthy. It is simply not realistic for TfL to increase its prices by more than RPI for a long period of time, unless the lowest wages are increasing by at least the same rate.

So why has TfL adopted the RPI+2% formula? Maybe the document I downloaded doesn’t tell me everything I need to know after all. There seem to be a lot of TfL Business Plans, but the 2009 one for 2009/10 to 2017/18 tells us what we need to know:

“…fares in January 2011 and in subsequent years are now assumed to rise at RPI plus two per cent.”

So it is indefinite. And the purpose is clearly to increase the proportion of operating costs covered by fares and therefore reduce what TfL term “Net operating expenditure”:

Excerpt from TfL Business Plan 2009/10 - 2017/18

Let’s just note in passing that the congestion charge is going to raise less in 2017/18 than 2009/10!

Bizarrely, TfL don’t state what the figures in the table refer to. Presumably they’re 2009 £s (i.e. adjusted for inflation). Assuming that is the case, TfL assumes a steady growth (several % p.a. varying erratically) in passenger numbers as well as a 2% annual increase in the fares. They say:

“As the economy recovers from recession, it is projected that demand will return to current levels by 2012 and then continue to grow strongly as London’s employment and population increase, with demand reaching record levels by the end of the Plan.”

This is a fairly heroic assumption, as it seems to assume a very low elasticity of demand – maybe it hasn’t occurred to TfL that people might consume less of their product when they put the prices up. I’ll return to this point in due course.

TfL’s Business Plan suggests they expect costs to also rise by several % p.a. more than inflation, and also erratically, with a bigger increase in 2012/13 presumably to reflect the need to bribe the staff not to disrupt the Olympics, and in 2017/18, perhaps because Crossrail comes onstream (though there is no concomitant increase in fare revenue).

So in answer to my earlier questions, it seems that unlike every other field of economic activity, running London Transport becomes less and less efficient with time. And low-paid London commuters are expected to pay an ever-increasing proportion of their income on transport.

It seems to make sense that the fare-payer should cover the cost of the service, but let’s make a few observations:

1. Unlike many others, the London transport market is not segmented, so that those who can pay more do (compare walk-on national rail or air fares with advance tickets). I’m not saying I’m a fan of dramatic market segmentation. It creates its own problems, such as making urgent travel punitively expensive for everyone. But in an unequal society, it does allow some access to services for the less well off. Obviously it’d be better to have greater income equality in London, but until that happy day, subsidising fares helps alleviate the problem.

2. The fare-payer is not the only beneficiary of the London transport network. Just as, in the ’80s and ’90s, out of town superstores and malls benefited from the motorway network, such as London’s M25, (and generally improved roads), so the new millennium has seen similar developments – notably London’s twin east and west Westfields (or perhaps the new one should be an Eastfield?) – piggybacking on the city’s public transport network. Maybe these businesses should chip in and subsidise fares from the taxes they and their customers pay.

3. Just as for customers, businesses benefit from the availability of employees. They don’t pay a higher minimum wage even for staff having to travel into the centre of London. Maybe they should, but in the meantime it doesn’t seem entirely unfair for businesses and higher paid employees to subsidise the fares of the low-paid through the tax system. £1 travel cost for each hour of work is a lot for those earning little more than the minimum wage of £6/hour.

4. Today’s fares shouldn’t subsidise investment. That should be paid for by future fares, i.e. the beneficiaries of the investment. And in fact, the goal in TfL’s Business Plan is not apparently to increase fares to pay for more investment. So when Boris mentions investment in the same bluster as higher fares he’s actually being misleading and trying to deflect criticism.

And on top of this, there’s an anomaly in the pricing scheme – this is what really got my goat and prompted me to delve into the mire of transport fares once again:

“Travelcard season prices increase by 8% overall because of the link with National Rail fares which, as approved by the Secretary of State for Transport, are to rise by 8% (RPI+3%).”

What tosh.

Fares other than Travelcards are going to increase by RPI+2% (7% this year), but Travelcards are going to increase by RPI+3%, because you might get the train.

Do they think we’re stupid?

The price for a mainline train within London is the same as the price for the same journey by tube. I can go to Ealing Broadway and get a train to Paddington or I could get the tube there. I’d touch in and touch out with my Oyster card the same either way.

The daily limit applies just the same whether I use tubes and buses or tubes, trains and buses.

No, increasing the weekly limit faster than other fares (and remember this won’t happen just this year, but indefinitely until the policy changes) affects certain people disproportionately. The sort of people most affected are those who use the system most, that is, those dependent on it most likely to get to work, that is, those with least choice.

