Surviving the Transport Subsidy Armageddon
Key Takeaways
- The war in Ukraine is leading many countries to increase their defence budgets.
- Governments will look for savings elsewhere to fund this extra spending, and transport subsidies will be a prime target.
- To move to a less subsidised model, transport systems should learn the lessons from those that have already followed that path, like London.
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Six lessons from London:
- Implement a fares policy that increases them slightly above inflation over a sustained period.
- Put in place offsetting measures to ensure access to transport for people on low incomes.
- Invest in active transport, providing more people with a fare-free option.
- Maximise additional sources of revenues.
- Develop strategies for working with unions to deliver efficiency improvements.
- Diversify funding sources for capital projects.
What next?
If you are a system that is likely to see a reduction in the level of subsidy, what can you do to start preparing for it?
Introduction
The heated exchange between Presidents Trump and Zelensky in the Oval Office might seem worlds away from your morning commute, but these diplomatic tensions are about to reshape public transport systems globally. As nations awaken to new security realities, defence budgets are expanding, and that money needs to come from somewhere.
Transport subsidies are likely to face significant cuts. How do we stop these cuts from worsening transport outcomes?
Cities worldwide must look toward models that require less government subsidy while maintaining quality service. This is where London's approach becomes particularly relevant.
Despite having some of the highest public transport fares in the world, London has achieved what many consider impossible: a system whose revenues cover operating costs without national government subsidy, while maintaining high ridership and accessibility. As defence spending climbs the priority list for governments worldwide, London's funding framework offers valuable insights that other cities might soon have no choice but to adopt.
This blog explores how these seemingly disconnected events—diplomatic tensions and transport funding—are intrinsically linked, and what transport leaders should prepare for in this shifting landscape.
Predicting the future
A trending focus in government policymaking circles is foresight, that is, the ability to predict what will potentially happen or be needed in the future.
The diplomatic stoush in the Oval Office between Presidents Trump and Zelensky is an event that should trigger foresight conversations among senior transport leaders around the world.
Whilst these events in the White House feel like a million miles from strategic thinking about public transport, their consequences will nevertheless ripple through our transport systems.
Since the end of the Second World War, much of the world has relied on the United States to guarantee its security. When the Cold War ended, many governments significantly reduced their defence budgets in what has been described as ‘a peace dividend’.
The events in Ukraine and the Oval Office have woken up governments around the world to the reality they can no longer rely on the United States to guarantee their security and will need to do more of the heavy lifting on national defence themselves.
For national budgets, this is going to be painful. The UK has already reallocated 40% of its overseas aid towards defence and this is just the beginning.
Government budgets are not in a good state, with often record levels of debt post covid, ageing populations, low growth and the need to tackle carbon emissions. Indeed, the OECD warned last year about the upcoming pressure on transport budgets. With the need to fund increased defence spending, many governments will need to reallocate funding from other parts of the budget.
The Impact on Transport Subsidies
Whilst reductions to government spending in any part of their budgets are usually controversial, some areas are more likely to face reductions than others. Whilst we can expect communities' top priorities, like healthcare, to be relatively protected, the same cannot be said of transport. In particular, public transport systems could/will see significant subsidy reductions.
Many transport agencies will need to think very differently about how to handle the reductions without compromising outcomes.
Low Subsidy Transport Systems
Over the last few decades, levels of public transport subsidy have been increasing in many places. However, there are some systems where current revenues cover operating expenses, including cities such as Singapore and Hong Kong.
Whilst these city systems have several strengths, such as good integration of transport and land use than many other systems, they overwhelmingly benefit from the density of their cities, driving high levels of patronage, which is unlikely to be easily or quickly replicated in most cities.
Are there other models we can look to that have similarly high cost recovery levels without the high density? This is where London’s transport funding model comes in.
London's Transport Funding Model
London is not a high density city. Despite this, its public transport system’s revenues still cover its operating costs without national government subsidy. For 2024/25, London’s transport budget:
*Note: additional revenue sources make up approximately £300m
Two things stand out:
- Whilst many transport agencies have struggled to make the case for higher fares, London has increased fares slightly above inflation for a sustained period. This has often been justified by arguing for investing in better services.
