Blog Post

Mind the gap: What’s next for the funding crisis at the heart of London’s transport system

The most recent funding deal for Transport for London expires on 11 December. Our Chief Executive Nick Bowes reflects on the choices that now need to be made to avoid the downfall of London’s world-leading transport authority.

The Autumn Budget offered thin gruel for London. The capital was worthy of just three mentions in the Chancellor’s speech – one on green finance, another because of the parliamentary tradition of referring to MPs by their constituency name, and the third? ‘London-style’ transport settlements across the rest of the country.

This much-repeated aspiration caught our eyes. Few can question its importance. As someone who regularly travels to South Yorkshire, I know well how local trains and buses fall way short of what the area deserves.

To the government, London-style transport means an integrated, efficient, reliable, and modern system, with state-of-the-art ticketing. In London, this has been achieved through two decades of sustained investment by the city’s integrated transport authority, Transport for London (TfL), which has transformed a decaying, unreliable and fragmented system into one of the world’s best.

It’s no wonder that the Mayor of Greater Manchester, Andy Burnham, aspires to a bus network like London’s, and similar ticket costs to boot. I also don’t blame Grant Shapps, the Secretary of State for Transport, for holding the London Overground concession model (TfL sets services and fares) as the blueprint for the future of the national railways. And it’s unsurprising that other parts of the country are desperate to replicate a contactless and Oyster ticketing system like London’s in their own patches.

Yet the current state of TfL’s finances, with no clear plan of how to fund it in the future, threatens to result in a very different London public transport system that elsewhere in the country would be wise to avoid. Unless solutions can be found to the current crisis, TfL could face deep budget cuts and a halting of investment, the result being a deteriorating service for Londoners. At this rate, not even London will have a ‘London-style’ transport system.

Where London finds itself today

London is lucky to have TfL. The world-famous roundel is one of the most trusted symbols in the city. But I suspect Londoners and London’s businesses have become blasé about the city’s transport authority – taking the frequency, reliability and safety of buses and tubes for granted. This complacency presents a danger: very quickly it can become a case of not knowing what you’ve got until it’s gone.

London has a frustrating clockwork-like habit of self-destructing over how best to run its public transport. Time and again over the last century, bodies in charge of the city’s public transport have been created and dismantled on a regular cycle, with the city waking up to its mistake and realising it needs a proper transport authority. The current incarnation of TfL is only 21 years old, and before 2000 London had 15 years without a strategic authority accountable directly to the city.

During that period, Whitehall officials were in charge and public transport was neglected, usage declined and infrastructure decayed. No single person was responsible for the entire transport network or charged with banging the drum for investment and planning. Londoners, visitors, and workers suffered as a result. The crumbling state of the system some 20 years ago led to a rolling programme of upgrades and investment, a job that is as yet unfinished. The latest is the Four Lines Modernisation (4LM) project – upgrades to the Metropolitan, District, Circle, Hammersmith & City lines, which continue apace. Recently some of the oldest signalling on the network was replaced between Baker Street and Farringdon, the oldest section of underground passenger railway in the world. Previous to this, faults with antiquated signalling equipment on this stretch required parts sourced out of the London Transport Museum or from collectors on eBay.

Much has been written about the current parlous state of TfL’s finances. TfL argues that after a period of painful cost savings and efficiencies (following the loss of the Treasury revenue support grant provided over many decades to subsidise running costs) a balanced budget would have been achieved in 2020/21. But then coronavirus struck. Passenger numbers slumped and fare income collapsed – at one point tube ridership dropped to five per cent of normal levels – leaving a gaping hole in the organisation’s budget.

The crisis saw politicians on all sides engaged in fierce finger-pointing. Some blame the current Mayor of London’s fares freeze, some accuse TfL of being too big and out of control, while others point to the previous Mayor’s (and the current Prime Minister’s) agreement to give up the revenue support grant in 2011.

Given the sheer scale of the collapse in revenue, TfL was always going to need financial support from the government, and three sticking plaster bailouts have kept the buses and tubes running. But passenger numbers remain way down on pre-pandemic levels (weekday tube usage is pushing 60 per cent of normal, albeit around 80 per cent at weekends) and London’s recovery lags the rest of the country. The tube is the most profitable bit of the network, used to subsidise other activities such as the bus network, which makes the financial squeeze all the worse. The resulting pressures on TfL’s budget show no sign of abating any time soon. In fact, the Office of Budget Responsibility recently suggested travel demand may never recover to pre-pandemic levels and public transport could require a permanent government subsidy.