I’m in zone 3. If you need to get a bus and tube to and from work – and tube stations are thin on the ground out here, so often a long walk – then you’re going to need a weekly Travelcard (£32.20 in 2011; £34.80 in 2012), given that 10 peak pay as you go (PAYG) zone 1-3 tube journeys alone cost £29 in 2011 and £31 in 2012.

Of course, the tragic thing about all this is that many Londoners get the bus all the way into the centre to save a few pounds at the expense of perhaps an hour a day. But even they’re being screwed. The cost of a 7 day bus and tram pass is rising by 7.3% from £17.80 in 2011 to £19.10 in 2012. I can understand why the individual bus fare is increasing by 7.7% – that’s to keep a round number (£1.40 in 2012 after £1.30 in 2011). But £19.00 for the weekly pass would have been a 6.7% increase. Why not stop there? Gratuitous.

As far as I can see, the main beneficiaries of the fare changes for 2012 are off-peak occasional tube travellers for whom the zone 1-2 fare rises by only 5.3% (£1.90 to £2 – OK a nice round figure) and the zone 1-4 fares by a mere 4% (£2.50 to £2.60). For the last, £2.70 would only have represented an 8% increase. It seems fairer somehow to impact what is most likely discretionary travel a little more and that for people trying to make ends meet a little less.

What else could be done to help the low-paid? Besides fair pay, that is.

Well, here’s another curious anomaly. “Peak” in regard to the daily limit means 4:30-9:30am. That is, if you travel between those hours the daily cap will be the peak rate (£10.80 in 2012, rather than the off-peak £7.80). But if you don’t reach the daily limit and just pay as you go, the peak is 6:30-9:30am and 4-7pm (16:00-19:00). Odd. Why not give people more of an incentive to travel before 6:30am, when presumably there is spare capacity? Why not make the peak daily limit apply only if you travel between 6:30 and 9:30am? Wouldn’t this be sensible demand-management? It would help at least some of those who currently spend more than the off-peak daily limit because they take a bus and tube to work (e.g. in zone 3 in 2012 a pre 6:30am tube fare, a peak return fare and two bus fares would come to £2.60 + £3.10 + 2x£1.40 = £8.50, above the off-peak cap of £7.80 but below the £10.80 peak cap).

The case I’m most interested in is my own, of course. It’s the borderline case, where I may as well walk to and from the tube station rather than catch the 297 (or infrequent E10). If the service were more frequent I might take the 297 to Ealing Broadway. As it is, I never do, because I don’t know how long I’ll have to wait, at least until I get to the stop, when there may be a few clues. When I come out of the station, though, I can sometimes see the bus waiting, or at least a queue of people. I’d take it more often if they actually bothered to display a departure time. But sometimes it comes down to a cost consideration. Basically, I’ll rarely pay the full fare. I might take the bus, though, if I reckon I’ll hit the daily limit.

I note that for 2012 the daily limits for zones 1-3 are increasing by more than the relevant tube fares. The peak daily limit is going up from £10.00 to £10.80 (8%) whereas the peak tube fare is increasing only from £2.90 to £3.10 (6.9%). And off-peak, the daily limit is going up from £7.30 to £7.80 (6.8%) whereas the tube fare is increasing only from £2.50 to £2.60 (4%).

So, in 2011, an off-peak return tube journey to the centre, and a journey within zone 1 (£1.90) came to £6.90, leaving 40p of the daily limit to be taken up by a bus fare, but the same itinerary in 2012 would come to £7.20 before the bus, which effectively costs me 60p. OK, it’s a 50% price increase but I expect I’ll still hop on a 297 at Ealing Broadway station if passengers are boarding!

Nevertheless, if TfL persists in increasing weekly Travelcard prices by more than other fares, there will be people who switch to pay as you go, and walk to tube stations rather than take the bus. Maybe this is all very healthy, but it seems a strange policy. It would make more sense to me to raise all TfL prices by exactly the same percentage and charge – now that it’s all electronic with Oyster – to the nearest penny if necessary.

January 4, 2011

Subsidising Cambridge Commuters?

Filed under: Bus, Economics, Inequality, Rail, Tax, Transport, Tube — Tim Joslin @ 4:28 pm

Labour is choosing to attack today’s VAT rise as “the wrong tax at the wrong time”. I’m not so sure. It seems to me that stealth tax rises, such as on public transport, are far less fair.

Pre-empting arguments over the figure, Labour are cunningly pointing out that the Lib Dems claimed during the General Election that the VAT rise would cost “the average household” £7.50 a week.

