Paxo stuffing, part 5

(… continued from Paxo stuffing, part 4, posted on 23 Jun 2015).

My discussion of the letter sent by Sir David Higgins to the Financial Times has reached the fifth sentence.

Sir David says:

“HS2 will help relieve the housing, commercial property and transport pressure on London whilst improving connectivity, and therefore productivity, in the Midlands and the North.”

I say:

The HS2 Ltd Chairman has made similar claims before, and has provided a little more, but not much, in the way of justification. The report of an interview that he gave to the Sunday Times (see footnote 1) explains:

“A new rail network, including HS2 with its 250mph trains, is vital, Higgins argues, because it will help ease the pressure on London’s ‘overheated’ economy by encouraging some of the companies concentrated there to move to ‘underperforming’ northern England.

“The scheme, which links London to Birmingham and then cities further north, would unlock the ‘massive’ amount of available brownfield land in Leeds and Manchester for house-building, which would help tackle the country’s chronic housing shortage.”

In identifying HS2 as an instrument to encourage business relocation out of southeast England Sir David is relying on one of the main assumptions underlying the infamous KPMG report. In fact, this report has been criticised for, as is admitted in paragraph 5.3.2 therein, making “the implicit assumption that transport connectivity is the only supply-side constraint to business location”. Now, whilst I am prepared to accept that good transport connections will be on the decision list of any businessman considering the relocation of his business, I am pretty sure that there will be other items on that list, some of which might even carry more weight than easy access to a high-speed rail link. The KPMG report even admits that there “could be other constraints”, and identifies the “availability of skilled labour and land in a given location” as two of these (also in paragraph 5.3.2).

The simplifying assumption of ignoring all constraints on business relocation other than the quality of transport connectivity is, I feel, a major shortcoming of the KPMG analysis and, inevitably, means that the economic stimulus that HS2 will bring has been overestimated by that work. Notwithstanding, it seems reasonable to assume that HS2 will stimulate the economies of the Midlands and the North, the only doubt being how significant the effect will be.

Sadly, this fairly supportable prediction is not enough for Sir David. He feels the need to boldly stride out onto the thin ice and predict that business relocation out of the southeast of England will be sufficient to take some of the fire out of that region’s “overheated” economy. In making this claim he seems to be ignoring the stimulus that HS2 is likely to bring to the south-eastern economy – even the KPMG report concedes that “Greater London does well” out of HS2 (paragraph 5.3.1) – and the huge momentum of that economy that appears to be such a barrier to other regions keeping up. Some economists have even predicted that the north-south divide will continue to increase despite HS2 (see footnote 2).

In its report The Economics of High Speed 2 the House of Lords Economic Affairs Committee (EAC) even contemplates the possibility that HS2 could actually make the situation worse (paragraph 277):

“We heard evidence that London was likely to be the biggest beneficiary from HS2. This has been the case with similar projects in other countries where the largest cities have benefitted the most, including in France where Paris was the biggest beneficiary from the TGV. This does not mean other cities may not receive some economic benefit from HS2, which could stimulate growth and play a role in rebalancing the economy if coupled with appropriate policies to foster economic growth.”

Aside from whether business relocation resulting from HS2 will prove to be the relief to pressures on development land in the southeast of England that Sir David Higgins predicts, there is another economic mechanism associated with HS2 that could have some impact on housing demand, and that is long-distance commuting to and from London. I will take a look at that in my next posting.

(To be continued …)


  1. The article was published on 26th October 2014, but is behind a paywall. I have not been able to locate a free-access version of the article.
  2. For example, see the written evidence submitted to the Lords EAC inquiry The Economic Case for HS2 by Professor Mike Geddes (pp 279-286).

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