The third and latest bailout runs out in early December. Ministers are demanding a long term and sustainable plan for how TfL will solve their budgetary problems. The government has made clear that writing cheques indefinitely is not an option. Quite simply – either the hole in TfL’s budget is filled through alternative sources of income, or TfL will have to retrench and live within its means.

In an ideal world, all sides would sit down, recognise this crisis needs solving and thrash out a deal. Alas, we live in a sub-optimal world where raw party politics come into play.

Choices, choices

TfL currently estimates a shortfall in funding between £1 billion – £1.5 billion a year. With London’s meagre revenue-raising powers, finding this kind of sum is a tall order. It only really leaves three options: first, TfL generates more income (including fares, but also commercial and property income); second, the Mayor brings in more funding via city taxes and charges; or, third, funding is provided by the national taxpayer. Or a blend of all three.

Extra income

Generating extra income might sound attractive, particularly to the government, but it’s never that straightforward. Take fares – increases would be very substantial and way beyond an already rising inflation rate to generate sufficient money. Hiking fares also suppresses demand when what’s needed now is more people travelling not less, so this option is unlikely to gain favour from either London’s businesses or Londoners.

Squeezing more out of TfL’s commercial side will also be looked at. But TfL already generates a healthy income stream, from kiosks and concessions in stations, advertising revenue across the network, and income from development on land it owns. Money also comes from selling its technology and expertise across the globe, such as its contactless technology.

There’ll be pressure to intensify homebuilding on TfL land, and undoubtedly these efforts will benefit from moves to a more arm’s length commercial model. Ultimately, however, this needs to be balanced against potential reductions in the number of affordable homes built or requirements for even larger development above stations and on car parks. We’ve already seen politicians across the city campaigning against such schemes in their patches.

TfL could come under pressure for a fire sale of assets such as its land and railway arches, or more complicated options like sale-and-leaseback of train fleets or even the Elizabeth Line tunnel once it is completed. While these generate a good lump of one-off money, you can only sell these kinds of assets once, and then a steady income in perpetuity is forfeited. This is also land that belongs to Londoners, and TfL plays a custodian role on behalf of the city, ensuring it delivers on a range of objectives for London, including new homes and public realm, and not just selling it for a cash receipt.

Taxing Londoners or devolving power

Inadequate devolution over many decades has left London with scant fiscal freedoms, so increasing taxes and charges have their limits. An obvious choice would be to increase council tax, which is partly in the Mayor’s gift and is already collected, so can quickly generate more income. But it’s a highly regressive tax and has already seen big increases over recent years to fund extra police and adult social care costs.

London’s council tax system is also well out of kilter with the city’s property market, and while there’ve been cross-party calls for reform or replacement with something that better suits London’s circumstances, there’s little sign the government will acquiesce to this happening any time soon.

Bills landing on doormats would also need pretty eye-watering increases to generate the sums needed. Every additional £10 on Band D council tax produces around £30 million in extra income – plugging the shortfall in TfL’s budget would add at least another £300 a year. Ministers also retain the power to cap council tax rises and how willing they’d be to support this option given historic opposition to using the rates to subside London transport is unclear.

Where the city does have powers is over road user charging. To date, raising revenue hasn’t been the explicit objective – the focus of the Congestion Charge and Ultra Low Emission Zone are tackling traffic levels and poor air quality. However, the powers do allow for other forms of road charging, hence the Mayor instructing TfL to look at the merits of a Greater London Boundary Charge.

The real prize would be the introduction of a pay per mile road user charging scheme, something Centre for London, some business groups and others support. This would deliver on a raft of objectives – promoting walking and cycling, reducing congestion, tackling air quality, and generating substantial income. However, nothing on this scale has been tried anywhere in the world, and it’s likely to be politically divisive, with formidable opposition from the car lobby, and some elements of the media. Moreover, even it was given the green light now, after consulting and implementation, any serious revenue is unlikely before 2025.

London could choose to generate more income if the city had greater fiscal devolution. Some form of land value tax to capture uplift in value, a hotel bedroom charge or the ability to levy additional amounts on existing taxes like VAT or income tax and retain the income are possibilities. VAT has its attractions – Londoners, commuters and tourists would all contribute towards the cost of a public transport system they all benefit from – but it’s regressive, and retail and hospitality would likely oppose it.

However, even before the pandemic, ministers have shown little desire to allow London greater freedom over taxes. The London Finance Commission reports – one published when Boris Johnson was Mayor, the other under Sadiq Khan – made the case for more fiscal devolution to London. Both received little enthusiasm in Whitehall and nothing since the pandemic suggests this has changed.

National support for London’s transport network

The recent phasing out of revenue support for TfL from the Treasury left the organisation very reliant on fare income. London is now almost alone amongst major global cities in that its public transport network is not in receipt of a financial subsidy from the national government.

