Labour’s policy for buses is a key part of reversing the impact of neoliberalism on transport since the 1980s. It is redistributive: it helps those who cannot afford to drive to work. Nearly half of all bus journeys are taken by those who have no car, and two-thirds of those who travel on buses have an annual income below £25,000 per annum. But it is also a brave policy. By far the most popular mode of transport is by car (or van), and the policy will be portrayed by opponents as putting road building at risk.

The money recently promised by Labour will mainly go to undoing another impact of austerity. Outside London fares on commercial routes are set by bus operators. Local authorities can provide subsidies for routes that are socially important but not commercially viable. Local authority-supported services outside London have halved in vehicle mileage since 2009 as austerity has squeezed local authority budgets.

But Labour also plan to change the way buses are run outside London. Bus operation was privatised by Mrs Thatcher in 1986. Yet privatisation has in most cases failed to bring the benefits of competition. Largely as a result of a long-term process of consolidation through merger and acquisition, the UK bus industry is highly concentrated with three businesses (Arriva, FirstGroup, and Stagecoach) dominating the sector. Head-to-head competition between operators is uncommon, producing what is effectively a monopoly.

The market failure in this case may be the ability of a large bus operator to stifle any competition by temporarily cutting prices or increasing frequency. That makes the routes unprofitable for a time for the large bus company, but it is also unprofitable for the new entrant. As the financial resources available to the big company are much greater, they have the ability to kill off or take over any competition. There is no regulator preventing this kind of unfair competition.

With new entry unlikely to happen because of the possibility of such threats, the large bus companies can do what every unregulated monopoly does: raise fares and reduce services. That is good for profits and dividends, but bad for passengers. The large bus companies make good profits, and the passenger gets a more expensive or less frequent service. Since 2009, for example, the average price of riding a bus has increased in real terms by over 15%, while the cost of using a car in real terms has hardly changed.

There is a vicious circle here. The cost of running a bus is largely independent of how many people use it, so if usage declines firms put prices up, which in turn discourages passengers. But one important area has seen bus use rise rather than decline, and that is London.

The system in London is rather different from the rest of the country. Contrary to common belief, Transport for London does not own its buses. What it can do that local authorities elsewhere cannot is set routes and fares, with private companies bidding to run each route. That avoids the high fares that come from monopoly, and it also makes it easy to establish a common ticketing system which is absent in places like Manchester. The system used in many European countries for their bus services is similar to London. An important advantage London has is that there is effective competition between bus companies to bid for tenders on routes, which helps keep costs down and maintains efficiency that might be lost in a completely nationalised system.

The success of London compared to most other areas of the country suggests the neoliberal ideal of a bus system free from government ‘interference’ does not work, and local control over routes and fares can provide a better service. It is a classic example of where economics, which recognises the social costs of monopoly, beats a neoliberal ideology that is often blind to the dangers of monopoly. This is why Labour also plan to encourage areas outside London to re-regulate bus services, and support the creation of municipal bus companies that are publicly run.

While a comparison between London and elsewhere shows the dangers of private monopolies charging too high a price for services, is there not a danger that if local government can set fares it will tend to set fares too low? I don’t think this is likely to be a major issue because of two other problems (what economists call externalities) with a profit-based bus service. If people use many cars rather than a single bus this increases congestion and pollution.

Anyone familiar with large towns and cities during rush hour will know what a nightmare congestion can be. Buses can reduce congestion by persuading people not to use their cars. Basic economics tells us that the congestion externality justifies subsidising bus travel or taxing cars. Exactly the same point applies to CO2 emissions and pollution. In this respect underpricing bus travel can be advantageous.

Unfortunately, the experience of UK cities suggests that cheap fares alone may not be enough to prevent congestion. In addition congestion outside London may be having a serious impact on the productivity of our cities, as well as increasing pollution and CO2 emissions.

Tom Forth writes about a recent study that starts with a puzzle. In many countries, large cities tend to be more productive than small cities, and economists explain this by talking about agglomeration effects. However, this pattern does not seem to be true for the UK if you exclude London. Another way of putting the same point is that UK cities outside London are not as productive as they should be.

The study then looks at transport times to the centre of Birmingham, where the transport system is mainly based on buses. At peak times, when congestion is high, bus journey times into work can double on bad days, and anyone using a bus route has to plan for bad days. So if we think about the effective size of Birmingham in terms of a reasonable time to get to the centre, the city shrinks substantially.

This study shows that as long as cars are free to come into the centre those travelling on buses also suffer. Birmingham is using this study to target investment in bus lanes, which provides a partial answer. Park and ride schemes can help too. Another approach is to again follow London and introduce a congestion charge, but this will only be politically feasible if alternatives are easy, cheap, frequent and reliable.

