Today has brought two of our themes into focus as we have an opportunity to see a real world example of fiscal expansionism and rampant inflation in action. So let us get straight to it via the Financial Times.
The cost of Britain’s new HS2 high-speed rail project could rise to as much as £106bn, according to an official government review which gives only lukewarm backing to the project. The review, seen by the Financial Times, says there is “considerable risk” that the scheme’s price will rise as much as 20 per cent beyond the £81-£88bn range set out in a report by the current HS2 chairman Allan Cook last September.
Both our themes are in play here because if we look back to July 17th 2017 on here we raise fears of a type of pork barrel politics and inflation.
But critics say the £56bn project will damage the environment and is too expensive.
So it is on its way to being twice as expensive and at the current rate of increase that may not take too long. Back in 2017 I expressed my concerns about the danger of this.
Actually more and more doubts are emerging over the final cost. From The Independent. The HS2’s first phase between London and Birmingham will cost almost £48bn, according to expert analysis commissioned by the Department for Transport (DfT).
Even what seemed eye-watering numbers back then are being exceeded. Also there is the issue of what we might get from it.
That highlights two problems. If we start with costs then if this report is accurate we will have the most expensive railway in the world at £1.25 billion per mile on the first bit from Euston to Old Oak Common. The next is that by 2026 if everything is on time we will only have a new railway to Birmingham which is way short of the “Northern Powerhouse” promises. Assuming that the bits to Leeds and Manchester are eventually built will it all be out of date by then?
The latter sentence echoes as I read this bit in the FT.
and then to Leeds and Manchester by 2040, seven years later than the original target.
That is rather a toxic combination of costs ballooning and any benefits receding into the distance. At that speed it could be obsolete before it ever opens. We of course knew that this would happen because back in July 2017 we got an official denial and we know what that means!
Mr Grayling told the BBC’s Today programme that the high-speed rail network will be “on time, on budget” and the government has “a clear idea of what it will cost”.
Where do we stand now?
The review seems to have lost the faith.
The review led by Doug Oakervee, a former chairman of HS2, also recommends that work on phase 2b of the project from the West Midlands to Manchester and Leeds be paused for six months for a study into whether it could comprise a mix of conventional and high speed lines instead. “On balance”, it says that ministers should proceed with the 250mph railway, which would stretch from London’s Euston station to Birmingham in its first phase and then to Leeds and Manchester by 2040, seven years later than the original target. But although the final draft of the review recommends that the project should proceed, this is subject to “a number of qualifications,” it says.
In the coded language of an official review ( after all those doing the review are usually chosen to give the answer required) this is really rather damning. The idea of a 250 mph railway seems attractive but it is also true that there are doubts about whether it can achieve what is promised.
It points out that no other high speed line in the world runs 18 trains per hour and recommends reducing it to 14.
Also if this was a football match the crowd would be chanting “You don’t know what you’re doing” in the background.
There are also concerns over the project’s management with more scrutiny needed from the Treasury, and its Infrastructure Projects Authority, as well as the Department for Transport. “The review has not seen convincing evidence that HS2 Ltd, especially the phase one construction team, have the level of control and management of the construction normally associated with major projects,” it says.
So we have costs out of control, the results seeming less and less likely all of course oiled by incompetent management in some sort of replay of the UK’s problems in the 1970s.
Meanwhile I notice @hancocktom on twitter has provided an international perspective.
Using the upper bound of the World Bank’s estimate of costs per km, in China a line of the same length would cost £3.7bn at market exchange rates……..(thats for the 225km phase 1, phase 2 would cost about $8.5bn in China).
Smart Meters
This is another area of waste. In fact the relative level of waste is even higher. The principle sounds good but offers so little over merely checking your bill if you have concerns. Then sadly it gets worse. From the BBC last September.
Nearly a third of all energy companies fitting smart meters are still installing old technology…….
However, eight companies still installing first generation smart meters say the network is not reliable enough to switch customers on to.
In fact the first range of Smart Meters were really rather dumb.
The second generation of meters is supposed to be able to connect remotely to a national network, which should make switching supplier possible, for the first time for many customers.
Aircraft Carriers
I follow various military blogs and what is clear from them is that not only were the 2 large aircraft carriers for the Royal Navy very expensive they bring a lot of extra costs with them. The obvious ones are the aircraft which are very expensive but there are others around the escorting ships. It is an area where HM Treasury should hold its head in shame because not only were the aircraft carriers more expensive due to the way it delayed the project, the carriers will be escorted by “£1 billion” destroyers because in doing the same to the Type 45 destroyer project it raised the costs there too. We could probably have had 8 destroyers rather than the 6 we ended up with for the same total.
It is a familiar theme of grand designs which overrun and then end up not reaching their goal as we may never sail them with a full complement of aircraft.
Comment
Let me start with the inflation issue as it is unlikely to get much of an airing elsewhere. Public spending has a big problem with inflation as they are usually valued on what is spent not what you get and an example is the “£1 billion destroyer”. But there are many other examples simply because by its nature ( free education. free NHS) there is no price for us to measure. Also there is often no measure of output. Thus a £106 billion HS2 sounds initially better than a £56 billion one when in fact it shows rampant inflation! If you look through the public-sector you see that the inflation measures are frankly like waving a finger in the air.
Next comes a theme of the times which are the calls for more fiscal policy with central bankers in the van. It is historically cheap ( the UK 50 year Gilt yield is a mere 1.08%) leading to support for their suggestions. However the examples today show cases where not only is money wasted but via the mechanism in the previous paragraph it is claimed to be real growth when it is not. This is exhibited in a reply to the FT by Saccharine.
Public infrastructure projects are not like a general consumer building an extension to their house.
“Overspend” doesn’t mean the money vanishes into oblivion like so many would have you think; it is wealth that cycles back into the economy through the salaries of those working on it.
What could go wrong?
Even worse there is this as the FT puts on its establishment trousers.
Despite the caveats, the report warns there are no alternative “shovel-ready” projects ready and that, with £8bn spent so far, it should proceed.
Perhaps they are fans of Arcade Fire.
If I could have it back
All the time that we wasted
I’d only waste it again
If I could have it back
You know I would love to waste it again
Waste it again and again and again
There is a move in the UK to send more public spending to the North which links at least in theory with HS2 but we have been there before as Yes Prime Minister satirised back in the 1980s. Here is the Chief off the Defence Staff on the army being based in the North.
I suppose other ranks, junior officers, but you can’t ask senior officers to live permanently in the north! The wives wouldn’t stand for it for one thing.
What about Harrods? What about Wimbledon? Ascot? Henley? The Army and Navy Club? I mean civilisation, generally! It’s just not on!
RIP Derek Fowlds
Podcast
https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast61
Notayesmanseconomics's Blog 