Some argue that London should be able to retain a fraction more of its economic contribution to the Treasury (£40 billion a year more than comes back to the city through public spending) to keep the transport network running. However, so far, ministers have been adamant there’ll be no restoration of the old revenue support grant for London.

Whether this leaves the door ajar for more subtle forms of support, such as hypothecating existing taxes paid by Londoners and ‘passporting’ the funding to TfL, is unclear. Vehicle Excise Duty (VED) has long been seen as the obvious choice and retaining the £600 million a year or so this generates (albeit a declining amount as electric vehicles become more popular) to help fund TfL has cross-party support in London. Business rates receipts, already partly kept by London to fund public services, could generate a further £500 million a year if five more percentage points are retained by the city. This would still mean a majority is redistributed across the rest of the country.

Answer: All of the above?

A combination of all the above options seems to be the most likely way of funding the shortfall in TfL’s budget. It would be the least politically difficult, with the added benefit of broadening the sources of income on which TfL depends, thus weakening its overreliance on fares.

It would also come with other advantages. Investment in activities that don’t generate additional fare revenue, such as walking and cycling schemes, come under pressure within TfL and more so in the current straitened times. Nevertheless, these are a crucial component of the city’s transport system and supporters of walking and cycling, including some in Downing Street, ought therefore to see the benefits of backing efforts to diversify TfL’s income.

However, while helping with TfL’s day to day running costs, none of the options discussed here will pay for major multi-billion-pound capital works. London would still depend on Treasury generosity, which – with the current reluctance to fund activity in the city and HS2 swallowing up ever more of the country’s capital budgets – makes it seem like it’s not even worth asking. Crossrail 2 (and the millions spent on numerous business cases) and even the Bakerloo Line extension have already been rejected. A Piccadilly Line signalling upgrade and replacement trains for the Bakerloo and Central lines are desperately needed, but with little prospect of forthcoming investment, all three lines face deteriorating reliability.

Political realities

I’m not confident that City Hall and the government will come to an agreement. I doubt there is even consensus on the most fundamental point – that the objective must be closing the budget gap – let alone on how to achieve this.

With many of the government’s political priorities residing elsewhere in the UK, London, and its multitudinous challenges, barely features. But it’s worse. There are currently more votes up for grabs for both main political parties in other parts of the country from being seen to go hard on London. Refusing to provide any further money for TfL falls into this category. It’s hardly surprising that political leaders in the North are enviously eyeing up the TfL funding crisis as they assume it will lead to an increase in the chances of them getting more money from the government.

Layer on the personal animosities, grudges and old scores being settled, and there is a toxic environment in which critical debates about the very future of London’s transport network are taking place. London’s political situation is unique: the Prime Minister is the current Mayor’s immediate predecessor. Many of Boris Johnson’s former inner circle at City Hall are now with him at Downing Street. Ordinarily, this ought to be an advantage – close Prime Ministerial aides understanding the difficulties faced by London – but not in the current set of circumstances.

Poor relations across the board, which from the outside look like they’ve warmed slightly since May’s mayoral elections, are still stuck in the deep freeze on transport. Statements from City Hall drip with anger at what they see as unfair treatment for TfL compared to the private rail companies. Interference in TfL’s day-to-day activities has grown throughout this crisis, threatening the integrity of what is a legally devolved matter. The Prime Minister publicly criticises Sadiq Khan for ‘bankrupting’ TFL, while others at Number 10 eye unfinished business from their time in charge of London. Trust between both sides is almost non-existent.

Number 10’s conditions have led to a near-total stop on new investment, while simultaneously insisting on progress on driverless trains and pension reform. Given both are likely to lead to serious industrial relations strife (something the Prime Minister and his team must know full well from their eight years at City Hall) it suggests these suggestions are politically motivated. This is particularly given that pension reform won’t deliver quick cash savings on a scale that will make a dint in the hole in the budget and transforming the network to driverless would actually lead to an extra bill for billions.

That isn’t to say that City Hall isn’t going to have to make some painful decisions if the buses and trains are to keep running. Londoners will have to pay more to maintain the transport system to which they’ve become accustomed. It’s impossible to duck this or to think that all the blame can just be deflected onto the government.

Avoiding the nuclear option

Now should be the time for a fundamental debate about the kind of public transport system London needs, and Londoners want. Just six months ago the city went to the polls and candidates for the four main parties took 87 per cent of the votes. Given all stood on a ticket of existing or expanded TfL investment and none campaigned for massive cuts, you could argue there is a clear democratic mandate for maintaining TfL at pre-pandemic levels. Similarly, business groups are also increasingly vocal in their pleas to find a solution for the sake of the city.

