The Impact of the Cancellations of HS2: A missed opportunity or the right decision?

By Adesola Odeyemi - Nigeria 

Introduction 

With the rapid growth of the economy in the early 2000s, HS2 emerged as a significant rail project with an estimated cost of £110 billion. It aimed to improve transportation links between London, the North of England and the Midlands. Introduced in 2009 by the Labour Party, the project sought to increase capacity and enhance connectivity between major cities across England, addressing the challenges of labor immobility within the economy. Initially, David Cameron strongly advocated for better connections between Leeds, Manchester, and London. The plan included running 18 trains at speeds of up to 224 mph, reducing travel time between London and northern cities from six hours to just one. This dramatic reduction in journey times was expected to have a significant impact on job creation, regional development and the broader macroeconomy through infrastructure investment. 

High-speed railways are considered the greenest, safest and most efficient form of travel, especially in a growing economy with increasing demand for transportation and a pronounced geographic divide. The construction of HS2 represents a major government investment aimed at improving connectivity between key cities, enabling faster and more efficient movement of people and goods while reducing travel times by more than half in some cases. The government initially estimated that HS2 would cost £35.7 billion in 2009; however, this figure has risen to an astonishing £108.9 billion in today's prices. Many other countries have benefited significantly from high-speed rail networks. For example, France’s TGV (Train à Grande Vitesse) grants better accessibility to Paris and to and from France’s major cities like Lyon and Marseille. However, compared to HS2, TGV only cost France €4 billion. TGV has demonstrated its success in transportation in France, significantly boosting the French economy. The total revenue of France’s railway company amounted to over €41.5 billion. 

Effects of cancellation

Recently, however, Rishi Sunak made the call to scrap the Northern leg of HS2 in October 2023, with many people questioning how the project will sustain itself without it. This only comes 2 years after the government scrapped the Eastern Leeds part of the project in November 2021. The primary reason for this was the significant increase in the cost of HS2, which exceeded initial estimates. The government plans to use this money elsewhere as the opportunity cost of such a venture is so high. Sunak emphasised North England needs better regional connectivity rather than improved connectivity to London. Therefore, he argued that the £36 billion would be better spent on new transport projects nationwide. From a macroeconomic point of view, enhanced connectivity can boost business opportunities, attract investment, and support regional development. Also, this will perhaps focus more on the firms and how they make decisions when allocating resources. For example, this may rely on tourism, innovation, and many more. London serves as a prime example of how efficient transport connectivity can boost economic growth. The city has consistently been far wealthier than other major cities in England, partly due to its well-developed transport system. This has enabled businesses to access a larger pool of labour, customers, and suppliers, leading to overall economic expansion with the help of other factors.

Furthermore, the positive relationship between wage rates and the quantity of labor supplied suggests that as economic activity increases and connectivity improves, individuals often experience wage growth - one of the key benefits HS2 aims to bring to Northern England. Given this, the government's decision to scrap a crucial part of the project raises important questions.

A cost-benefit analysis helps assess the economic value and viability of such investments by considering both financial and social returns. Initially, HS2’s benefit-cost ratio was estimated at 2.3, classifying it as a medium-value investment. However, by 2017, this figure had fallen to 1.5, likely due to escalating project costs. Since these ratios are based on projections, the actual economic impact could be higher or lower, as certain wider economic benefits remain difficult to quantify. This limitation mirrors the concept of “information failure” in microeconomic analysis, highlighting flaws in the methodologies used to assess large-scale projects.

Conducting cost-benefit analyses presents challenges, as they require estimating both private and social costs and assigning monetary values to them—an inherently complex process. The valuation of external costs and benefits is particularly problematic, as certain aspects may be underestimated, overlooked, or even omitted entirely. For instance, a report by KPMG estimated that HS2 would contribute a 0.8% boost to economic growth, but it faced criticism for failing to account for multiple project components and external factors. This underscores the difficulty of accurately assessing the long-term impact of large-scale infrastructure projects. Despite these challenges, cost-benefit analyses remain one of the best available tools for evaluating projects that require substantial investment.

In-depth cost-benefit analysis

The transport user benefit of the reductions in train journey times is estimated to be £77.5 billion. This includes valuing times saved by businesses, commuters, and leisure travelers from faster train journeys. A survey taken in 1994 put a value of £6.04 for each hour of travel time saved per person. The shorter journey times free up time that can be used in the workplace, increasing productivity. However, if further research seems to find that people can work as effectively on a train as in their place of work, then the benefits of HS2 in this case can be significantly questioned. Furthermore, with the amount of people nowadays having the opportunity to work from home,  the benefits of HS2 will be much lower than the current estimate. This can all link back to the idea of agglomeration, which refers to the advantages of connectivity between firms, opening opportunities for more effective integration and trading. This cost-benefit of agglomeration is estimated to be £13.7 billion. Many of these benefits will be lost with the cancellations causing slow economic growth. This is because as more firms in related fields of business cluster together, their production costs decline significantly.

