Charles Wright: How will Sadiq Khan’s budget fund TfL’s fares freeze?

Sadiq Khan’s one-year Transport for London fares freeze, announced last week, is set to be repeated in future years, the London Assembly has heard in the first of its two-part scrutiny of City Hall’s 2024/25 budget plans.

The Mayor previously froze TfL fares from the levels he inherited in May 2016 until March 2021, a flagship policy that is estimated to have cost TfL some £640 million over a four-year period. But he told Assembly members that the loss was more than covered by £1 billion in operating cost savings over the period and that the same approach would be applied again.

The freeze would also tempt more passengers back onto public transport, boosting fares revenue further, Khan said, but warned: “We’ve been quite clear with TfL that if they can’t find savings we’ll have to step in. If we don’t see the increases we are talking about then we’ll need to support them in subsequent years.”

The move comes as TfL heads towards break-even on operating costs for the first time in its 23-year history, with forecast current account surpluses of some £500 million by 2026, even without the government’s pandemic support, which will end in March.

It’s a remarkable turnaround, given the pandemic body blow to TfL’s finances and the financial heat the network was feeling even before Covid, with declining passenger numbers, the removal of government grant and Elizabeth line delays and cost overruns contributing to deficit forecasts of up to £1 billion a year from the mid-2020s onwards.

Just three years later, though not quite out of the woods, things are back on track. In November influential credit rating agency Moody’s upgraded its long-term assessment of TfL’s prospects from stable to positive, partly because of improving income forecasts. So, with the new freeze plan set to cost TfL £123 million in lost revenue in 2024/25, is this the right time for Khan to renew a freeze?

Initially, that £123 million shortfall will be covered by City Hall increasing TfL’s income from retained business rates, drawn from an overall windfall of £258 million from that source according to latest estimates. And Khan confirmed today that he has also set a target of £650 million in recurring savings by 2025/26, by which time public transport ridership is expected to have returned to its pre-pandemic level – it recently climbed to 89 per cent – which will help shore up future TfL budgets.

Will it all add up? Khan will be buoyed – and his opponents disappointed – by a significant verdict this week from the largest global ratings agency S&P that “freezing fares at Transport for London will not have a material effect on its financials”. The agency points to the Mayor’s confirmation that the cost of the freeze will be “fully funded” by recurrent transfers of funds from City Hall, as well as ridership recovery and ongoing work to identify savings and new revenue sources.

Politics are in play too, of course. Khan’s approach marked a change from that of his predecessor, Boris Johnson, who put fares up by more than wage increases throughout his eight-year term – 42 per cent in all between 2008 and 2016. Despite Khan’s subsequent freeze, London’s fares are still among the highest in Europe, and his latest proposals have been widely welcomed by business and passenger groups alike.

Detail in his budget show another shift too, towards calling on council tax-payers generally to put more towards their city’s transport. Pre-pandemic, they were paying just £6 million a year to TfL. After four years of increases, that figure will rise to more than £244 million in 2024/25, with each Band D households paying £75 a year more to TfL. This increase is primarily down to the conditions attached to the various government Covid funding deals requiring more local as well as national taxpayer contributions, according to City Hall (see page 77).

The balance between income from fare-payers and from council tax-payers is another political dividing line. The 2012 mayoral election illustrated this well: Johnson pledged a 10 per cent cut in council tax while his Labour rival Ken Livingstone promised to reduce average fares by £1,000 over a four-year mayoral term..

If pandemic necessities have prompted the latest rebalancing between transport-user and wider taxpayer contributions, there’s a continuing debate about it too. The independent review of TfL finances commissioned by Khan in 2020 noted that, pre-Covid, Londoners in general were paying just £22 a year in tax towards TfL, while across all major metropolitan areas the average was a far higher £104 per household.

Asking for more would be a reasonable approach, the review said. And with taxing residential properties one of the few direct ways the Mayor has of raising money, it was the logical option to take: “The wider economic benefits associated with an efficient public transport system are well known…and extend beyond benefits derived by public transport users.”

We can expect to hear more about where the balance should be struck as campaigning heats up ahead of this year’s mayoral vote in May.

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