Curious. £7.50 extra VAT a week at 2.5% implies £300 of spending that qualifies for the tax – that is, £300 of spending that doesn’t include mortgage or rent, food, children’s clothes, books or newspapers, lottery tickets, gas, water, electricity, public transport or Council Tax. Difficult to manage on an income of ~£30K, that is, a weekly spend of ~£600, I’d have thought.

On the other hand, multiplying £7.50 by 52 weeks and the ~20m households in the UK gives around £7.5bn, which does seem about right. I suspect VAT is in fact a progressive tax.  The wealthy spend proportionately more on the sort of things that qualify – restaurant meals, expensive booze, nibbles and confectionery, new cars, designer gear and other big-ticket items.  The poorest – getting by on Tesco bogoffs, saving up for the odd bus ticket, buying all their clothes from charity shops and so on – must have eff all VAT-qualifying expenditure.

I strongly suspect that this is a case where Mr & Mrs Average do not in fact actually exist.

Maybe Labour would gain more votes by instead pointing out what appears to have been another case of dissembling during the election campaign by those (allegedly) lying liar Liberals.

Or perhaps they could have focussed instead on the increases in public transport costs which are in many cases seriously regressive.

Take the Zone 1-4 Travelcard (and daily Oyster limit) which will affect those working in the centre of London.  It’s rising from £6.30 to £7.30, off-peak, that is, by nearly 16%, not the 11% the BBC calculates, bless. What’s more, if you happen to live near muggins here in zone 3, the peak Travelcard/Oyster limit has increased from £8.60 to £10 – that’s over 16% even if you’re the BBC – to match the unchanged rate for zone 4.

Curiously, bargain of the year for 2011 is the 7-day zone 1-3 Travelcard which remains less than that for zones 1-4 at £32.20 against £30.20 last year, a mere 6.6% increase.  This could now pay for itself in 32.20/10.00 = 3.22 days, against 30.20/8.60  = 3.51 days last time out.  Even off-peak it’s worth considering at 32.20/7.30 = 4.41 against 30.20/6.30 = 4.79 days.  More realistically a mix of peak and off-peak travel into London over 4 days (2*£10.00 + 2*£7.30 = £34.60) would justify buying the Travelcard for £32.20 whereas last year you were much more likely to need to travel on 5 days (2*£8.60 + 2*£6.30 = only £29.80, still less than a £30.20 Travelcard).  Where’s the logic in that?

Having to decide in advance whether to invest in a weekly Travelcard is an unnecessary irritation, since the system could cap weekly expenditure in the same way as daily.  I understand TfL’s IT experts will get round to doing this by around 2013.

Hours of amusement, perhaps, though maybe deadly serious if, like me, you fall into the category of zone 3 residents who travel into London on an irregular basis.  A category that is being seriously screwed by the latest fare rises.

Who will this arbitrary unfairness affect the most?  The poorest of course.  Consider those who live in zone 3 and can’t afford the higher price of property near a tube station.  In 2010 two off-peak tube fares to the centre at £2.40 each, for example, brought you within striking distance – £1.50 – of the daily limit of £6.30.  You didn’t end up spending full whack on the bus each way to the tube station – the cost was capped at another £1.50.  In 2011, though, those two tube fares will set you back £2.50 each, but the daily limit has been disproportionately raised to £7.30, so the buses will cost you £2.30.  The tube fare – which is all Mr Rich who lives near the station has to worry about – might have gone up by only 4%, but the bus fare will have risen by 80/1.50 = 53%!  The percentage is even greater if one of the tube fares happens to be at the afternoon peak rate (£2.70 in 2010, £2.90 in 2011, charged from 16:00 to 19:00) when the off-peak daily cap still applies. [In 2010, £2.40+£2.70 left £1.20 of the £6.30 daily limit for the bus; in 2011, £2.50+£2.90 leaves £1.90, so the cost of choosing the bus rather than walking has risen by more than 58%!].

I happen to fall into the category of those who live near enough to a tube station to be able to walk if I’m not feeling lazy.  I now have much more of an incentive to do so.  What TfL has done is make it much more expensive for zone 3 travellers to use a bus as well as the tube.  So more people will walk instead and TfL may not even realise the extra revenue they may expect from the daily cap increases.  Leaving everyone worse off.

Boris may want to take note that with another 8.3% increase (from £1.20 to £1.30) in the flat-rate bus fare, following the 20% increase at the start of 2010 (from £1) he’s making short hops in general more and more expensive.  The flat-rate fare makes a lot less sense in a purely fare-based system than in a subsidised one where the fares don’t recover the full cost.

