Economics of Independence

The hidden cost of the Union – HS2

High Speed Trains. Not coming to Scotland anytime soon!

High Speed Trains. Not coming to Scotland anytime soon!

Update: Victorysince the UK government has now been forced to admit that Hs2 will never reach Scotland.  The civil servants who compile the GERS report have confirmed to Business for Scotland that they will now refuse to accept any contributions to the cost of Hs2 on Scotlands behalf.

Original article > How do you feel about the people of Scotland having to stump up £4,771 million pounds for a transport project that not only comes nowhere near Scotland, but offers absolutely no economic benefit to our economy at all?  An even better question might be: if you had £4,771 million pounds to spend on Scotland what would you spend it on?

I will not bore you with a long list of my worthy projects that you could use that money for, many of which you could come up with yourself, but I will suggest one that you wouldn’t spend it on.  I suspect that precious few people in Scotland would spend that much Scottish money on building a high speed train link which doesn’t come anywhere near Scotland.

The UK Government has approved plans to build HS2, a £48.2 billion pound high speed train service between “London and the North of England”, their words, although it will actually go to and from London and Manchester/Leeds. Given I was brought up in Hexham in Northumberland, Manchester is not even the North of England to me nor indeed many Northern England voters! It was originally supposed to come to Scotland and the Scottish government hopes it still will but it was deemed to expensive and may not happen in our lifetimes.

With an original estimated cost of £25.7 billion the cost of HS2 has ballooned to £48.2bn and Scotland will have to supply nearly 10% of the cost out of our budget, but why?As you know, the Scottish Government doesn’t collect the revenue of Scotland (yet). The UK Treasury does, the Chancellor then sets the spending priorities, and his officials work out how much will be spent in England before allocating a percentage of that spend by population size to the other home nations. Due to the more rural/less sparsely populated areas in Scotland, Wales and Northern Ireland, the costs of infrastructure and maintenance can be higher per head and so a system called the Barnet Formula adds a small bonus to the devolved budgets.

The Barnett Formula however takes no account of the much higher tax revenues per head generated in Scotland (about £1700 per year higher than the UK average).  The net result is that Scotland, which generates 9.9% of UK taxes and only receives 9.3% of UK spending, subsidises the UK and has done so over the last 30 years.For major infrastructure projects like HS2 the formula assumes that the benefits come equally to Scotland (which is clearly not the case) and we should therefore be allocated a share of the costs. The result is that the money is spent in the South and no corresponding additions are made to the Barnett Formula to compensate Scotland”

So when the UK Government spends £48bn on a train line from London to Manchester and Leeds, Scotland has to contribute approximately £4,771 million pounds for high speed trains that not only come nowhere near Scotland, but deliver absolutely zero economic benefit to the Scottish economy at all.  In essence, the HS2 project sums up the hidden price that the Scottish people pay for remaining part of a broken political system called Westminster and a political-economic model across the UK which requires substantial reform.

But does HS2 add up to a good investment at all?

I am all for infrastructure investment and firmly believe austerity is slowing demand even more in the middle of a demand crisis. However, we need infrastructure investment that adds to GDP, and so the return on investment (ROI) is a crucial criteria for selecting the right projects in lean times like these. In this respect, the UK Government has justified the HS2 investment on the economic benefit. In addition to the associated employment in London, the South East and the Midlands, they have also worked out the benefits of shorter journey times for business commuters.

In my view, however, their model for calculating ROI is flawed. The UK Government calculates the minutes saved in traveling times for business travellers and assumes this translates to economically productive business time.  I doubt that will prove the case, not least because people will spend more time with their families at each end of the commute. The calculation assumes you can take the average earnings per minute of a UK intercity business traveller and then multiply the minutes saved by the estimated amount of people expected to use the service. Again, I think that’s debatable.

The huge problem is that this calculation assumes that business people travelling by train are not productive. I recently worked on a train with free wifi on my way to Manchester. I managed to get through a power of work, without the usual interruptions.  The other problem is that most business travellers are salaried and so don’t earn any less for a day at their desk versus a day travelling and so there is no direct financial benefit from spending less time on the train.

Ten years ago, before my 3G phone could be used as a wifi hotspot and when laptop battery power was far more limited, I would have paid a lot to knock an hour off my journey, but not necessarily nowadays.  So how did the UK Government work out the amount of people willing to pay to travel on HS2?  They did it by taking a 2003 business traveller survey and updating it for inflation, a survey from ten years ago.

In this context, the National Audit Office (NAO) reported earlier this year that “the economic benefits of the HS2 project are unclear”. They also reported that they had “reservations” about how the planned high-speed rail link would deliver growth and jobs. They also stated that project had an estimated £3.3bn funding gap.

Taking all of this into account, there seems to be little economic justification for the project even for travellers who can use the service. And we know there is absolutely none for Scots business travellers who probably wouldn’t choose to switch trains halfway, and if they wanted to get to London quickly would probably fly, or use the East Coast rail link anyway. Yet Scots are paying a massive financial contribution to this project under the current constitutional settlement.

I have travelled on high speed trains all over Europe. A long journey across Germany last year was so fast and easy it was an eye opener to how poor our own system has become. However, the answer is not HS2 which represents a £48.2bn expense (let’s see if it stays within budget) in an economic downturn when capital spending is being cut disastrously elsewhere in the UK. Far from bringing any real economic benefit to Scotland, given the high contribution we have to make, it will actually restrict Scotland’s ability to boost our economic competitiveness, including transport, broader infrastructure and connectivity projects north of the border.

So why does the UK Government want HS2 so badly?

This question really stumped me at first, especially when you consider that the line goes through several marginal Tory constituencies where its construction is quite unpopular but the answer came from a surprising source. I am just back from two weeks in Turkey where I visited the incredible Roman ruins at Ephesus . The guide (in faltering English) explained that “the streets were paved with red and green marble, the most expensive available in Aisa Minor at that time”. One of my party asked “why go to all that expense” and she replied “not just in Roman times but to this day also the political classes like to show off, no?”

The question for the UK should’t be what our politicians want to do, but rather what our economy and our people need and want.  I’m not sure Scots are keen on showing off or investing Scotland’s hard earned revenues in expensive white elephant projects like HS2, maybe thats our canny side?. If we want maximum economic and social benefit from our own hard earned cash, then we need decision making in the hands of the Scottish people to set a fairer, more enlightened, more relevant, less egotistical and more enlightened approach to infrastructure investment.

I ask again, what should £4,7771 million be spent on? Following a Yes vote next September you will live in a system of government where you have much more influence over the answer. Scotland’s future in Scotland’s hands.


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Further Reading

HS2 rail benefits to economy ‘unclear’, says National Audit Office 
High-speed trains to be hit by Scots delay | Herald Scotland
Eddington Transport study – HS2 low priority for investment 

About the author

Gordon MacIntyre-Kemp

Gordon MacIntyre-Kemp is the Founder and Chief Executive of Business for Scotland. Before becoming CEO of Business for Scotland he ran a small social media and sales & marketing consultancy.

With a degree in business, marketing and economics, Gordon has worked as an economic development planning professional, and in marketing roles specialising in pricing modelling and promotional evaluation for global companies (including P&G).

Gordon benefits (not suffers) from dyslexia, and is a proponent of the emerging New Economics School. Gordon contributes articles to Business for Scotland, The National and The Huffington Post.


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