Dr Richard Wellings: High Speed 2 is a flawed project

Dr Richard Wellings is Deputy Editorial Director at the Institute of Economic Affairs.

Earlier this week, in a piece for ConservativeHome, Karen Lumley MP launched an astounding attack on the IEA’s latest research paper, High Speed 2: the next government project disaster? Her article was astounding firstly because it failed to to address the detailed criticisms of HS2 set out in our analysis, and secondly because in places it parroted almost verbatim a briefing released by the ‘Yes to High Speed Rail’ campaign.

Contrary to the assertions of the high-speed rail lobby, our study shows that the economic case for the proposed scheme is very far from robust. Indeed, we conclude there is a high risk that HS2 will be the latest in a long line of government big-project disasters with higher-than-forecast costs and/or lower-than-forecast benefits.

The list of failed schemes includes the Channel Tunnel Rail Link (now known as High Speed 1), where passenger numbers after completion were only a third the level estimated at the planning stage. The line was uneconomic and most of the capital costs had to be written off – at huge expense to taxpayers.

HS2 is also uneconomic, of course. On a commercial basis it will be hugely loss-making, since the costs will far exceed the revenues – hence the need for such enormous subsidies. And the bulk of the financial risks will be borne by taxpayers, who will be forced to fund the scheme whether or not they use the train services. The main beneficiaries will be a fairly small number of relatively wealthy rail travellers, including long-distance commuters subsidised to make even longer trips, while the costs will be dispersed across the tax-paying population of the UK.

As with HS1, the case for HS2 is based on very high estimates of future passenger traffic. If passenger numbers are lower than expected, the bill for taxpayers will be even larger. And there are further flaws in the economic case.

One of the most ridiculous assumptions is that business travellers are unable to engage in any productive work on the train. In an age of laptops and mobile technology, this is clearly implausible. Yet it forms the basis of the time-savings estimates that are used to justify HS2.

The impact of competition on passenger numbers has also been neglected. When HS2 opens there will be spare capacity on the existing West Coast Main Line (WCML). Indeed, existing stations on the WCML – such as Birmingham New Street - are likely to be more convenient for many travellers than the new HS2 stations. Competition from alternative routes is likely to put downward pressure on both passenger numbers and fare revenues on HS2. Taxpayers will once again be on the hook for any shortfall.

There will also be serious cost implications from the decision to terminate the proposed line at Euston. Just under a quarter of the construction costs of the London-Birmingham route will be spent on the five miles from Euston to Old Oak Common, a total of about £4 billion. Worse still, the Underground station is already overcrowded at peak times, while the Northern Line and the Victoria Line are among the most congested on the entire Tube network. Realistically, the problem of passenger dispersal at Euston will require further investment in expensive infrastructure, whether a new Underground line or a Crossrail 2 link. The Treasury should be extremely concerned about the wider implications of HS2 for public expenditure, particularly in the context of extremely high levels of government debt.

Policymakers should also be highly sceptical about the wider economic benefits claimed for high-speed rail. While certain areas will undoubtedly benefit from a large injection of taxpayers’ money, there will be wider economic losses from the additional taxes needed to fund the scheme. It is well known that higher taxes destroy wealth – by reducing work incentives and hampering investment, for example - yet this has not been factored into the government’s assessment of the wider economic impact of HS2. Lower taxes and less regulation would do far more to regenerate the North of England than a hugely expensive rail line.

Before even considering spending £34 billion on high-speed rail, the government should be addressing the enormous burden already imposed on taxpayers by existing rail subsidies, which totalled at least £5 billion in 2010. Unless these subsidies are phased out, together with price controls and other distortions, the real level of demand on the railways cannot be determined and, accordingly, resources are likely to be misallocated. If HS2 goes ahead, taxpayers will be punished for the government’s failure to expunge socialist economics from Britain’s transport sector.