Commuters who make one tube journey each day haven’t been hard hit, but it’s difficult to find categories of bus user who aren’t much worse off after these latest changes.  The daily bus limit has only increased by 2.6% – from £3.90 to £4 – this time (though it was £3.30 in 2009).  This is good news only for occasional bus commuters to the centre, who most likely have to change – and it’s a disgrace that some people are paid so little that they can’t afford to use the tube (and note that you face no penalty for changing tube routes) – since the 7 day bus pass has increased by 7.2% from £16.60 to £17.80.  [And now represents 4.45 rather than 4.26 daily maximum fares.  Where's the logic in that?].

All this has been rather a digression as what I really wanted to do was provide an update on the cost of mainline rail travel.  ‘Cos if you want to get about the UK within a finite time you need serious money.

A couple of years ago I introduced the Cambridge Day Travelcard (with Network card discount) fare index, which is admittedly not yet perhaps quite as famous as the Economist’s Big Mac Index.  Here’s the full series, brought up to date:

2003     £11.55

2004     £12.60     9.1% increase on previous year

2005     £13.85     9.9%

2006     £14.85     7.2%

2007     £15.20     2.4% (presumably lower because of the new afternoon restrictions – the return can no longer be used on trains departing King’s Cross between 16:30 and 19:00, which is inconvenient, to say the least)

2008     £15.85     4.3% (lulling us into a false sense of security)

2009     £17.50     10.4% (out of the blue – it’s a record!!)

2010     £17.50     0% (but still a real-terms increase! – according to the RPI, prices in July 2009 were 1.4% lower than a year earlier)

2011     £18.50     5.7% (close to the July RPI of 4.8% plus 1% which I understand was allowed for the average of each operating company’s fare increases)

So the cost of a day Travelcard from Cambridge to London – for a degraded service, remember – has risen a whopping 60.2% in the mere 8 years since 2003.

What about inflation?  Really we should compare the RPI for a month from December 2010 to December 2011 (reflecting general prices when we’re actually travelling) with the same month in 2002-3, but the latest data available is for November 2010 when the RPI index was 226.8.   It was 178.2 in November 2002, so prices in general over the same 8 years have risen only roughly 27.3%.

That is, in 8 years, the day Travelcard from Cambridge to London (with Newtork card discount), for a degraded service, has risen about 25.8% in real terms.

And the formula for the next few years is RPI+3%.

But what really got my goat, and prompted this post, was reading the comments of an RAC spokesman in Saturday’s Guardian:

“The RAC Foundation, a motoring thinktank, claims that the annual £5bn subsidy of the rail network disproportionately benefits Londoners and the well-off, with 40% of households earning more than £50,000 a year using the railways at least three times a week – double the figure for those on less than £25,000 per year.

Stephen Glaister, its director, said: ‘The rail subsidy comes from the Treasury and, in that sense, it is paid for by everybody. But the benefits are weighted towards the south-east and the relatively well-off. If government policy is intended to help redistribute wealth and help the less well-off, rail subsidies are a poor way of doing it. Spending the money on helping road users would be a better way of doing it.’ “

Well, of course only the wealthy can now afford to use the railways!  There’s not much point taking a £15K a year job in London if it’s going to cost you £5K of that just to get to work, is there?

But I rather dispute that the benefits are “weighted towards the south-east”, or at least towards commuters on busy routes, such as Cambridge to London.  What I suspect happens is that commuters subsidise those travelling off-peak; busy routes subsidise those at the periphery of the network; and busier regions, especially in the south-east subsidise less-busy regions.

The Guardian could, for example, have taken a peak at the latest (2009-10) National Rail Trends (NRT) Handbook from the Office of the Rail Regulator (ORR).  On p.62 you’ll find table 6.2c which gives the 2008-9 passenger subsidies for each Train Operating Company (ToC).  I crudely show it here:

As can be seen at a glance, First Capital Connect (FCC), which operates the Cambridge-London route, is not directly subsidised, but in fact pays 3.4p per passenger kilometer for the privilege of running the trains.  Now, this is for the whole franchise, which must include peripheral routes that are less heavily used, as well as the most overcrowded trains in the country from Cambridge.  But those peripheral routes at least help to bring some passengers onto the network, so let’s take the figure of 3.4p to be realistic.  A round trip to London must be in excess of 100km, so travellers from Cambridge are on average paying in at least £3.40 every time they buy a return ticket.

