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Nicole Gelinas: Livingstone's promise on tube fares means higher costs – and more accidents – later

NicoleNicole Gelinas is a Chartered Financial Analyst (CFA) charterholder and a contributing editor to the Manhattan Institute’s City Journal. She has analysed New York City’s public-transit finances for nearly a decade. Follow Nicole on Twitter.

Ken Livingstone unveiled a 100-page “Manifesto for London” last week. Yet one proposal had already captured attention: the Labour mayoral candidate’s promise to “cut fares by 7% this year and freeze them throughout 2013.” “Ken’s Fare Deal” plan for the Tube, buses, and rail shows that Livingstone doesn’t get Transport for London (TfL)’s financial situation – or that he hopes the voters don’t get it.

Livingstone says his plan is simple. He says he'll save the average person £1,000 over four years. But they’ll still be able to ride around soon enough on a newly built CrossRail, plus newer Underground cars and tracks.

How’s that? In the past couple of years, he says, Conservative Mayor Boris Johnson has gathered up a huge “fares cashpile” – having “bank[ed] £727m in operating surplus.” This surplus, Livingstone says, makes it “possible to both cut fares and increase investment from the network.”

Livingstone says he knows he can do this because he has done it: as mayor between 2000 and 2008, he boasts, he “kept fares down while delivering a massive investment programme.”

In last week's debate, Boris called Ken's plan “irresponsible” – and he's right.

TfL doesn't have a fares “surplus” in the way that most people would think of a surplus: taking in more in fares than it spends on other things. This year, TfL will take in about £4.1bn in fares, congestion charges, and other income – and it will spend about £6 billion.

That makes for a £1.9 billion operating deficit – one that grants from HM Treasury largely fill in. Make no mistake: TfL does not – and will never – support itself from fares, with extra to spare.

What Livingstone means when he talks of a surplus is that TfL has underestimated how much it would earn from fares over the past 18 months. But the prudent thing to do with this extra money is to pay down some debt.

Why is that? TfL is in the midst of a massive capital-investment scheme. Back in 2003, the Blair-Brown government determined that to supplement its grant money as it embarked on these capital investments, TfL could borrow on the public markets with the mayor's permission.

And that is exactly what TfL has done. Today, TfL owes £11.8 billion – and by this time next year, it will owe a neat £12 billion, including £7.6 billion in long-term borrowings and £1.6 billion in unfunded pensions. Debt as a percentage of TfL's revenues has gone from 72 percent in 2006 to 106 percent by last year, according to the bond-rating firm Moody's. Over the next year, the amount of money TfL must spend on interest payments will rise by 16 percent, from £270m to £312m.

TfL must guard its resources carefully for another reason: Treasury grants are falling. As the Coalition continues its austerity programme, it has frozen grants at £2.8bn from last year to this year, and will further cut them to £2.7 billion in 2013 and to £2.4 billion in 2014. That's why, last year, borrowing comprised 54 percent of TfL's capital investments, up from 36 percent the previous year.

It would be a different story if higher prices were driving riders away. But falling ridership is not the situation. Tube ridership is at records, and bus ridership hasn't seen today's levels in five decades. Furthermore, if Londoners are worried that higher fares disproportionately harm the working poor, the answer to that problem is targeted subsidies, not lower fares for everyone.

Livingstone's fare-pledge freeze is reckless not just fiscally, but socially and economically. To understand why, Londoners can look to New York history.

In early twentieth-century New York, mayor after mayor pledged not to raise the subway fare from a nickel. As costs rose, subway operators became more squeezed, cutting service and investment. These cuts led to dangerous conditions, including frequent fires and crashes.

Yet the people refused to accept reality, because the politicians told them they did not have to. Eventually, on the eve of World War II, the subway operators went bankrupt and needed a massive government takeover.

London should not follow New York in politicising Tube fares. Cutting fares now means higher costs – and more accidents – later.

One one level, Livingstone seems to understand that. fact Part of his plan – the part often unreported in the media – is to allow fares to rise with inflation effective in 2014. The risk here, though, is that after 2014, another election will loom – and if candidates see that cutting and freezing fares works now, they'll figure it will work then, too. In the meantime, deterioration of Tube assets is harder for riders to see in time for an election.

It’s not only commuters who should worry. Businesses whose executives travel by private car and who pay the congestion charge should understand that their employees and customers come in via mass transit. Moreover, if transit service declines, more people will take to the roadways, creating congestion for delivery drivers and others who have no choice but to be on the roads.

Thankfully, Londoners seem to understand that Livingstone's plan is fanciful. Yes, the fares-cut proposal made a splash when Livingstone announced it in January, helping to push him ahead temporarily. Since then, though, enthusiasm has waned. Forty-five percent of respondents in early April’s ComRes poll agreed that “Ken Livingstone cannot deliver on his pledge of a 7% cut in public transport fares” (28 percent said that he could). And though more people trust Livingstone with the Tube in general compared to Johnson, the margin is slim – 37 to 35 percent.

To be sure, Livingstone deserves credit for the early investments he made, as mayor, at TfL. But investments always have to be paid for in future – and the future is here.


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