Free bus passes for the under-25s are terrible economics
This was followed by the usual political bickering. The transport minister described the policy as “bribing young people”, and claimed that it would cost far more than £1.4bn if a realistic estimate is used. But the government is hardly in a position to attack the policy, neither on grounds of principle, nor on grounds of fiscal prudence.
It was this government, after all, which lifted the age limit for the 16-25 Railcard – which entitles young people to subsidised rail fares – from 25 years to 30 years. How does that not constitute “bribing young people”?
It was this government which fiercely defended universal old-age benefits, such as free bus passes, which would have been a relatively low-hanging fruit for fiscal savings. How is bribing old people better than bribing young people? The criticism sounds vacuous coming from this government.
But irrespective of that – free bus passes for the under-25s is a terrible policy. It is good politics, and unsurprisingly, the media response has been very positive so far (see e.g. here and here). But good politics is often terrible economics, and this is no exception.
Let’s ignore the obvious objection that a government which still runs a substantial budget deficit is not in a position to hand out more free stuff. Let’s pretend that they had a big budget surplus. Even then, it would still be terrible economics, for a number of reasons.
Cash vs kind
Most economists generally prefer cash transfers to transfers in kind, which is what free bus passes are. The reason is obvious: cash transfers give recipients freedom of choice, whereas with in-kind transfers, you have to take what you are given. Compare a situation where the government gives you £100 in cash to a situation where the government gives you a seasonal bus pass worth £100. Which one do you prefer?
There are two possibilities. It could be that you would choose to spend a £100 cash transfer on a £100 bus pass. In that case, you will be indifferent between the two options. An in-kind transfer means that the government gives you what you would have bought anyway.
Or it could be that you would choose to spend the £100 cash transfer on something other than a £100 bus pass. In that case, you will prefer the cash transfer.
So some people will be better off with a cash transfer, while others will be equally well-off under both options. But there is not one person who will be better off with an in-kind transfer. It is clear that the cash transfer is the welfare-maximising option.
Age and income
Opposition leader Jeremy Corbyn presented the policy in the following terms:
“Young people deserve a break. Nearly eight years of Tory austerity have hit their incomes […] Young people also tend to be in lower paid, more insecure work”
In other words, he uses “age” as a proxy for “income”. He does not want to subsidise the young for being young, but for being, on average, less well-off than other age groups.
This is true. The average income of people aged 20–24 is about £19,000, while the average income of people in their 40s and 50s is about £41,000. So age could be seen as a proxy for income.
But it is just that: a proxy, and a very crude one. We normally use proxies when the thing we are actually interested in is not directly observable. Income clearly is observable. If the aim is to help people on low incomes, then why tie a transfer to a proxy for income, rather than just to – you know – income?
Using age as a proxy for income introduces all sorts of anomalies and inefficiencies. The 24-year-old who has just landed a job at an investment bank is not poor, and the 40-year-old who cleans their office is not rich. Yet under this scheme, the latter will subsidise the former’s bus travel.
“Free” bus travel is not free. It is paid for out of taxation.
Three years ago, I would not have written these sentences, because I would have considered it a point too obvious and too trivial to make. But in the age of free-stuff populism, it seems that the obvious needs stating again.
Who will pay for “free” bus travel? To some extent, it will be paid for by the beneficiaries themselves. If you are in your early 20s and in work, you will not just be a bus passenger, but also a taxpayer, and the “free” bus pass is just a transfer from taxpayer-you to passenger-you. The government takes money out of your left-hand pocket, and puts it into your right-hand pocket.
If you are in your early 20s and in full-time education, your budget will come from your parents, and your “free” bus pass will be paid by them, in their role as taxpayers. The government takes money out of your parents’ pockets, and puts it into yours.
Of course, some young people will be net beneficiaries. Their bus pass will be worth more than their or their families’ incremental tax payments required to fund them. But the extent of fiscal churn – the government bribing you with your own money – will be huge, because the policy is so poorly targeted.
Compare it to a relatively well-targeted transfer, such as Income Support. People who receive Income Support have no or almost no income of their own, so they will pay no or almost no direct taxes, and less in indirect tax than other people. Churn is minimal. This is clearly a transfer from one group of people to another.
Free bus travel is a much more roundabout, and inefficient type of transfer.
As argued above, cash transfers are generally preferable to transfers in kind. This is true regardless of what good, or what service it is that the government is providing. But it is especially true if the availability of that good or service varies hugely across the country.
Suppose we had an entitlement to “free” sun protection, paid out of the EU budget. This entitlement would be worth little in places like Britain, and quite a lot in places like Spain and Italy. It would clearly be, in effect, a transfer from Northern Europe to Southern Europe.
Free bus travel is not that different. It is worth a lot in London, where there is a very dense bus route network, and where most bus lines run on a high frequency. It is worth a lot less in smaller towns, and less still in rural areas.
Free bus passes would, among other things, amount to a chaotic form of redistribution from rural areas to cities.
Bus operators compete with all kinds of other forms of transport. Free bus passes would distort this market. For bus operators, it would mean a guaranteed income stream, irrespective of the popularity of the services they provide. It would reduce incentives to attract customers, which cannot improve quality in the longer run.
Meanwhile, competing modes of transport, such as ride-sharing apps, will find themselves undercut by a competitor who can offer a zero-priced product. At least in some areas, this may well reduce the availability of such services.
In short, free bus passes for the young are terrible economics in every way. If we must increase social spending by yet another £1.4bn, the government should do that in a way that is neutral with regard to how people want to spend their money, where they live, and how old they are. If we must increase social spending by yet another £1.4bn, the government should ensure that the money goes to the people who need it most. If we must increase social spending by yet another £1.4bn, the government should do that in a way that does not distort the transport market.
In order to achieve that, they could simply raise tax credits or Universal Credit by £1.4bn. That would be less gimmicky and less headline-grabbing. But it would suggest at least a semblance of economic literacy.