HS2: Should the Taxpayer Be Going Loco?

A recent study by the Institute of Economic Affairs (IEA), a free market think tank, has suggested that the cost of the proposed rail investment High Speed 2 (HS2) will be close to the £80 billion mark, nearly £40 billion more than the last government estimate. Does HS2 still have any economic rationale or is this ambitious investment rapidly running out of steam?

© Dotting

© Dotting

HS2 is a planned high-speed rail network that will create a route from London to Birmingham, with extensions to Leeds and Sheffield. The cost of building the rail link was originally projected at £32 billion but recent reports suggest this figure is wildly optimistic. Even if one accepts a conservative estimate, it is questionable whether HS2 will offer any value for money to the taxpayer.

Large-scale infrastructure projects are rarely financed by private capital simply because they aren’t commercially viable. The reason why HS2, and similar projects such as Crossrail, have been allowed to materialise is because of the external benefits they bring to society. The Government argues they will bring widespread returns to the country by increasing productivity in the economy and relieving pressure on the existing rail network.

The claim that HS2 will increase productivity seems a fairly reasonable one at first. People travelling on the new high-speed network will experience a much quicker service, with time savings from London to Birmingham, Manchester and Leeds in the region of 40%. However, the actual value of these time savings to the economy is less significant. As part of their cost-benefit analysis (CBA), the Government estimated that the value of time savings was £37 an hour, on the assumption that very little work gets done on train journeys. Needless to say this is completely ludicrous. Since the use of laptops, tablets and high-speed internet has become commonplace in trains across the country the opportunity cost of travelling by rail has gradually decreased. With this in mind the benefit of lower journey times is unlikely to create a major advancement in productivity.

The other primary justification for this huge investment is that it will relieve pressure on the existing rail network. HS2 will undoubtedly deliver a large increase in capacity with platforms at over 400 metres in length and trains able to accommodate 1100 passengers. However, such statistics divert attention from the core issue: whether or not these benefits outweigh the costs of building the network as well as the opportunity cost of the billions of pounds of taxpayer’s money. The short answer is no.

The Government has said that HS2 will generate £2 worth of benefit for every £1 invested. This calculation doesn’t take into account information from new studies, such as the IEA’s, which demonstrate that the cost of building the network has been massively underestimated. As the general election draws closer it is inevitable that the costs of building HS2 will continue to rise, due in part to environmental concessions being made on the route in order to satisfy local authorities and conservationists.

That aside, the opportunity cost is the most pressing concern. If we take the Government’s estimate of the cost of building HS2, it is still equivalent to 2% of the UK’s gross domestic product (GDP). This money could be used in more efficient ways, for example, lowering income and corporation taxes. Rather than targeting one particular area, reducing taxation will bring benefits to the whole of the economy through the creation of wealth and jobs, whilst encouraging investment and consumption. Furthermore, these impacts will be immediate and will not cost the taxpayer a penny.

It is true that the rail industry does need investment to increase its capacity, mainly due to overcrowding on the South East network and inter-city lines. However, HS2 is not the solution. The current rail market is organised so that if passenger revenues for train companies are more than 6% above their target, the government takes 80% of the extra revenue – equally the government makes up 80% of the extra revenue if takings are 6% below target. This system destroys the incentive for train companies to invest in extra capacity. The Government should let companies take more of the risk and reward of operating their services, which would then encourage investment into the rail industry without emptying the public coffers.

Whitehall must ignore the pressure from special interest groups and pull the plug on this enormously expensive project. Since the plan was first announced, the cost benefit analysis has deteriorated, leaving the economic foundations for HS2 crumbling. The Government will argue that the rail link will bring wider benefits to society but, as aforementioned, these benefits are either overvalued or heavily outweighed by the costs. There are other public road and rail schemes that will create jobs and relieve pressure on the railways without breaking the bank. Alternatively, the Government could let the free market decide where investment should go by lowering taxes and giving more autonomy to private train companies. It may be a bumpy ride but the sooner this project derails, the better.

  5 comments for “HS2: Should the Taxpayer Be Going Loco?

  1. Paul Marks
    Aug 26, 2013 at 11:13 pm

    At least the government is consistent – its monetary policy does not make sense (supporting an inflated stock market and property market with funny money), and its fiscal policy does not make sense either (supposedly trying to control government spending – whilst handing out blank cheques). As for transport policy – government is no better at transport priorities that it is at any other industry.

  2. Aug 27, 2013 at 3:04 pm

    Perhaps you could clarify if “autonomy” means building new lines?

  3. Aug 29, 2013 at 4:13 pm

    ‘Autonomy’ means that train companies would be being the incentive to build new lines, as opposed to the current situation where there is no reward to extending capacity. Paul:Yes, I quite agree. Consistency is one of their stronger attributes!

    • Aug 30, 2013 at 6:58 am

      So you would repeal the measures that (I read) require Parliament’s approval to open or close a line?

      Did you ever find the text of that measure though? I did try once and failed.

  4. Aug 30, 2013 at 8:32 am

    The autonomy I refer to is explained in paragraph 8 of the article. It’s about allowing TOCs to keep more of the revenue they earn when they run extra services. This will then encourage them to run more services where demand is high, relieving overcrowding without intervention from the government.

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