Why we're still being taken for a ride by our train companies

There are too many "vested interests" to keep happy.

This week, two stories broke regarding the rail industry. On Tuesday it was the fact that fares are set to rise in January by up to 11 per cent on some journeys. That pushed the second to the very top of the news agenda: today's news that First Group has beaten off Virgin’s bid for the West Coast Main Line franchise.

The rise in fares was as predictable as death and taxes, and slightly more depressing than both. In real terms, they're now up a fifth since 1995. An annual ticket from London to Brighton now costs as much as a second-hand VW Golf, and that leaves change for some go-faster stripes for the seafront. Our trains are among the most expensive in Europe. Why?

If the train business doesn’t seem like any other industry, that’s because it’s not. Successive governments have never quite decided whether they’re a business or a social necessity – and they know full well there’s a decent case for the latter, because they’re clean, and thousands of people don’t die on them every year, which they do on the roads.

That means that under the current model you’ve got three competing obligations: quality (which takes investment), affordability and shareholder dividends. You can’t meet all three without money – so the burden for this was supposed to be split between the taxpayer and the passenger. That split used to be roughly 50/50, but the burden on passengers has crept up and up for the last 10 years towards 75 per cent passenger input.

You might say this could pose a few conflicts of interest, and you’d be completely understating the case. According to the Department for Transport the case for structural change has not been made. And this is true, assuming you discard countless industry experts, analysts and, um, the government’s own command paper on the subject.

It’s hard to know where to start. Fares can’t continue to rise at this rate, or the only people taking the train will be Lakshmi Mittal and at a push the Queen, assuming she can get an old person’s rail card. But the government hasn’t given any indication as to when the fares will stop going up. Given that it’s committed to £18bn of investment on goodies like Crossrail and Thameslink, not saying anything is probably a good idea, because it's going to be a decade at least.

But to be honest this is less of a problem than a point raised in the aforementioned command paper: the way the current system heaps the risks on taxpayers while giving fat payouts to shareholders, like the £88m pocketed last year by Stagecoach’s two founders (the polite euphemism in such reports is of “incompatible incentives”). This is due to the fact Labour (unchallenged by the other parties) brought in “revenue support” clauses, which guarantee taxpayers cover 80 per cent of shortfall between franchisees' forecasts and their actual revenues.

They’re not small, these sums of money. To pick an example entirely at random: despite paying out £340m to its shareholders last year, Stagecoach - the company with the directors who presumably keep their earnings in a pit with a diving board like Scrooge McDuck - also received £68m in bailout funds for the third South West Trains franchise a year ahead of schedule, after taking legal action against the government. At least RBS waited for things to really go belly up before they shafted us. This sort of thing might annoy those readers who think the railways should be publicly funded, but there’s something for everyone here, because ever since the railways were privatised the subsidies have flown up.

They might be siphoning cash straight out of the exchequer, but don’t worry, these companies are rummaging around in your pockets for loose change at the same time. Ever wondered why buying a ticket from a machine is like attempting to deal in equity derivatives while a 30-strong, tutting queue builds up behind you? Why you can get a “group save” in some places but not others, why you never seem to know for sure if your advance ticket is valid for the journey you’re trying to take, what constitutes "off peak", when “anytime” actually is?

You’d think the train companies would realise there’s an issue, what with successive reports on the subject by the Office of Rail Regulation and Which? pointing out that we all find the labyrinthine systems confusing, but maybe the message hasn’t got through. Either that or overpayments and fines are a nice little sideline.
 
Still, some friendly ticket office staff can help us, can’t they? Well, this leads us back to First Group’s bid for the West Coast rail franchise. It prompted Richard Branson to write to David Cameron, reminding him that the East Coast line had been handed to GNER and then National Express, both of whom hadn’t been able to deliver on their promised plan. Branson was apparently writing from the moral highground despite the fact Virgin has received £1.4bn in subsidies after, well, failing to deliver on its plans for the franchise. Sounds ludicrous? Well done; you're getting the hang of this.

What makes First Group more attractive? The fact it promises to run the line for less. How will it do that? Assuming you don't buy the growth predictions of eight per cent (generous), there’s only one way, and that’s by cutting jobs. This is assuming it does run the line, and doesn’t hand back its contract after promising to pay overly-ambitious premiums, as it did with another last year (which actually meant it was able to keep running the franchise for a few months without paying for it - result!).

The great irony is that somehow all this mess hasn't created that terrible a service. Anyone who thinks renationalisation is a silver bullet hasn't spent six hours in the waiting room at a provincial station on the Continent with no air conditioning and nothing but the town lunatic's thousand-yard-stare to keep you company; pretty much my summer of Interrailing in microcosm. But then anyone who thinks something good can come out of bodies that aren't competing in any normal way probably wasn't watching the women's badminton at the Olympics. The fact is, no one wins.

Actually, that's not quite true. Take a deal like Chiltern Railways' promise to invest £250m to cut journey times between London and Birmingham and provide an alternative route between Oxford and London. It's borrowing the money from Network Rail, which owns the infrastructure. Network Rail can do this because the government guarantees all its debt. The government has promised that Chiltern's successor will pay the outstanding amount once Chiltern's franchise ends, thus guaranteeing a loan from funds it's already underwriting. Have you got that? No, me neither. And such arcane deals require a veritable army of lawyers and consultants; an army that's deliberately complicated the various bidding processes in order to make itself ever more needed.

If Labour don't opt for renationalisation after its policy review, let's hope it looks seriously at simplifying the system - one train operator; one provider of infrastructure. It probably won't happen: there are a lot of "vested interests" (the same ones who were the party's corporate partners only a few years ago) to keep happy. There are all sorts of other ways of getting value for money out of the railways which haven't been explored like developments around train stations, but this is the big one. The alternative is that we all continue being taken for a ride.

 

First Group has beaten off Virgin’s bid for the West Coast Main Line franchise. Photograph: Getty Images

Alan White's work has appeared in the Observer, Times, Private Eye, The National and the TLS. As John Heale, he is the author of One Blood: Inside Britain's Gang Culture.

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?