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Monday essay: Should the state pay our fares?

THE Department for Transport is paying National Rail operators who had been running franchises until March this year to keep going. The government takes the revenue and pays the bills, and the deficit so far has reached £4.2 billion. But does this amount to renationalisation, and should the state simply pay the fares as well? Sim Harris has been looking at the figures.

A LETTER from a Railnews reader has prompted this essay.

Mr Collenette from Exeter writes: ‘Not long after the railways were nationalised in 1948, a backbench MP (somewhat light-heartedly) asked the question in Parliament: “Now that the railways are ours, why don’t we just put a penny on the Income Tax, and let everyone travel free?”

‘Of course, the circumstances to-day, 70 years later, are completely different … Aren’t they?

Perhaps Mr Collenette is also being light-hearted, but before you reject the idea out of hand it is worth considering, perhaps, that many costs would be avoided if there was no revenue to be collected. No tickets would mean no ticket offices, no ticket machines to provide or maintain, no online booking systems, no booking clerks, no revenue protection staff. No Rail Settlement Plan, either, because there would be nothing to settle.

We will leave aside the costs (financial and otherwise) of shedding all those jobs, and the policing problems which would arise if trains became free-for-alls, and stick with the basic question. How much extra would it cost to pay for the passenger railway through taxation?

Let’s look back for a moment. I have tried to trace the quotation offered by Mr Collenette without success, although I searched Google, Hansard and the British Newspaper Archive. But a similar suggestion was indeed made, although many years before nationalisation, by an obscure campaigner called R.A. Cooper. 

He published a pamphlet in 1890 entitled ‘Free railway travel’, in which he suggested that third class rail travel (the equivalent of Standard now) should be free, with the costs of running the network being met mainly from rates and taxes. He speculated that a superior class might survive on some routes, for which a paid-for ticket would still be required, but did not consider the question of goods traffic. Inevitably, his plan was not adopted.

We will assume that the MP’s question quoted by Mr Collenette was actually asked.

The revenue of British Railways from passenger traffic in 1948 was £122.5 million, and in 1948-49 the standard rate of Income Tax was 45 per cent in the pound. On 6 April 1948, the House of Commons was told that the revenue from Income Tax in 1948-49 was expected to be £1,395 million. 

This means (we’ll ignore the higher rate bands) that the revenue from Income Tax would have needed to go up by around 9 per cent of the total raised – slightly more than 9½d (9.5 old pence) on the standard rate – to raise £122.5 million to replace the railways’ revenue from tickets (bearing in mind that there were 240 pence in the pound in those days).

A mere (old) penny on the standard rate in 1948 would have raised only about £12.9 million – so it is probably just as well that the question does not seem to have been asked.

What about now? According to the ORR, ticket revenue from National Rail was worth about £10.2 billion in 2019-20 (the lockdown which started in late March came almost at the end of the statistical year).

We know that the DfT is now paying the formerly franchised operators some £600 million a month, which would be £7.2 billion in a full year. The remaining £3 billion is presumably coming mainly from the reduced ticket sales.

At the moment, there has been no increase in taxes to pay for the costs of the pandemic, although the Chancellor has been warning that there will have to be some adjustments next year. 

Income Tax increases are seemingly ruled out, but just to make a comparison with 1948, what would happen if that tax had to rise to pay the £10 billion or so which would need to be found if rail travel became free?

The tax structure is not the same as it was in 1948 – VAT is more important than the old purchase tax was, for example – but let’s see what might happen if taxes paid for every train journey.

We’ll assume that the budget needed to replace the income from rail fares is £10 billion.

The amount raised from VAT in 2019-20 is expected to be around £136 billion (according to the Office for Budget Responsibility), which suggests that a 1 per cent increase in the VAT rate from 20 to 21 per cent would be worth £6.8 billion. An increase to 22 per cent, yielding £13.6 billion, would pay for everyone’s rail tickets and leave change of around £3.5 billion – to put towards HS2, perhaps?

Income Tax and National Insurance are worth £340 billion a year, with Income Tax alone raising £172 billion.

The standard tax rate (again, we’ll ignore the other bands) is 20 per cent which means, roughly that each per cent raises £8.6 billion. The basic rate of Income Tax would therefore need to rise from 20 per cent to maybe 21.25 per cent to raise a comfortable £10 billion for the railways.

We pause to note that the revenue raised from Income Tax would have needed to have increased by about 9 per cent to pay for all rail travel in 1948, but that an increase in 2019-2020 Income Tax to achieve the same thing now would be about 6 per cent (172 x 6/100 = 10.32). 

What has changed? The value of the pound is a clue, because the 2020 pound is worth about 3 per cent of the 1948 pound. So £122.5 million in 1948 is effectively £4,083 million now. In other words, at £10,200 million rail ticket revenues have more than doubled in real terms. 

The sharp rise in patronage must be one of the causes of this. In 1948 there were 996 million ‘originating’ journeys, as against roughly 1,400 million in 2019 (the official figure for last year is more like 1,700 million, but that total is inflated by counting every train used in the course of a single journey).

Similarly, if Income Tax collected £1,395 million in 1948, the equivalent today is £46,500 million, when in fact Income Tax now raises £172,000 million, or almost four times as much.

With so much more coming in to HMRC, it is not surprising that rail ticket revenues now, expressed as a percentage of income tax, are lower – even though the number of rail journeys has increased by about half.

The other point is that we are earning a lot more in real terms than we were in 1948. The average wage in 1948 was £300 a year. At 2020 values that’s £10,000. The real average wage in 2019 was £27,976 – almost three times as much. No wonder we pay more tax.

But leaving free travel aside, let’s return to Mr Collenette’s comment: ‘Of course, the circumstances to-day, 70 years later, are completely different …’

If he was serious, he was more or less right, but it is possible to suspect that he was still being light-hearted, and that he is implying that the circumstances in 1948 and today are pretty similar.

If he is, I am afraid he is mistaken. The only direct similarity is that Network Rail has become state-owned, which means that the infrastructure has indeed been renationalised.

The Big Four companies which were wound up after nationalisation at the start of 1948 possessed much more than the infrastructure. They owned all the train services – passenger and freight – and the rolling stock which provided them (apart from such exceptions as Pullman cars and ‘private owner’ wagons). They mostly built their own rolling stock at their works on various sites from Scotland to southern England. They owned kilometres of docksides, and substantial fleets of ships. Back on land, they also owned a large number of hotels, many of which were at large stations.

The hotel and ships were ‘hived off’ in the 1980s, when British Rail was forced to sell them. The number of railway works grew fewer, and this process was accelerated after privatisation. Freight operators and a large range of smaller railway-owned enterprises were also sold or ceased to trade, such as the concrete works at Exmouth Junction which had cast so many of the Southern Railway’s distinctive lineside components.

All these things have gone or are in the private sector under different names, but it is misleading to suggest that even the former franchises have been truly nationalised – yet. The private sector still has its passenger railway contracts, even if the terms of those contracts have been changed by Covid. Their trains, of course, are built by third-party companies and leased from specialist finance houses.

The railways have never been in a similar position before, and what happens next is – bluntly – anyone’s guess. But whatever the outcome, it is probably safe to predict that the concrete works at Exmouth Junction – and many similar fragments of the past – have had their day, while free rail travel will remain no more than an intriguing fantasy.

The next print edition of Railnews, RN286, will be published on 3 December. That edition and some previous issues can be obtained by calling 01438 281200 from UK numbers or +44 1438 281200 internationally, and selecting Option 2.

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