But the franchise payments are not the main subsidy to the railways.  The taxpayer provides around £4bn a year in direct support to Network Rail (see Table 6.2a of the ORR’s HRT handbook – self-serving obfuscation in Network Rail’s financial statements reveals no more detail).  Table 6.2c shows a total of around 50bn passenger kilometers per year (note that some operators are outside the franchise system so the distance total in table 6.2c is not complete).  Making the heroic assumptions that Network Rail’s subsidy is evenly spread and not used to support vanity investment projects, rail passengers do indeed appear to be subsidised to the tune of around 8p per passenger km.

Combining the two subsidies suggests FCC passengers are on average subsidised by around 4.6p per km (8p – 3.4p) whereas those on, for example, Northern Rail receive around 12p/km (8p + 4p from Table 6.2c).

The Guardian notes that an annual season ticket from Cambridge to London costs around £4000.  If this is used 250 times, that works out at around £16 per day return, not bad at all compared to the £13.85 price for an off-peak day return with a Network card. It seems commuters in fact get a relatively good deal since their season ticket entitles them to unlimited travel to London at times when the day return fare would otherwise cost an absurd £34.

This isn’t quite what I expected – as always, it pays to delve into the numbers.  It seems a bit daft for an annual season ticket to represent no more than 120 daily trips (£4000/£34).  I don’t really see why anyone making fewer than that should be so severely penalised.  This discourages all kinds of business and other activity, part-time working, working from home and tourism, for example.

It remains conceivable that even commuters on the Cambridge to London route are still being subsidised, though the trains are so busy I’m confident that the Cambridge to London route in fact subsidises the rest of the FCC franchise.

The people really being fleeced are:

- those adults without a Student, Senior or other railcard – since anyone can buy a Network card for around £25, this means occasional users are penalised, which hardly helps to bring new passengers onto the railways;

- all non season-ticket holders forced to travel at peak times (which, since 2007, includes 16:30 to 19:00 from King’s Cross);

- purchasers of single or open return tickets. An Anytime (i.e. including peak-time trains) open return from Cambridge to London now costs the same as two peak singles, at £40, a ridiculous two and a half times the effective rate (£16) for a season ticket-holder occupying the same seat – or more likely standing on the same train.

The numbers suggest these categories of passenger from Cambridge to London are definitely not being subsidised.

If the strategy is for costs of rail travel to be attributed to those using the service, then it makes no sense for some categories of passenger to pay substantially more than the cost.  The open return ticket price should be reduced to that of the day return and single tickets should be half the return price.   For Cambridge to London, the non season-ticket peak fare is way out of line and should simply be reduced to say 1/150th of the season ticket price, that is, around £27 (from £34).

The TOCs effectively have monopoly pricing power.  Prices therefore reflect expediency rather than the cost of providing the service.  If there were a decent level of competition they’d soon find another operator could afford to undercut them on those fares that are out of line.

What’s more, allowing peak fares of effectively twice the off-peak rate gives no incentive to rail companies to increase passenger numbers, for example, by running more late-night and pre morning-peak trains.  Allowing an afternoon peak is insane – the rail company has a disincentive to ease over-crowding.

The whole rail franchise system is dysfunctional.  What’s effectively being sold is the right to charge monopoly prices.  This is absurd.

In an ideal world, there would be no need for peak and off-peak fares – sufficient trains would be run to meet demand at all times.  In the meantime, though, the need for demand management skews incentives for the TOCs.  It’s therefore necessary to divorce ticket-pricing from financial rewards to the TOCs.  The TOCs should be paid just for the service they provide – that is, the same rate per passenger regardless of when they travel and how much they’ve paid for their ticket.  And less per passenger on trains that are more than 70% full. The TOCs should have an incentive to increase use of the railways, not screw more money out of fewer passengers.

October 27, 2010

Housing Horror

Over the last few decades, here in the UK, we’ve become very good at pointing to apparent failure.  Often despite considerable objective evidence to the contrary.  Apparently we’re no longer any good at making things (compared to Germany and China, maybe, but not to most other countries), our armed forces are puny (compared to the US, maybe…), our energy supply is insecure, our public services are falling apart, the English Premier League is in a mess…  Such angst is spreading elsewhere in the West, but somehow you rarely hear fundamental criticism of our political and economic system.  You’d think the political process was merely flawed, a little unfair in places, perhaps, a little too tolerant of peccadilloes by the powerful, but basically sound, and very difficult to improve.  Despite considerable objective evidence to the contrary.

