Economic Theory

Free bus passes for the under-25s are terrible economics


Yesterday, the Labour Party announced a plan to introduce free bus passes for people under the age of 25. According to their own estimates, the policy would cost £1.4bn.

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.

Fiscal churn

“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.

Geographic variation

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.

Market distortions

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.

Conclusion

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.

 

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).


5 thoughts on “Free bus passes for the under-25s are terrible economics”

  1. Posted 15/04/2018 at 18:36 | Permalink

    Do these arguments not equally apply to roads?
    Money taken for an in kind benefit – it is geographically varied, and obviously roads compete with other transport systems – but the distribution is more progressive.
    If a mobile population, preferably using public transport, is desirable then this a reasonable way of providing it.
    You are correct it isn’t the same as adding money to the hugely means tested Universal Credit programme, but then it isn’t intended to be.

  2. Posted 16/04/2018 at 06:57 | Permalink

    Oh dear. This article is exactly the kind of economics that gives the term such disrepute nowadays.
    ‪Atomised economics.‬
    ‪Service worth £1000/year to those who need access to public transport, but would be worth £100/year if handed out as cash to individuals <25.
    ‬Services target needs directly. (Ideally it should free local public transport for everyone- a Universal Basic Service)
    ‪No mention of social infrastructure or environmental benefits of public transport.‬
    No mention of the economies of service provision versus cash distribution – cash has zero economies of scale.
    Of course service quality varies, but that can be changed and needs incentive to change.
    Cash distribution is only superior economics if you’re so powerless you cannot conceive of improving your society and default to doling out cash as the simplest and laziest way to placate people whose needs you don’t want to understand and whose political compliance you think you can buy. It’s one step lower even that “bread & circuses”.

  3. Posted 16/04/2018 at 09:33 | Permalink

    Andrew, I presume that you get paid in kind, then? That your employer does your shopping for you and your colleagues?
    Surely, they’re not so powerless that they cannot conceive of improving their society. Surely, they wouldn’t default to doling out cash as the simplest and laziest way to placate people whose needs they don’t want to understand. How lazy would that be?

  4. Posted 16/04/2018 at 13:52 | Permalink

    @Andrew Percy: “Cash distribution is only superior economics if you’re so powerless you cannot conceive of improving your society and default to doling out cash as the simplest and laziest way to placate people whose needs you don’t want to understand and whose political compliance you think you can buy.”

    You may want to understand people’s needs, but isn’t it just slightly arrogant to think that you can better understand their needs than they can? And what if their needs are all different?

  5. Posted 19/04/2018 at 23:04 | Permalink

    I know it’s an old debate, but in Vienna where I come from, they have experiemented quite a while with the free bus passes for young people. Surprisingly, it seems to work better if you work locally, for instance the Vienna area is much more urbanized – and hence has much more bus lines – then the mountains. It’s hard to be fair with a sweeping measure that will affect young people differently based on their location and income. But as unperfect as it is, another factor is to avoid resorting to automobile transportation, which has led to many traffic disasters in America and Europe.

    Best,
    Franz Hümmer, Vienna
    flowerdeliveryaustria.at

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