‘Fallacies and Misadventures in Blunderland’: the HS2 case

Article by John Burton. Originally published on the IEA blog: ‘Fallacies and Misadventures in Blunderland’: the HS2 case, and reproduced by permission.

The recent IEA evaluation of the High Speed 2 project has presaged much further criticism of this serious misadventure. A former Transport Secretary/Chancellor, Alistair Darling, has described the scheme both as foolish and a potential fiscal nightmare. The Institute of Directors (IOD) – drawing upon a large-scale survey of its own members – has also labelled the project as a ‘grand folly’ and called for it to be abandoned. Much other commentary – far too much to even list – has concurred in such negative evaluations.

But what has been the response of the government’s PR machine(s) to these critiques? Initially, some Treasury insiders said, off-the record, that the cash costs of this project would be far higher than the official figure; but this disclosure was quickly stamped upon by the Chancellor’s PR mouthpieces, who reiterated the (now- standard) government mantra that HS2 is ‘a crucial project for our future prosperity and growth’. Simultaneously, the Department for Transport (DfT) issued the response that: ‘HS2 is absolutely vital for this country, providing a huge economic boost that will continue paying back for generations to come’.

This is a seriously erroneous statement, in (at least) three major ways. Firstly, it is utterly inconsistent with the DfT’s own (!) evaluation of the (supposed) economic case for HS2, in which it was exposed that there just might be some argument for HS2 (on Treasury criteria regarding Value for Taxpayers’ Money – VfM) if we can confidently assume that the growth rate of UK GDP will be 2.5 per cent per annum, over an extremely long time period/for decades to come. This is a ‘magic-by-growth-assumption’ fallacy. We should not make this (extremely optimistic) assumption; we need to make sensible assumptions.

Secondly, the DfT’s VfM estimation techniques have been (rightly) held in much ridicule. It is not possible to recount all of the problems involved here; but one (absolutely chronic) matter requires special mention: the DfT valuation of ‘business traveller benefits’ from the HS2 scheme. According to the DfT’s ‘economic case’ evaluation, businessfolk do absolutely no work on intercity trains! …and its ‘case’ for HS2 rests, preponderantly, on this crucial assumption; but, as the IOD survey emphatically shows, this is seriously wrong.

Thirdly, it has to be emphasised that, in presenting the supposed ‘economic case’ for HS2, what the DfT has actually done is to present a (flawed) VfM appraisal. The ‘costs’ they identify are only the (projected) ‘net exchequer costs’; which are not the same thing at all as the true/economic/opportunity costs of the scheme.

The true economic cost of the HS2 scheme is the returns on the investments foregone by this ‘very considerable’ diversion of £50bn/80bn (?) of public infrastructure monies into this one ‘biggie’ project. It means that the UK will have to forego the alternative of providing those funds for a multiplicity of genuinely high-value infrastructure projects (on VfM, and other, appraisal criteria). As the IEA study argues, these opportunity costs are likely to far exceed the direct costs of the project. And, by crowding-out (in the public budgets) these many (less well-hyped, smaller/ less grandiose) higher-value infrastructure projects (in rail, road, and other infrastructure), it would be inescapably the consequence of HS2 that the UK’s economic performance would be dissipated and reduced.

The ‘case’ for HS2 has been jerry-built on a dire combination of statistical deceit, economic fallacy, and special-interest group pleading (which the IEA paper details studiously). This is, unquestionably, a classic case of (what I call) ‘Alice-in-Blunderland’ economic policy-making.

But there is a question niggling in my mind. In other contexts — for example, The City/markets for financial products – the ‘authorities’ would by now be examining/prosecuting the producers of this sort of (ludicrous) economic guff, for mis-selling. It appears, in this case (HS2), however, that it is the ‘authorities’ themselves (the DfT and ‘HS2 Ltd’: the latter is not a private limited company; it is a 100 % taxpayer-financed quango) who have been the fons et origo/producers/sponsors of the said economic guff! And who is going to prosecute them, I wonder, for misrepresentation?