Similarly, ideas move from person to person in urban spaces, as words are spread quickly and efficiently in cities. In the book ‘Triumph of The City’ by Edward Glaeser, he described the movement of information as ‘one smart person met another smart person and sparked a new idea’. This is very crucial for economic development, as new ideas are what will make a revolution or a great invention. In London, there are over 9 million people. However, for many of the major cities in Northern England, there are nowhere near as many people as in Leeds there are just over 500,000 people and around the same in Manchester. This is due to the drastic industrial decline in the north compared to the south, which is why this sense of connectivity and closeness is so important. As there are so many people in London, perhaps in the same line of work, ideas are bounced back and shared, boosting the economy. However, as it is proven difficult to travel around cities in the north, the chances of these concepts being shared are slim. As I mentioned, Sunak has proposed using cancellation fees on smaller rail services throughout northern England. Many see this as a positive economic investment, and many question whether access to London is more important than better connectivity within smaller areas. This for example, means that instead of connecting Liverpool to London, the government should use the proposed money to enhance the transport and rail links in the Liverpool, Sheffield, Leeds, and Hull areas between 2029 and 2040. This is a very positive aspect of the cancellations and something people think is better than the original plans. From an economic point of view, this could stimulate economic activity and have similar or even better effects than HS2.

External Costs and Benefits 

An external cost or benefit is an indirect cost or benefit to an uninvolved party that arises from another party's activities. Through the construction of HS2, multiple external costs will affect the wider community. This includes environmental mitigation, which is the cost of environmental conservation efforts such as creating new habitats, planting trees, and other landscaping activities to mitigate the environmental impact. From building a railway, things like sound pollution and noise pollution are prominent in such a large-scale project like HS2. 

Multiplier effect 

These significant government investments will lead to the multiplier effect. This refers to the process when an initial increase in government spending leads to a larger increase in the overall GDP. This is an idea that John Maynard Keynes looked at in depth. He discovered that during times of economic downturn, government spending can help to stimulate an economy to upturn and grow. When the multiplier effect occurs, people’s incomes increase, meaning they have more disposable income and are more likely to spend more. This leads to increased demand and income for workers, and this chain will increase economic activity and growth. However, the size of the multiplier depends on multiple factors, such as the marginal propensity to consume (MPC). This is the proportion of income people spend instead of saving, which depends on consumer confidence driven by other macroeconomic indicators such as inflation. A lower marginal propensity to save implies a more significant multiplier effect. However, this advantage will be significantly reduced with the proposed cancellation of a large section of the railway, as the level of the multiplier effect will be limited. This once again highlights the negative economic impacts of the cancellations. Nevertheless, the economic benefits of the multiplier may shift to areas where Rishi plans to implement smaller rail services. Similarly to assessing the advantages of building HS2, a cost benefit analysis will need to be conducted to determine whether this diversion of funds represents a more efficient use of resources. 

Opportunity cost analysis 

As I have discussed the various advantages of the building of HS2, one must also consider the opportunity cost of government spending. Opportunity cost refers to the value of the next best alternative forgone. In this case it represents the value of the alternative projects or investments that the government could have used with the money allocated to HS2. One could say that the staggering £100 million could have been used on many social and economic benefits both in the private and public sector. For example, it  could have been directed to the National Health Service, or to pay tuition fees for the public, amongst many more. Moreover, to obtain this money the government may have had to raise taxes to properly fund this project. This wasn’t a specific announcement made by the government but the funding of large-scale public infrastructure often comes from general taxation of the public. However, because of these cancellations, the opportunity cost will be lower than originally planned, which can be seen as a good thing. Furthermore, this will mean that taxes will no longer need to rise, and when taxes are low, people have more disposable income, increasing their living standards and overall population happiness. 

Conclusion 

The benefits I have identified from the construction of HS2 will now be largely lost. It was not only the fact that HS2 would provide faster travel to Manchester, Leeds and beyond, but the new lines would also decrease congestion and crowding for slower trains. The estimated benefit of reduced crowding was £13.5 Billion, as many feel that the capacity of the train network is reaching its limit. Without knowing all aspects and factors of this decision, it is difficult to provide a definitive answer on whether this was a sound decision or not. The building of public transport often involves a range of complex considerations, opinions and perspectives. Therefore, as I have previously discussed, it is inevitable that there will be many economic benefits and faults that will come from both the construction and the cancellation. 

Bibliography

Dawson, Bethany. "Rishi Sunak Scraps Northern Leg of HS2 Rail Line." POLITICO, 4 Oct. 2023, www.politico.com. Accessed 4 Oct. 2023.

Arnold, Tom. "What Rishi Sunak Scrapping HS2 – and Promising a New ‘Network North’ – Means for the North of England." The Conversation, 4 Oct. 2023, www.theconversation.com. Accessed 4 Oct. 2023.

Pettinger, Tejvan. "Pros and Cons of High Speed Rail HS2." Economics Help, 29 Jan. 2021, www.economicshelp.org. Accessed 29 Jan. 2021.

Sloman, John. "HS2: Do the Costs Exceed the Benefits?" Pearson Blog, 28 Oct. 2013, pearsonblog.campaignserver.co.uk/?s=HS2. Accessed 28 Oct. 2013.