Alexander Jan: Government’s conditions on TfL funds would cause unprecedented drain on Londoners’ budgets

Alexander Jan: Government’s conditions on TfL funds would cause unprecedented drain on Londoners’ budgets

In the last day or two, the government’s apparent conditions to be attached to the latest round of financial assistance for Transport for London have emerged. The Financial Times reported that these involve a range of measures, including higher council tax – to be precise a higher precept paid as well as the borough Council Tax – a bigger congestion charge zone and higher Tube and bus fares.

Following a collapse in farebox revenue caused by the coronavirus crisis, Sadiq Khan is looking for a £5.7 billion settlement over the next 18 months, which includes a further £750 million to complete Crossrail (a project that was jointly supervised by TfL and the Department for Transport until its governance was transferred to TfL three weeks ago). Between April and June of this year, passenger income was down an eye watering 81%. The government stumped up a first round of assistance of £1.6 billion, but is now reportedly prepared to offer just £1 billion of help – less than a fifth of the Mayor’s latest request.

TfL’s finances have been particularly hard hit because so much of its income is derived from fare-paying passengers. At 72% of all income, this the highest proportion for any world city transport authority. If the Mayor is only provided with £1 billion of new support, how might he close the budget gap from the farebox and the two other sources that the government wants him to tap into?

The £5.7 billion ask for 18 months equates to about £3.8 billion for a year. Let’s be generous and assume that the government allows TfL to have the full £1 billion it is offering as a grant and use it all in the first twelve months. That would leave the Mayor needing to find a further £2.8 billion.

The government has demanded London households pay more through the Council Tax precept. This is raised from London residents to fund a range of city-wide public services that largely come under the Mayor’s authority, over and above those paid for by London’s boroughs. They include policing, fire and rescue and, of course, TfL. The Mayor’s precept is currently £332 for a Band D property, and brings in £1 billion a year from all payers.

One option would be to hike the precept by, let us say, 150% (or £498) to £830 per Band D household. That would raise an extra £1.46 billion. Such an increase would be unprecedented (the precept for the Olympics was just £20 per annum). It would still leave just under £1.35 billion of our £2.8 billion to be raised from the other measures the government has demanded – fare increases (remarkably) plus an extension to the congestion charge zone (something Boris Johnson pared back when he was at City Hall).

Taking the farebox first, this is arguably likely to offer comparatively slim pickings over the short term – not least because it has been decimated by the impact of the coronavirus. The TfL business plan pre-Covid projected fare income of £5.4 billion for 2021/22. But July 2020 forecasts suggest that revenue will be down by around 35% (£1.9 billion) to £3.5 billion next year.

The revenue impact of fare increases can be tricky to estimate because of what economists call price elasticity. Higher fares can deter some people from using services altogether, or they might switch from, say, Tube to bus, as that is cheaper. Reports suggest the government has talked about demanding increases of more than RPI+1%. But given the size of the budget hole the Mayor is trying to fill, TfL would need to announce a very high fare increase to have any impact.

Let’s say it goes for a 20% net increase in revenue – some £700 million. Because of the elasticity issue, fare prices would need to go up by much more than 20% to offset the loss of demand as passengers fled the network. This might be offset by an extension of the congestion charge (as discussed below), but the overall effect would be to very significantly reduce demand on the network – and at a time when we might want to be nurturing its recovery.

In any event, a big hike in fares would be pretty dramatic by historical standards. You need to look back nearly four decades to when the Greater London Council’s “fares fair” policy was overturned in the courts by the borough of Bromley. This led to fares being doubled for 12 months and caused uproar.

Even assuming the Mayor could actually bring himself to introduce such a big increase – and it’s an enormous “if”, especially in an election year – that would still leave us with £650 million to be found.

To do that, we need to turn to the last of the three demands from the government – to extend the congestion charge to an area encompassing the parts of London contained within the North and South Circular roads, an area 18 times the size of the existing central zone.

Any even half-detailed estimation of who would pay what is not straightforward. For example, assuming the system worked on the basis of a daily flat fee, there would surely be a need to introduce a series of zones and discounts. There would also be a knock-on impact on the revenue generated by the existing congestion charge zone, because income might fall as vehicles are priced off the road by the wider scheme. Based on the assumption that we are trying to find the remaining £650 million of our £2.8 billion, how might that impact on the pockets of motorists?

In 2019, there were just under 3.1 million motor vehicles registered in Greater London (by both residents and businesses). On average, each notional motor vehicle’s user would need to find just over £200 per annum to generate the £650 million in question. To put that in context, it is equivalent to more than doubling the £500m raised from vehicle tax paid in the city by vehicle owners. Such a move would represent a dramatic policy change, dwarfing the size and scale of the Central London scheme.

If the government is seriously considering forcing these measures on Londoners, it is likely to have a real fight on its hands. The effect of the precept and fare increases alone would – on average – make London households £738 a year worse off. Then there is the impact of the congestion charge expansion. Only 55% of London households have access to vehicles. That means there would be an additional burden of £305 per car owning household, bringing the total financial hit of all three measures to around £1,043 per annum for those who live and drive in the city.

Such changes would represent an unprecedented drain on Londoners’ daily budgets at a time when household incomes are falling. There would unquestionably be sustained opposition from many politicians, businesses and residents. Don’t expect a deal along these lines any time soon.

Alexander Jan is chair of the Midtown business improvement district and former chief economist at Arup. Follow Alex on Twitter.

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Categories: Analysis

3 Comments

  1. WAGN says:

    The headline confuses me. The cost of TfL hasn’t risen. Most of the revenue to cover that cost used to be paid by Londoners through fares (yes there were tourists and commuters, but they were a minority). Now Londoners are paying less in fares, so it’s proposed that revenue is raised in a different way. But the overall burden on Londoners’ budgets wouldn’t increase substantially, it would just take a different form

  2. Greg T says:

    Ah, but all those people are already almost entirely Labour voters, so BoZo’s vicious misgovernment have nothing to lose, do they?
    Or that is their mis-calculation,because people in the “outer” boroughs will also be affected.

  3. Chantal Coady says:

    Interesting article, and I have noticed that we are not allowed to do a .gov petition on this – here is the example of someone who tried to start one:
    In response to: Stop the proposed extension of the London Congestion Zone.
    THIS PETITION WAS REJECTED because
    It’s about something that the UK Government or Parliament is not responsible for.

    We can’t accept your petition because the UK Government aren’t responsible for the issue you raise.

    It has been reported that the UK Government has suggested that London’s congestion zone be extended, but doing so would be a matter for the London Assembly and the London Mayor.

    The London Assembly has its own petitions process. You can find out more about how to petition the London Assembly here:

    https://www.london.gov.uk/about-us/london-assembly/petitions

    We only reject petitions that don’t meet the petition standards.

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