We’re just now quite rightly much vexed over the issue of housing (warning, link is to page of all 865 comments, and counting).

The issue, in a nutshell, is the extent to which the state should pay to provide some people with a standard of housing higher than they can afford on the open market.  The 1997-2010 Labour government (supported by at least the non-Tory controlled local councils, who have executive powers in area of housing), was quite enthusiastic about doing so, though in the main merely continued existing policies.  As time has gone on, though, the provision of housing to some by the state has been a factor in driving those not eligible for, or simply not claiming, state support, into less desirable – smaller, and often, crucially, less conveniently located – accommodation.  It should be noted that Labour’s attempts to increase the supply of housing over recent years has been effectively stymied by nimby campaigns, if not supported, then at least not effectively challenged by foot-dragging Liberal and Conservative local councils.  Despite guilt all round, the new Coalition government has decided to address the problem, in part, I suggest, as part of their strategy of blaming everything on Labour.   And in that regard, housing is pretty much an open goal.

As the debate continues, we see not one but two failings of our political system in stark relief.

The first failing is a confusion: are we making policy on the basis of reason or emotion?  Let’s take people who aren’t working for whatever reason (unemployed, incapacitated or retired).  Now, I’m not even going to argue this on the basis of rights.  It simply makes no sense, as hundreds of bloggers have pointed out (to massive approval, judging by “Recommendation” statistics), for workers to commute in every day from the outskirts of conurbations such as London, whilst people who don’t actually need to live there are paid to do so by the state.  Why, oh, why does Labour defend the indefensible? (Link to where Polly Toynbee explains the Coalition’s inhuman proposals – remember we’re essentially taking about a zero-sum game, here: what we give to one household, we deny to another).

But – there’s always a “but” – there are “priority cases” as a Councillor Timothy Coleridge (Tory, Kensington and Chelsea) explained on Radio 4 this morning trying to “soften” the policy.  There’ll be a “transition fund”, we were told.  He seemed to be particularly sympathetic to the elderly.  So it seems we’re going to make value judgements.

It might be worth digressing at this point to note that gerrymandering is a factor, because of first-past-the-post local elections.  Politicians want to keep their voters in their constituency and move the opposition’s out!  I suspect the Tories see the elderly vote as key to their next few terms in office, so I was immediately suspicious of Councillor Coleridge.  Any “prioritisation” must surely be done according to an objective, nationally applicable set of criteria.  Trouble is, value judgements are why we’re here in the first place.

If the policy is to minimise the fiscal cost of housing benefit, and optimise the use of housing, then that’s what we must do.

Here’s a case of the same sort of thinking, from a letter to the Guardian, by an Ann Tobin:

“The house was lovely, built to Labour’s postwar housing standards (later abandoned by the Tories). Us kids grew up and moved on and my parents stayed there until my mother died in 1998, 50 years after they had moved in. My father died three years before her. Yes, the house was too big for her, but she liked to invite her children, grandchildren and great-grandchildren to stay.” [my stress]

This partly explains how we’ve reached the present situation.  This identifiable individual (Ann Tobin’s mum) “liked” her big house, provided by the state.  Meanwhile, there is a waiting list of millions of families for such houses.  Maybe, because Ann Tobin’s mum was allowed to keep a house she liked, a family with a couple of school-age kids spent years moving about between emergency B&B accommodation to temporary lodgings.  Maybe that family would have “liked” a house of their own.  Because Ann Tobin’s mother has been allowed to stay in a family house, another family that can’t be precisely identified is living in poor or insecure accommodation.  This is crazy.  Housing supply is limited (though could be improved).  Why is it so difficult for people to understand that because of that limitation one decision impacts on others?  In areas with a limited supply of housing, its allocation is a zero-sum game.  You can’t give some people a place they’d “like” without denying others the same thing.

To my mind what we’re witnessing is the complete failure of post-war housing policy in the UK.  Council housing, for example, makes no sense.  It locks in housing allocation at one moment in time, making no allowance for the changing world we live in. Or the changing size of individual families for that matter.

This brings me on to the second failing of the political system.  Politicians see direct action by the state as the only way to achieve anything.  So we’re told we have to build more social housing.  Wrong.  We simply have to build more housing, period.  100,000 private homes will house 100,000 households just as well as 100,000 social homes will.  100,000 fewer households will be waiting for housing in either case.