If we look at cities in France, the big difference with UK cities is metros. Lyon has 4 lines, while Lille and Marseille have two lines each. Birmingham and Manchester have none. Last week I visited the French city of Rennes, population 215,000, that has one metro and is building another. Manchester has a good tram network similar to Lyon, but Birmingham has just one and Leeds none (compared to three in Marseille and two in Lille).

In short, cities outside London lack the transport infrastructure that can make them work productively, but also in a way that reduces CO2 emissions and other forms of pollution. One difference with France is how money is provided. In France, every city larger than 100,000 people has a ten-year transport plan, with significant national investment in five-year allocations with ten-year strategies. In the UK cities are good at the strategies and visions but cannot secure funding to realise them.

Once you have well-functioning cities you need to provide easy connections to nearby towns. Towns flourish when they are well connected to dynamic cities. Many will argue that this kind of local investment is money better spent than HS2, but I don’t think we should think of these as alternatives. Cities that link quickly to other cities are likely to be more productive, and France’s TGV network puts the UK to shame. The UK has underinvested in non-road transport infrastructure outside London for decades, and we need to make up for this quickly to create a more prosperous and greener future.

This piece was cross-posted from Simon Wren-Lewis’ blog MainlyMacro. Photo credit: Flickr / Dun.can.

The post Buses are about redistribution, productivity and a greener future appeared first on The Progressive Economy Forum.

Public sector bodies have been under pressure from central government to sell off land. Such pressure is not entirely new. It has existed to one degree or another since the beginning of the 1980s.

What’s new is the intensity of this pressure and the emphasis on a hitherto marginal rationale. Land is being sold off to raise income specifically to reduce the budget deficit. This is the perverse logic of austerity.

Pressure has been especially intense on local authorities, who have sold more than 12,000 sites just since 2014-15. And, as they have disposed of their landholdings, councils have struggled to satisfactorily provide a number of services that have historically been at the core of their operations. This includes youth centres, leisure facilities, allotments, farm tenancies and, last but not least, social housing – all of which need land.

Manchester City Council sold off 673 public properties between April 2014 and July 2018. This included a large amount of social housing, as well as community centres, care homes and schools. While this is the most extreme example of sell-offs, it’s a similar story for many councils around the country.

The madness of austerity

Meanwhile, local authorities have increasingly been buying other types of land. Not the same kinds of property they can use to provide important services for the community. But rather commercial investment property – most notably, shopping centres. This is all about austerity, too – and in two key respects.

First, austerity explains why councils have been doing this: to raise (rental) income in order to continue to be able to fund the provision of local services that have been imperilled by savage cuts in grants from central government as the latter has devolved austerity to the local level.

Second, austerity explains how councils have been doing this. As is now widely recognised, austerity in Britain has ushered in a lost decade of stunted growth. The Bank of England has accordingly maintained interest rates at historically low levels and local authorities have benefited from the availability of unprecedentedly cheap debt. They have borrowed prodigiously to finance their commercial property investment spree, with annual borrowing rocketing to £10 billion in 2017-18 from £4.4 billion four years earlier.

You don’t have to be particularly radical to believe that this state of affairs – councils selling land crucial to what they should be doing (such as providing social housing) while pursuing a land acquisition strategy well beyond their central remit (speculative investment in commercial property) – is absurd.

In 2016 alone, local councils spent more than £1 billion on business parks and shopping centres. Spelthorne Borough Council in Surrey, for example, spent £360m buying an office complex from BP, while Canterbury City Council in Kent made the first of two payments towards the £155m acquisition of a shopping centre.

This may be the new normal but these are bizarre decisions for local authorities. As FT journalist John Plender writes, it makes Spelthorne council more of “a property company with a sideline in providing local government services”. To paraphrase academic and author David Harvey, who has written of the madness that underpins a lot of mainstream economic reasoning, we might say that this is the madness of austerity reason writ large.

Reintroducing sanity

As a first step to reintroducing some sanity, the government should halt the austerity-augmented privatisation of public land. Not only is the income generated by disposal a one-off, non-recurring source of income. But it often removes a source of recurring public-sector income, as was the case with the privatisation of Network Rail’s commercial property portfolio.

Furthermore, there is growing evidence that public land acquired by the private sector is frequently hoarded rather than being used in a productive way – such as for the construction of truly affordable housing. And even where such land is put to use, there is zero evidence that this use leads to economic growth.

If Britain is to chart a navigable and fair route out of austerity, plotting a better path for the ownership and allocation of the ground beneath the nation’s feet is quite simply a political and strategic necessity.

This article has also been published on The Conversation. Photo credit from previous page: SomeDriftwood / Flickr

The post Stop councils selling off public land appeared first on The Progressive Economy Forum.

At the Conservative Party Conference the Prime Minister pledged to bring austerity to an end. I applaud that pledge and urge her to act on it. In light of Tory budget commitments through 2020, that pledge must be viewed with considerable scepticism.

If we take her at her word, what might delivering on her pledge involve?

