(… continued from Let’s be courageous, part 21, posted on 28 Nov 2016).
In the heading of the final section of his briefing paper, Rich man’s toy: The case for scrapping HS2, Taxpayer’s Alliance Policy Analyst, Harry Fairhead, poses the question, “Is our current approach to infrastructure spending coherent?”. Mr Fairhead comments that attempts over recent years to reduce the budget deficit appear to have been largely to the detriment of capital spending, and that “since the early 1990s, current expenditure has outstripped investment by around £9 to £1”. His conclusion, and one that is shared by many economic commentators, is that we in the UK “appear to have underinvested in infrastructure”.
Judging by the autumn statement that the new Chancellor of the Exchequer delivered to the House of Commons last month, the Government agrees. The Chancellor confirmed that he has ditched the plan to run a budget surplus by the end of this current parliament and “prioritise additional high-value investment, specifically in infrastructure and innovation”. The thinking is that this investment will “directly contribute to raising Britain’s productivity”. The Chancellor explained that this infrastructure will be funded “in the short term from additional borrowing” (see footnote 1).
The strategy is, on the face of it, a simple one. A loosening of the austerity yoke, at least in a rather modest way in one area of government spending – the squeeze is still firmly applied when it comes to revenue spending – will generate economic growth, which will bring in taxes that will contribute positively to the budget in future years. But this does not mean that profligacy can be encouraged: as Mr Fairhead points out the acceptance that “we appear to have underinvested in infrastructure … does not, however, make any project inherently worthwhile”.
The other factor that should be taken into account is that investment in infrastructure is not all win, win; there are future revenue costs associated with such investment that will offset any gains that increased economic activity will bring. The debt incurred will require to be serviced, a charge to be met from the revenue budget in future years. In addition, the use of the infrastructure may generate maintenance and operational costs that are in excess of any direct income generated: a railway scheme, such as HS2, is an example of the type of infrastructure investment that may require an ongoing subsidy call on the revenue budget.
The spearhead of the Chancellor’s announcements aimed at improving the UK’s infrastructure and, in consequence, its productivity is a £23bn National Productivity Investment Fund, “to be spent on innovation and infrastructure over the next five years”. The Chancellor identified a number of areas where investment will be channelled: research and development; housing; transport; and digital communications (see footnote 2). I feel sure that this new fund is to be welcomed, but its significance is perhaps best assessed by reflecting that it represents funding that is less than a half of the budget agreed for HS2.
As Mr Fairhead reminds us “HS2 is expected to cost a very large amount of taxpayers’ money” and “there may be better uses for it” since HS2 represents “relatively poor value for money”. No doubt some of those better uses will be competing for the funds available from the National Productivity Investment Fund.
Although the Government appears convinced that improving transport infrastructure will lead to productivity increase and greater economic activity, the House of Lords Economic Affairs Committee (EAC), following its very thorough inquiry into HS2, remained unconvinced (see footnote 3):
“Evidence we have heard shows that investing in transport infrastructure does not necessarily lead to economic growth. Improvements in transport infrastructure need to be carefully chosen and linked with other policies to ensure that money is spent where it can be most effective in stimulating growth.”
The EAC also found that the Government had failed to demonstrate that “HS2 is the best way of stimulating growth in the country”, nor had it “considered the opportunity cost of spending £50 billion at 2011 prices on this single railway” (see footnote 4).
Both Mr Fairhead and the EAC also raise a question of the morality of spending such a huge sum on, as Mr Fairhead puts it, “enhancing the lives of some of the richest people in the country” (see footnote 5).
In part 1 of this blog series I suggested that an independent review of HS2 was called for and cited Mr Fairhead’s briefing paper as “a good starting point on which to base a critique”. I hope that over this long series I have provided added value to Mr Fairhead’s excellent essay and have convinced you that, as the clock is ticking down on Royal Assent for Phase 1, the need for such a review has become extremely urgent.
After all, the EAC saw the need for the Government “to [re]examine the case for HS2” counselling that (see footnote 6):
“There should be no embarrassment in being prepared to revise the project: the objectives and cost are too important.”
If you agree with Mr Fairhead, the EAC and me, please sign the petition calling “on HM Government to commission an independent technical review of every aspect of the HS2 scheme “
- See columns 901 and 902 of the House of Commons Official Report for 23rdNovember 2016.
- See columns 902 to 904 of the House of Commons Official Report for 23rd November 2016.
- See paragraph 247 in the report The Economics of High Speed 2, House of Lords Economic Affairs Committee, 1st Report of Session 2014-15, March 2015.
- See paragraphs 7 and 8 in The Economics of High Speed 2.
- This issue is addressed in paragraph 70 of The Economics of High Speed 2. I first raised the matter more than five years ago in my blog It’s just not fair (posted 11 Apr 2011).
- See the Summary on page 5 of The Economics of High Speed 2.