Treasury needs lesson in GCSE economics

Every year, rail fares go up and every year, the proposed increase in fuel duty is shelved. This year was expected to be different: the railways have taken a battering with the biggest collapse in passenger numbers since the first train trundled along the Liverpool & Manchester Railway in 1830. Today, passenger numbers are less than a quarter of 2019 levels. In contrast, the roads have clogged up with cars, reaching levels of congestion in the summer higher than those of 2019; even now, in full lockdown, traffic is two-thirds of normal levels.

It would therefore be logical for a government with a stated interest in halting climate change and reducing air pollution to nudge a bit in the right direction. It would be a welcome recognition that the post-pandemic world has to be different to the one before. Not a bit of it. It’s business as usual, with rail fares due to rise by 2.6 per cent in March, calculated on the usual formula of 1 per cent above July’s rate of inflation.

This demonstrates a lack of understanding of even GCSE-level economics since putting up fares will reduce further the numbers travelling on already almost empty trains. Would the manufacturers of Coca Cola put up their prices in response to a collapse in demand?

Worse, it reveals a contradictory attitude towards the railways. Trains have been kept running throughout the pandemic precisely because they are recognised as a vital service, essential for key workers and others who make up the 20 per cent without access to a car.

Ministers mistakenly believe that the railways have to pay for themselves, an attitude exemplified by rail minister Chris Heaton Harris who said: ‘Recognising the scale of taxpayer support, it is vital that farepayers make a fair contribution.’ But railways are not a commercial business and have a social value far greater than the amount collected in the fare box. Barely any railway in the world pays for itself. Of course they will need more taxpayers’ money while the effects of the pandemic play out, but there is no point in subsidising services that are too expensive to use.

Compare this with the treatment of the roads. Rishi Sunak has promised a £27bn roads programme with no suggestion of increased fuel duty to pay for them. There is never any talk of motorists having to make ‘a fair contribution’ to these costs, nor of closing little-used roads.

By encouraging fares rises, Treasury economists are assuming that demand is inelastic and passengers will use the railways come what may. If so, they are out of kilter with the new world. Passengers will be particularly sensitive to fares, especially if they have an alternative, such as working from home or using the car. Putting up fares will reduce passenger numbers, and then the pressure will be to close lines. Perhaps that is the Treasury’s cunning plan.