To assess whether austerity ends, we need a generally accepted definition of austerity.  Spending cuts are not austerity itself, but rather the form it takes.  The driving ideological force of austerity policy is the goal of making public expenditure equal public revenue; to eliminate all public borrowing and thereby achieve the here-to-fore elusive target of “balancing the books”.  Austerity will end when the government treats the fiscal balance, surplus or deficit, as a policy instrument not as a problem.

Once we recognise that austerity is the policy to achieve zero public borrowing, the end of austerity is clearly revealed.  Ending austerity means restoring the expenditure sacrificed in the pursuit of zero borrowing.  A Financial Times article estimates a 14% fall in inflation-adjusted overall public expenditure since 2010.

The end of austerity does not require higher tax rates to prevent greater borrowing.  The assertion that restoring expenditure to its pre-austerity level requires more public revenue is no more than a restatement of the austerity ideology that budgets must balance, the “how to pay for it” cliché.

While many if not all public services have suffered from spending reductions since 1980, restoring local government funding would be the appropriate place to start, for at least three reasons.  First, of major spending categories, local government suffered the most severe cuts.  Second, the services delivered by local governments directly affect households – e.g. education, elderly care and supporting council house tenants.  And third, restoring this funding could be quickly done because salaries account for the overwhelming majority of local budgets.

Restoration of central government grants to local authorities would send a clear signal that the Prime Minister intends to end austerity.  How much expenditure would restoring grants to local government require?  Using the chart below, I start with the simplest calculation, returning grants to their annual level achieved in the first quarter of 2010, the last full quarter with a Labour government.  The quarterly numbers in the chart, all in current prices, are annual totals, each quarter’s grants plus the three previous quarters (“annualized”).  The numbers are not adjusted for inflation because neither the Office of National Statistics nor the Office of Budget Responsibility provides inflation indices at this level of detail.

Through the second quarter of this year Parliament local authorities received an annualized grant total of £112 billion, £15 billion less than for 2010Q1.  If inflation in cost of LG services followed the consumer price index, returning LG grants to where they were eight years ago would require an increase of £18 billion.

Returning to the funding level at the beginning of 2010 would be a very modest gesture.  In early 2010, LG grants represented 28% of other central government current expenditure, falling to 20% in mid-2018.  A serious move to end austerity in LG funding should bring spending back to its 28% share, requiring an increase (unadjusted for inflation) of £46 billion (blue line in chart).

Restoration of LG grants at 28% of other current expenditures does not account for spending losses due to the overall decline in current spending as a share of GDP due to austerity.  At the beginning of 2010 other current expenditures were 30% of GDP, falling to 27% in 2018Q2.  This decline in the share of national output going to public services constitutes the essence of the austerity ideology.  For Theresa May to deliver on “ending austerity”, a return to the early 2010 spending share is essential.  Doing so implies an increase by £60 billion.

Annualized Grants to Local government Compared to Last Quarter With a Labour Government, 2010Q1-2018Q2 (current prices)

Notes:

For each quarter expenditure is annualized, taking the sum of expenditure in that quarter and the previous three.

Actual compared to 2010Q1 – 2010Q1 value subtracted from each quarter.
Actual compared to 2010Q1 share of current spending – In 2010Q1 local government transfers were 28% of current spending. That percentage is applied to all subsequent quarters.
Actual compared to 2010Q1 share of current expenditure in GDP – Previous adjusted for fall in current spending as a share of GDP.
Adjusting for population growth – Previous adjusted for quarterly population growth at 0.2%.

Source: Office of National Statistics.

These calculations ignore an obvious change affecting the demand for LG services.  Our population is now 7% larger than it was in early 2010 (69.9 million compared to 62.5 in early 2010).  An end to austerity would return British residents to the level of local authority grants per person when austerity began.  This requires a pledge of at least £73 billion (“at least” because I have not adjusted for inflation).

“Where will the money come from”? It will come from growing taxation and a bit of borrowing.  A feasible and quite conservative programme to restore the irresponsible LG cuts might be to increase expenditure in each quarter until achieving the additional £73 billion at the end of the current Parliament, which implies an additional £8 billion each quarter.  If nominal GDP grows at the same rate as during 2016Q1-2018Q2 (0.9% per quarter) and public revenue remains at 35.8% of GDP (its average over the ten quarters), quarterly revenue increase would almost equal quarterly increases in LG grants.  Thus, annual public borrowing will be at almost the same in mid-2020 as now (23 billion compared to the present 21 billion).

These simple propositions – nominal growth continues at its present sluggish rate and the Prime Minister introduces no  tax cuts – allows for recovering of local government grants, with a fiscal outcome quite consistent with the dysfunctional obsession with reducing public borrowing.

Photo credit: Hazel Nickelson / Flickr

The post Theresa May says she will “end austerity”: start with local government appeared first on The Progressive Economy Forum.