And in actual fact, over the last decade or so, demands for social housing have actually reduced the total provision of housing.  Why?  Because the main way social housing has been provided has been through Section 106 agreements with housing developers.  In this daft system, housing developers have been given planning permission in return for including schools, hospitals or social housing in their schemes.  And you thought schools, hospitals and social housing all came out of the health, education and housing budgets?  This tax on developers, or first-time buyers, however you want to look at it, has the effect of reducing housing provision.  At a given house-price level, building houses is less profitable than otherwise would be the case, so fewer invest in that activity than in other opportunities.  Fewer houses get built, house prices rise, and more prospective purchasers find themselves on social-housing waiting lists.  Section 106 agreements to provide more social housing because it’ll be needed are, in aggregate, self-fulfilling!

I can’t even bring myself to discuss how shared equity schemes and other devices to subsidise house purchases simply push up the general price in the market.

The solution seems to me blindingly obvious, so I’m going to cut to the chase (a phrase, incidentally, that grated when used by Bob Hoskins in Made in Dagenham, since it wasn’t in general usage in 1968 when the film was set – I remember first hearing it in 1994).

We’ve simply got to manage the relationship between wages, at the low end, and house prices so that working people can afford to house themselves and their families.  The implication is that there needs to be a higher minimum wage in areas where housing is expensive.  It is simple exploitation to be paying the national minimum wage in central London, because there are only a limited number of possible outcomes.  Either workers commute in which case they spend more time and money than if they were working near their home; or living-standards drop and people end up sleeping in shifts; or benefits are necessary to top-up earnings, subsidising employers and consumers in expensive areas.  Ideally, employers would have to pay more in expensive areas, but the labour market is, has been for some time, and will be for some time, a buyers’ market.  Indeed it is government policy to force people to take any job they can get.

What a mess! State provision of housing has led to a situation where the minimum wage is nowhere near a “living” wage.  Perhaps that’s a bit strong: rather, state provision of housing and other benefits has provided a safety-valve so that pay has been allowed to become gradually lower and lower relative to socially accepted minimum living standards.

Maybe some blame should be apportioned, in order to unravel some of the mystery how we arrived in this absurd situation.

First, there are those, almost all in the Labour Party, but not all of the Labour Party, who believe it is right that the state provides housing and benefits on the basis of need.  “Capitalism” is so “unfair” that the state must step in.  As I’ve mentioned this policy has failed.

Second, there are those in all three parties who take a position I would characterise as “hand-wringing liberals” who make no attempt to analyse the problem and produce a complete policy.  They just want to address the problems of those with whom they empathise.  The trouble is, as I’ve also already said, with limited supply, allocating a house to Mr Jones simply moves Mr Smith onto the waiting list.  As a rationalist this is the position I detest most of all.  Government has a duty to find as solution for everyone, not self-righteously apply sticking-plaster where they most easily can.

Third, there are those in all three parties – since many of the individuals concerned have a vested interest in the form of their own properties – who explicitly or tacitly believe the natural order of things is for people like themselves to own their own homes, ever-rising in value, and that there must necessarily be “the poor” who don’t deserve or are incapable of having the same thing.  Explicitly in the case of some Conservatives… heeeere’s Boris!:

“Better a stagnant housing market, [those arguing for an end to housing speculation] will say, than another great boom and another great bust. Which is all very well, in theory.

In practice, it looks as if flattening off the housing market is both risky in the short term, and unachievable in the long term. The sad truth is that it is still psychologically essential to the British middle classes to have a sense that our principal asset is gently appreciating in value, or at least that it will over the long term.”

Stark-staring bonkers, of course.

Houses simply can’t appreciate in value indefinitely compared to other goods and services.  The world doesn’t work like that.  Eventually house price rises will become self-defeating: even if they don’t stimulate more new-build supply (because of self-interested nimbyism); or inflation, causing interest-rate and hence mortgage increases; they’ll eventually act as such a drag on the economy that activity moves elsewhere – abroad, most likely – and housing demand and prices fall.

Those who buy into the view that the increasing value of their home represents a permanent increase in wealth support the ongoing British class division implicitly.  What they refuse to countenance is entirely feasible: it is possible for everyone in work to own their own home, or rent at a market rate, if they prefer the flexibility they gain that way.

So the three stooges are “Old Labour” socialists, who don’t believe markets can ever be fair; bleeding heart, sawdust-headed “Liberals”; and divided nation, blue-blood-is-just-better “Conservatives”.

It doesn’t have to be this way.  Instead of accepting capitalism as it is (“Conservative”), or rejecting it (“Old Labour”), or ooh, poor little kitten! (“Liberal”), we can make capitalism fairer.  A much higher minimum wage, relative to local house prices, would solve many of the problems that are causing such angst.

