HS2: a magic money tree?

27 September, 2018

Unthinking populism has led some to put forward scrapping HS2 as a solution to worrying projections of economic losses from Brexit. ‘Here’s £50bn we could save and spend instead on (say) the NHS’.

But scrapping HS2 does not create a magic money tree.

Rather, it would be an act of extreme short-termism, signalling no belief in the future of the UK.

For a start, aborting the capital spend on HS2 means losing the stream of economic benefits it generates at roundly the rate of £2 benefit of every £1 outlay.

More reliable, quicker rail journeys, more capacity for commuters, fewer lorries on our motorways; fewer people travelling by car and air –  so fewer accidents, and less carbon; a huge stimulus for businesses to locate in Birmingham, Manchester, Liverpool, Preston, Crewe, Leeds, Sheffield, York, Darlington and elsewhere; a chance to re-structure services across the existing rail network – benefits that translate into higher productivity and a more balanced economy worth £100bn+ would all be foregone.

But that’s not all.

The belief that scrapping HS2 would provide the state with a magic money tree overlooks the fact that HS2 can and surely will be used to return a huge cash pay-out directly back to Treasury.

Just look at the experience with HS1 (the channel tunnel rail link, as was). Just two years after its completion, it was sold on a long-term concession to a major pension fund. At a stroke, HM Treasury recouped around 40% of the line’s capital cost. The pension fund is happy: it has a secure and reliable income stream from track charges levied on Eurostar and other users of the country’s only high-speed line to date, on which demand for train paths growing steadily, year-by-year. So much so, that it recently changed hands at a premium. And it doesn’t stop there. The concession is time limited, so 30 years on, it can be sold again, no doubt for a much higher amount.

Now compare HS2 with HS1. Rather than 2-3 international trains/hour and a handful of commuter trains for Kent (with half of the line’s capacity yet to be taken up), HS2 will start with 11-12 intercity trains each hour. The income prospect is much higher than with HS1, even on a per mile of route basis (the first phase of HS2 is twice the length of HS1). If a similar or equivalent approach is taken, much more than 40% of the Treasury’s cash outlay on HS2 could be returned by this route alone – and again, just a few years after its opening.

True, Government hasn’t said it will do this with HS2. It might favour another way of recouping its capital outlays on HS2. It might use the proceeds from HS2’s first phase to fund the second. It knows these options are bumper bonus opportunities for Treasury ten years hence.

Even this is only part of the fiscal bonanza. The economic stimulus from HS2 will have a whole range of tax implications. Higher productivity means more profit and so more tax, expanding employment, higher pay levels and so more tax income. Greater investment by the private sector to capitalise on the gains HS2 offers – and note, the development boom around Birmingham’s Curzon Street station has already started –  is likewise a source of extra tax revenue.

So yes, in a sense, HS2 will be a magic money tree once it is built. But scrapping HS2 would mean huge cash returns to Treasury as soon as the line opens will be lost.

© Greengauge 21