Why public transport subsidies are a costly political promise and a really bad idea

With Queensland’s state election less than a week away, both major parties support the continuation of 50c public transport fares for every one of Queensland’s 5.6 million residents and visitors. It’s a costly political promise to keep and a really bad idea.

But is it sustainable? Are we prepared to maintain 50c fares up to the 2032 Olympic Games?

Queensland’s Treasury already transfers a vast amount of taxpayer money – more than $2bn per year – to the Transport and Main Road Department to subsidise the 178 million passenger trips, mostly benefiting regular users.

In 2023-24, the average public transport running cost was $19.21 per trip, but farebox revenue averaged just over $6. In other words, back then the taxpayer subsidy represented two-thirds of the operating cost of providing public transport services, including capital costs, pushing the Queensland taxpayer’s effective subsidy to more than 75 per cent. Now, with 50c fares, it’s virtually a 100 per cent subsidy.

There is a major hole in the Queensland government’s cost-of-living justification for 50c fares. In this year’s state budget, Treasury argued that the combination of 50c fares and other subsidies, such as the $1300 electricity rebate, would reduce Brisbane’s consumer price index from 3.25 per cent to 2 per cent and take pressure off interest rates.

Queensland Premier Steven Miles with 50c when he announced the move in May. Picture: Annette Dew

Even if the Reserve Bank fell for this ruse, it’s incredibly shortsighted. What happens to the Brisbane CPI when the subsidies are removed? Not only does inflation go up, it goes up by even more than it came down. If I lower the price of a bus trip from, say, $5 to 50c, that’s a 90 per cent reduction in price. But when I subsequently increase the price back to $5 from 50 cents, that’s a 900 per cent increase. In other words, when these subsidies are reduced or removed, the boost to the CPI will be far greater than the initial cut because the price rise is coming from a much lower base.

The next problem is that the subsidy – like all subsidies – raises real incomes and spending in the short term. This is because the reduction in public transport fares increases the public’s real purchasing power, most of which they will spend, especially given we’re in a cost-of-living crisis. As a result, in the short run, as the RBA has pointed out, the increase in aggregate demand from all of these subsidies puts upward pressure on inflation and interest rates.

The third and potentially most serious problem is that given the other huge public spending commitments, including for the Olympic Games, future governments won’t invest enough in maintenance and expansion to ensure a high-quality service.

Rates of cost recovery are very low in Queensland. Standard economics maintains that the ideal price to support continued investment, innovation and quality public transport services is to charge full cost recovery less the avoided costs of traffic accidents, traffic congestion and vehicle emissions. The ideal price in southeast Queensland should be well over 50 per cent of full cost recovery, given it has tolls all over the place and other means to reduce those three “negative externalities”. But we’ve never been close to that level and now, with 50c fares, cost recovery is close to zero.

Fourth, if 50c fares are expected to help achieve some state-based emissions reduction target, this hope may well be dashed. For one thing, our rail network is 80 per cent powered by coal- and gas-fired electricity. Similarly, shifting commuters from ever more emissions-efficient cars into hydrogen buses will have a negligible effect on total emissions if you consider the source of the electricity required to split water into hydrogen and oxygen via electrolysis. Additionally, while taking cars off the road reduces congestion in the short term, it will only lead to latent demand, inducing more cars onto the road and significantly reducing the emissions benefits of shifting to public transport.

The reasoning behind 50c public transport fares are flawed. Picture: John Gass

Fifth, under the National Competition Policy Agreement, it was agreed government-owned businesses would compete fairly with privately run businesses that don’t generally have access to $2bn annual subsidies. Uber drivers say business is already down, and private bus companies must also be feeling the pinch. This reduces private investment in otherwise viable commercial businesses.

Sixth, the reduction in public transport fares is ultimately capitalised into land prices of homes in areas where there are abundant transport options – the inner city. The distributional impacts of virtually zero fares are likely to be regressive, boosting the wealth of inner-city residents.

Last, the 50c price point is below the cost of providing the tap on-tap off infrastructure and supporting technology such as the TransLink app, credit card facilities and fare evasion monitoring infrastructure. Why not make fares free and get rid of the cost of tapping on and off?

Arguments that low, but non-zero, fares keep the derelicts and troublemakers off the buses and trains and, therefore, lowers the cost of fare evasion monitoring undermine the transport department’s first principle of a “more accessible, integrated and inclusive” system.

Some might argue the post-Covid reduction in public transport demand necessitates a fiscal boost. Others wish for a return to the vibrant Brisbane CBD pre-Covid. But this reasoning is flawed.

The decline in demand is mainly a result of the benefits of working from home in some industries, which saves people commuting time and money, and provides greater freedom and flexibility. Moreover, the reduction in CBD activity is at least partly offset by more in the suburbs. Cheap fares will not deliver back to the CBD workers who decide they are better off working from home in their pyjamas.

Joe Branigan is director of Tulipwood Economics