 

October 1, 2010

Dissecting a Wolf, a Bean and a Vulcan

Filed under: Credit crisis, Economics, Inequality, Inflation, Public borrowing, Public spending — Tim Joslin @ 8:04 pm

I see John Redwood was up bright and early this morning, blogging away.  At 6:34am he posted that:

“…the [cuts] strategy has worked, bringing interest rates on government borrowing down and seeing off a possible Greek or Irish style borrowing crisis.”

Well, maybe.  But there’s an alternative explanation which would chill the former Minister’s blue blood.  I would have thought traders would pay a lot of attention to the interest rate desired by a central bank able to use QE to drive down yields to whatever level it desires.  FT Alphaville suggests that the Fed, at least, might decide to simply target long-term interest rates rather than apply a specific amount of QE.  Not a market to short just now, I would have thought.  Much safer to bully the Portuguese.

For the record, I can’t help a nasty feeling about all this QE.  The danger is letting inflation catch up with us.  A bit of inflation right now would be a jolly good way to get rid of all that negative equity.  But if inflation expectations sneak up on us the Old Lady would be compelled to sell off her QE bonds at a loss to soak up excess cash.  And it would suddenly make new government debt rather expensive.

Still, there don’t seem to be any better ideas out there.  And the clear and present danger, as pointed out by Posen, does seem to be a Japanese style “lost decade”.

But it was what the Vulcan did next that really amused me.  He was on the Today programme this morning absolutely fulminating that the Deputy Governor of the Bank of England, Charlie Bean, had suggested that if savers spent some of their money it might benefit the economy.   Redwood apparently believes that: “We are all collectively embarked on cutting the mortgage and putting some more money into savings and pensions.”  Yes, “all”.  How does that work, John?  Where does this money come from?  The same magical mystery place as bank interest apparently, since the former stalking horse also lectures us that: “Consumers might spend more if they got a better return on their savings and had more savings income” and that: “As house prices fall, people become more alarmed by the level of the mortgage.”

Um, doesn’t one person’s savings income come from another person’s mortgage interest payment?  And won’t house prices fall even further and people become even more alarmed if their monthly mortgage payments rise?

What on Earth does the Member for Wokingham think the economy is?  Maybe on Vulcan there are some different principles, but in this part of the Milky Way it’s generally considered that the more money circulates in return for goods and services, the healthier the economy is.  Yes, John, money has to circulate.  We can’t all stuff our mattresses with it.

Another getting their knickers in a twist over all this is our old friend Martin Wolf over at the FT.  If he feels the Coalition’s cuts agenda is dangerous I suggest we listen.  And this morning Wolf’s teeth were dripping the blood of the IMF, who (much to the delight of Grant “Anyone for Rugger?” Schapps on Question Time yesterday evening) have dared to endorse the new government’s spending plans.

Personally I think there’s a good chance the whole cuts debate is redundant as – just like in a household – it’s not always that easy to cut back on your spending.

But what really surprised me this week was a rare slip by Wolf.  He wrote that:

“The [policy strategy] of slashing the fiscal deficit while the private sector tries to slash its debt suffers from a fallacy of composition: it is impossible for all sectors of the economy [i.e. the public and private sectors] to spend less than income at the same time.”

This is simply incorrect. There is no “fallacy of composition”. The creditors are all private sector, so it is entirely possible for both public and private sector debts to be paid down simultaneously. It’s not the balance between the sectors that matters; it’s what happens within the private sector that’s important. Simply put, to decrease total debt, there needs to be an increase in financial equality (though not necessarily in living standards, since public spending reductions affect the rich financially and the poor non-financially).

Strangely, whilst my first contribution to the debate appeared immediately, my second comment which began by succinctly pointing out Wolf’s error failed to appear on the FT for a couple of days (then appeared twice).  I have little tolerance for this sort of thing.  It seems to me that the mainstream media who have coopted much of the blogosphere debate have a responsibility to allow debate to actually proceed and make sure their technology works reliably.  I was going to have a good whinge.  Now I suppose I’ll have to give the FT the benefit of the doubt.  Must have been a glitch.

There’s a really big issue here, though.

It’s becoming more and more apparent that the big picture is that inequality is more than just bad for us Spirit(Level)ually – it’s also bad for the economy.  Robert Reich has apparently explained this in Aftershock which I was just about to order when I realised I had his Supercapitalism on my shelf.  Unread.  Not any more though, so I’m off to see who can rush me Aftershock (2-3 weeks say Amazon, tsk).

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