- London has significant taxes and charges that support its transport budget.
At this point, I can hear sharp intakes of breath from public transport subsidy advocates who will say that London’s high fares must mean low public transport patronage and be inaccessible for low-income Londoners. Is that true?
London’s Transport Mode Share
In 2023, in London, 63% of all estimated trips were by foot, cycle, or public transport, up from around 60% in 2011/12.
The number of trips by private transport fell by about 400,000 over the same period. However, trips by public transport also fell by about 100,000.
Trips by walking increased in this period, but the biggest shift in modal share was in cycling, with the number of trips and the modal share more than doubling.
Overall, London has managed to average increasing fares at just over 1% above inflation whilst not driving people towards private vehicles.
London's Travel Affordability
Answering the travel affordability question is challenging. Many international comparisons consider the cost of public transport fares only, but this fails to consider the holistic cost of travel. For example, if someone is car dependent because public transport in their area is poor, cheap fares will not offset the substantial cost of owning a car.
In terms of connectivity, London is the highest scoring European city, with more than one-third of Londoners living within 500 metres of a metro or rail station, and only 55% of London households own a car.
London also puts in place other mitigating factors when considering affordability, including:
- Free travel for all over 60s.
- A deliberate policy of keeping bus fares low, with fares frozen six times in the past 9 years.
- Significant investments in active transport, providing people with the option of fare-free travel.
In short, although London’s headline figures show expensive fares, which might harm those with low incomes, there is a range of mitigating factors that mean this is often not the case.
Capital Projects
Large capital projects in London have often used substantial national funding. However, the city has also been innovative in its funding models. For example, the Northern Line extension cost of just over £1bn, was paid for by a combination of developers' contributions and tax increment financing from local business rates.
The Elizabeth Line also funded a significant amount of its costs through a business rate supplement and private sector contributions.
Efficiency
It is difficult to assess how efficient London’s transport system is. However, there is clearly still room for improvement. For example, whilst other cities are automating trains, London’s new Elizabeth Line has drivers. Union demands probably drove the decision not to automate.
If London’s transport system was more efficient, it could invest in additional services, to drive increased public transport patronage and further reduce car dependency.
Lessons from London
So, what can we learn from London?
- Implement a fares policy that increases them slightly above inflation over a sustained period, and justify it with improved services, such as higher levels of connectivity to provide people with better transport options.
- Put in place offsetting measures to ensure access to transport for people on low incomes.
- Invest in active transport, providing more people with a fare-free option.
- Maximise alternative sources of revenues, such as hypothecated taxes or congestion charges.
- Develop strategies for working with unions to deliver efficiency improvements.
- Diversify funding sources for capital projects, leveraging private sector sources wherever possible.
Whilst some of these changes are going to be politically challenging, reduced subsidies will make the alternative scenario worse:
- Reduced public transport services.
- Increased levels of congestion.
- Higher carbon emissions.
Conclusion
The ripple effects of global security shifts - exemplified by the tensions between Presidents Trump and Zelensky - will inevitably reach our public transport systems. As defence budgets grow across the world, transport agencies must prepare for a new reality where government subsidies can no longer be taken for granted.
London's model demonstrates that it's possible to maintain a well-functioning, accessible transport system with limited government support. By gradually increasing fares above inflation while implementing targeted affordability measures, diversifying revenue streams, investing in active transport options, and finding innovative approaches to capital funding, cities can build more financially resilient transport networks.
The transition won't be easy or politically painless. Transport leaders will need to communicate clearly why such changes are necessary and how they ultimately protect service quality. The alternative - significant service reductions, increased congestion, and higher emissions is a far worse outcome for communities.
As we enter this new era of budget reprioritisation, foresight becomes essential. The cities that begin preparing now - by studying and adapting elements of London's approach - will be better positioned to weather the coming financial constraints while continuing to provide the transport services their residents depend on.
The connection between diplomatic tensions in Washington and fare policies in London may not be immediately obvious, but transport leaders who recognise this relationship early will be better equipped to navigate the challenging road ahead.