It is time for a rethink in the way that the railway’s economics are presented and analysed. The railways suffer from the perception that they require vast amounts of subsidy and yet the way that the information is presented is a crude oversimplication, failing to consider various aspects of railway economics and crucially missing out a fundamental figure – the railways’ contribution to the exchequer – which greatly reduces the headline figure.
The conventional view, reiterated by politicians of all hues, is that the railways are massively subsidised and that the costs must be driven down. However, the extent of that subsidy, which was used widely by the McNulty report on the finances of the industry, is hard to ascertain. McNulty who slavishly followed what his political masters wanted him to say, never investigated wider questions on what that subsidy figure means.
Politicians are wont to pluck figures out of the air but thankfully the more open policy recently adopted by the Office of Rail Regulation has resulted in the publication of clear figures for government support of the railways annually. This table, available on the ORR website, shows that government support for the railways reached a peak of £6.3bn in 2006/7 (McNulty actually says £6.8bn, possibly because it may include Northern Ireland) and has gone down to just under £4bn currently (all in real money).
However, that overall figure is not very helpful. At a time when there is a lot of investment on the railways, the subsidy is bound to rise, and vice versa. While it would seem simple to separate out investment, that too is complex because so much of the work on the railways is replacing old assets, but, simultaneously, improving them making it hard to obtain a net figure. According to McNulty, around £5bn of the total £11bn cost of the railway was spent on maintenance or enhancements. In any reasonable assessment of the railway’s finances, the investment ought to be separated out and calculated over the life of the assets, rather than all being lumped into the year in which the money is spent.
An even bigger issue, though, is the failure to assess rail’s real net cost, as opposed to the headline figure. Norman Bradbury of Railfuture and a group of his colleagues (declaration of interest – I am president of Railfuture, an honorary title) have spent the past few weeks trying to ascertain how much of the railway’s money goes back to the taxpayer in various ways. It is not easy, and obviously requires approximations, but they have taken a conservative view to give an excellent base figure.
First, Network Rail which employs around 36,000 people. As can be seen from the table, there are various ways in which Network Rail contributes to the Exchequer. The main ones relate to employment, but there is, significantly, the £200m payment made to the government to pay for the guarantee that Network Rail gets on its borrowing. There are a variety of odd ones such as £4.2m on the aggregates levy, £2.5m on climate change levy, £2.2m on Insurance Premium Tax and even £600,000 on stamp duty and £83,000 on air passenger duty – all those executives flying up to Scotland, I presume!
I have left out Corporation Tax which was only £3.5m in 2010/11 because of a rebate, but this could actually amount to much more in future years. Nor has VAT been included, as most is reclaimed but there may well be some net contribution.
For the train operators, who employ 47,000 people, there is corporation tax on their profits, as well as the employment taxes. And there are also the rolling stock companies (ROSCOS) who do not directly employ many people but pay some corporation tax, though much of their tax burden is offset by capital allowances. The ROSCOS, though, are set to be taxed more due to complex changes in the way that their assets are treated with the tax take set to rise perhaps to as much as £120m by the end of the decade. In fact, all these figures are approximate and can be argued over although in every case a conservative estimate has been made, but the key point remains – the railways are making a significant contribution to the Exchequer which is not recognised in the subsidy figures bandied about by politicians and commentators.
Outside of these three groups, there are something like 75,000 people employed in the industry supplying Network Rail and the operators. I have estimated that they contribute something like £8,000 each in terms of tax and National Insurance, which is fairly conservative given the high level of skills of many jobs in the industry.
The Insurance Premium Tax of £2.2m paid by Network Rail figure is interesting because it suggests that the overall bill for insurance is £44m – that is an extra payment as a result of privatisation since British Rail was self-insured and therefore did not pay insurance premiums.
Norman and his colleagues did not look at projects which is another area ripe for examination. A big scheme such as the rebuilding of stations like Reading or Birmingham New Street or the construction of a new line such as Crossrail. Typically, say, two thirds of the budget will go on manpower, a third on materials. Then, as an average, crudely, in a £1bn scheme, about 30 per cent of the total wages fir tax and National Insurance – say £220m – and 20 per cent (VAT) of the materials cost – say another £65m – goes back to the Exchequer. That does not include the tax paid by labour on supplies from Britain and therefore it is quite reasonable to assume that the headline cost of all major projects should be reduced by at least third. This obviously should be applied to the ailing business case for HS2, even though, as readers know, I have my reservations about that particular scheme.
Yet none of this is taken into account – quite the opposite, the Treasury insists on increasing the expected cost of projects with an ‘optimism bias’ figure ranging from 30 to 50 per cent – to compensate for the tendency of project promoters to give low estimates of the ultimate cost and to pay for contingencies. Worse, remember the way that the Treasury used to add tax foregone as a cost when assessing schemes – in other words, if a rail scheme managed to get people off the road, then the Treasury scandalously, until Andrew Adonis stopped the practice, used to put the non-payment of the fuel duty as a cost of the scheme? Well, one way of looking at the fact that the railways employ 159,000 would be to say that they are keeping that number of the dole and contributing to their pensions – which at a conservative estimate estimate would surely be worth say £10,000 each, so a cool £1.6bn. Ok, that’s a bit fanciful but you get my drift.
What these crude calculations demonstrate is that this type of analysis needs to be taken up more widely by the industry itself. The industry should commission studies into the real economics of the railway in order to counter some of the crude analysis that featured in the McNulty report and that has been used as a stick to beat the industry. Railfuture has done a great job in starting the ball rolling, but these figures need filling out and, crucially, should be used widely in order to boost the industry’s case for investment. I recognise that this is largely back of the envelope stuff. But then so are many of the business cases used to analyse rail projects which would actually benefit from this type of wider analysis.
All this is without assessing the societal value of railways. Railways are justified by what economists call ‘externalities’, the wider benefits such as reduced congestion, facilitating business transactions and, of course, environmental considerations. These are often forgotten by politicians who tend to emphasise the need for railways to ‘pay their way’. That is a nonsense but the importance of trying to assess their financial contribution to the Exchequer is that it weakens these daft arguments which are given greater emphasis by the ostensibly high levels of subsidy.
What these crude calculations demonstrate is that this type of analysis needs to be taken up more widely by the industry itself. The industry should commission studies into the real economics of the railway in order to counter some of the crude analysis that featured in the McNulty report and that has been used as a stick to beat the industry. Railfuture has done a great job in starting the ball rolling, but these figures need filling out and, crucially, should be used widely in order to boost the industry’s case for investment.
Rail industry contribution to Exchequer (main items only)
Tax paid or collected
Employers National Insurance 121
Landfill tax 11
Local business rates 91
Fuel tax and other custom duties 12
Government loan guarantee 200
Other (climate change levy, aggregates tax etc) 19
Income tax 267
Employees National Insurance 110
NR Total 830
Corporation tax 200
National Insurance (employer and employee) 280
Income tax collected 470
TOC Total 950
Corporation Tax 20
Employers National Insurance 2
ROSCOs total 22
Other (75,000 employees)
NI and Income Tax 600
Grand total 2402
Subsidy in 2010/11 3960
So a possible alternative figure for net subsidy 1558