Number 10 and City Hall must avoid brinkmanship as this is a dangerous game to play: the stakes are too high, and it could risk destroying TfL. Bus and tube services would have to be slashed. Non-essential investment shelved. Progress made over 20 years to encourage a shift from private cars to public transport, walking and cycling, and upgrading the network could go into reverse overnight. Thousands of Londoners will be left with no choice but to return to their cars, clogging already heavily congested roads and worsening air quality.

TfL’s multi-billion-pound supply chains, with buses from Scotland, trains from Goole and bicycles made in the West Midlands would dry up, risking thousands of jobs across the UK. Worsening congestion and deteriorating public transport, undermining the competitiveness of the city as a place to do business, could lead to London’s already spluttering economy stalling or going into decline and ceasing to be the cash cow the Treasury relies on.

Alternatively, the Mayor may refuse to deliver budget cuts if a funding deal can’t be struck, but this could see what is known as a s114 notice triggered. Effectively leaving TfL bankrupt, the debts, liabilities, and responsibility for running the services would land in the government’s lap. It is unlikely ministers and officials in Whitehall would be keen on this outcome, giving added impetus to the importance of finding a solution. Both sides need to avoid this nuclear option at all costs.

A time for cool heads

Next May’s local elections across all 32 boroughs will be the first test at the ballot box and it is hard to see how a crippled TfL won’t feature as one of the big issues during the campaign. That’s why both Number 10 and City Hall would be wise to avoid thinking their political reputations can survive a catastrophic situation where no deal means overnight cuts in TfL’s budget as this is a stalemate from which neither could emerge unscathed.

Instead, cool heads on both sides are needed, with a good dose of honesty with the public. This means Number 10 being frank with the country that investing more in London’s public transport system is in the nation’s interests. And the Mayor needs to be honest with Londoners that they are going to have to pay more if they want to keep their buses and tubes at pre-pandemic levels. Neither will be popular but both are right for the city to continue functioning.

There also needs to be a less frantic approach to negotiations. It’s not clear whether Whitehall turning to the problem a matter of days from existing deals running out – as has happened on previous occasions –is a deliberate strategy or a sign of incompetence. Either way, it doesn’t lead to the conditions needed to come to a good agreement for the city.

It also means that both sides need each other if this is to work, and Number 10 and City Hall might be best advised to hug each other close to share the pain. If City Hall proposes road user charging to help fill the funding gap, this approach will be particularly important to a Treasury facing the conundrum of falling petrol duty as more cars run on electric. The government benefits from London going first on road user charging, testing the public’s appetite and ironing out any issues with the technology and during implementation. The Mayor will however be reluctant to go gung-ho on road user charging, fearing the government turn their guns on him and his ‘war on motorists’.

The history book on the shelf need not always repeat itself

Heavily reliant on public transport, with road space congested and constrained, and less than half of inner London households owning a car, London is unlike other UK cities. It simply ceases to function without a quality public transport system and given the age of much of the infrastructure, investment in maintaining it is needed in order just to stand still.

During TfL’s short life, the organisation has grown and matured and is now one of the world’s most respected public transport authorities, aspirational to ministers and metro mayors across the country. Two decades of sustained and planned investment in the capacity and reliability of London’s buses, tubes and trains have been critical to London’s economic and population boom. What’s more, for many low-income Londoners, public transport – in particular buses – are a lifeline.

And TfL is much more than just an operator of buses, tubes and trains. It’s a place maker, an agent of regeneration and environmental improvement, and an enabler of house building. New projects or improved capacity on TfL’s network unlock poorly connected parts of the city, allowing new homes and communities to be built – the Northern Line Extension and the new Barking Riverside Overground station being two of the most recent examples of such schemes. With both TfL and statutory spatial planning powers under the control of the Mayor, the city is in the enviable position of joining up transport and planning.

Yet Whitehall doesn’t always fully understand the full power of TfL, and it’s often left to the Department for Transport (DfT) to manage the relationship. This underplays TfL’s wider role and interests that span across many other government departments beyond DfT. However, requests to the Treasury for transport funding meet resistance as it is seen as ‘just’ money for buses, tubes and trains, not an investment in the wider economic benefits that public transport brings to London and the country.

TfL is not perfect. There are plenty of grumbles about how it operates and things it could do better. It must constantly keep costs under control, keep pace with technological developments and changing passenger tastes, and find better ways of working with the London boroughs. But the thought of London without a successful integrated transport authority is scary. To shrink TfL or destroy it altogether would both be negligent acts for which the city will pay the price for many years to come.

Nick Bowes is Chief Executive of Centre for London. Follow him on Twitter. Read more from him here.