High speed link could leave Wales stranded


Eurfyl ap Gwilym says the parties should be lobbied on their manifestos so Wales receives the HS2 money it is entitled to

Much heat has been generated in England over the question of HS2, the proposed high speed train link between London, the midlands and north of England and possibly, in the longer term, extending to Scotland. For many of us in Wales our interest has been focused on the funding of the project and whether or not Wales will benefit from a corresponding increase in the block grant through the Barnett formula mechanism.

If forthcoming such an increase in funding could be used for much needed improvements in the transport infrastructure of Wales. This will be even more important if Wales is to compete with those regions of England which gain competitive advantage as a result of HS2.

Given that the latest estimate of the construction cost of HS2 is £42.6bn there is much at stake here. The Welsh Government’s total capital investment budget is currently approximately £1.4bn a year. If the capital spend on HS2 were over and above the normal run rate of public sector capital expenditure then Wales stands to gain as much as £2.5bn over the period of HS2 construction.

Herein lies the rub for the UK Government. If the governments of Northern Ireland, Scotland and Wales were to receive Barnett consequentials for HS2 this could amount to a total of ~£8bn, thus pushing the effective cost of HS2 over £50bn. One can see why the Treasury in its recent spat with the Welsh Government was keen to claim that Wales was not receiving an HS2 consequential as part of the increase in Welsh funding.

Although the UK Government now appears to have conceded that Wales has received a Barnett consequential for HS2 expenditure this does not mean that the Welsh Government can relax and assume that if HS2 goes ahead Wales will receive its full due.

The uncertainty is because of the way the Barnett formula is operated by the Treasury. There are precedents that may be deployed on both sides of the argument and depends on interpretation of the ‘rules’ governing the application of the Barnett formula. There are two key considerations when deciding whether or not a devolved administration receives a Barnett consequential arising from public expenditure:

  • The first test is whether expenditure is in a spending area which is devolved. If it is devolved then usually the corresponding expenditure is devolved through the Barnett mechanism. Examples of this are health and education.
  • A second test is whether or not the expenditure is ‘for the benefit of the UK as a whole’.

In the case of the London Olympics the Labour Government of the day decreed that the Games were for the benefit of the UK as whole and that there would be no adjustment made to the block grants of the devolved administrations. It was conceded that expenditure on some of the associated land reclamation and infrastructure improvements were specifically for the benefit of East London and after a great deal of haggling Northern Ireland, Scotland and Wales received modest additional funding although it was considerably less than the Barnett consequential.

A more promising precedent for Wales is the treatment of Crossrail. Crossrail is currently the largest civil engineering project in Europe and involves driving twin railway tunnels under central London together with building a number of new stations. The total cost is estimated to be £14.8bn. In this case Wales and the other devolved administrations receive full Barnett consequentials. While the UK Government argued that the Olympics were for the benefit of the UK as a whole no attempt was made to make a similar claim for Crossrail.

In the case of public expenditure on rail infrastructure the picture is muddied by the different treatment of Scotland and Wales. Network Rail is the body responsible for the track, signalling and railway stations in Britain. In the case of Scotland expenditure on these items is devolved and included in the Scottish block grant. The Scottish Government then determines its spending priorities and employs Network Rail to undertake any work on the rail infrastructure in Scotland.

Wales is not in such a favourable position. Spending on rail infrastructure is not devolved. A budget is determined by the UK Government for the activities of Network Rail in England and Wales and Network Rail then determines its spending priorities on an ‘England and Wales’ basis. It is perhaps not surprising that under this arrangement investment in Wales on rail infrastructure has been so low. Indeed the Welsh Government has been obliged from time to time to raid its own block grant which is not meant to cover investment on rail infrastructure in order to top up Network Rail funding in Wales. Such expenditure has come at the expense of spending on devolved programmes such as health and education.

How can the ‘for the benefit of the UK a whole’ test be applied to HS2 when the whole programme is within England? To the extent that HS2 will stimulate the economy of parts of England it might be claimed that this will also benefit to the UK as whole. Of course, a similar argument could be deployed for any infrastructure spending by the Welsh Government in Wales: if it provides a local economic stimulus it is of some benefit for the wider UK.

Unfortunately, the Treasury has a long record of looking at spending from a London-centric viewpoint and presuming that what is good for England is for the benefit of the rest of the UK as well. Fortunately in the case of HS2 a report published in September and produced by the accountancy firm KPMG for HS2 Limited sought to assess the economic benefits of HS2 for the different cities and regions of the UK. Not surprisingly the major winners were the cities on the HS2 line such as London, Birmingham, Manchester, and Leeds and the contiguous areas. In the case of Wales, Wrexham and the surrounding areas stood to gain marginally due to their proximity to Crewe. But as well as winners there are many losers including Bristol, Newport, Cardiff, Neath and Swansea. It was noteworthy that in the first release of the report the winners were identified but the losers were not. It took an FOI request from BBC Newsnight before the full list including losers was published.

The towns, cities and surrounding areas that stand to lose will suffer comparative competitive disadvantage if HS2 is built. Analysing the KPMG report of winners and losers indicates that while England would be a large net gainer, Wales would lose considerably. The KPMG analysis should bolster the argument that HS2 is for the benefit of England as a whole, that Wales will lose and should therefore receive a Barnett consequential.

So far I have concentrated on the ‘technical’ arguments surrounding application of the Barnett formula to HS2. In reality many decisions are made as a result of political negotiation and the leverage of the parties involved. The UK Government, through the Treasury, is judge and jury in its own case. A key event in the resolution of the HS2 funding question will be the next UK Spending Review. At each such review the Treasury publishes an updated Statement of Funding Policy which sets out the guidelines for the application of the Barnett formula and crucially also publishes comparability factors for the various public spending programmes. It is to be expected that the HS2 programme will be included for the first time.

While the Statement of Funding Policy is published by the UK Treasury it is meant to be agreed with the devolved administrations. The next Spending Review will take place soon after the UK General Election in 2015. It will be up to us in Wales to press the UK political parties to commit in their manifestos to Wales receiving its consequential share of HS2 expenditure. Following the election and in the lead up to the release of the Statement of Funding Policy the governments of Wales, Scotland and Northern Ireland will need to ensure that funding of HS2 will have Barnett consequentials for the three devolved administrations.

Eurfyl ap Gwilym is Plaid Cymru’s economics adviser

16 thoughts on “High speed link could leave Wales stranded

  1. The flaw in the argument presented by Eurfyl is his omission of other related transport projects. The upgrading of rail transport from London to Swansea will have economic benefit to the whole of South Wales, add the electrification of the valley’s and associated benefits to the proposed Cardiff city-region and the economic issues facing Wales is not HS2, but the effect concentrating economic investment in South Wales will have on the rest of Wales. And the upgrading of the M4 has an extra benefit for the economics of our strongest commercial areas.

    What will be done for the rest of Wales ?

  2. The recent KPMG HS2 Economic Impact Assessment ( and the 2010 version of that work which I analysed and presented to Transcom in 2011 http://www.mgbarryconsulting.com/docs/03072012113816.pdf ) both made the assumption of 1hr 45min journey times between Cardiff and London in the analysis. So the impact of the upgrade of the GWML has already been factored in the current determination which still shows a major dis-benefit to S Wales.

    Re SE Wales vs the rest Wales. Well SE Wales is half the Welsh population, the most densely populated and so far easier to develop and justify schemes like electrification and the Metro. I suggest Swansea Bay could consider exploring the transit opportunities in that region. As for N Wales, then perhaps electrification of the main line and perhaps more importantly Wrexham-Bidston?

  3. I also suspect, that perhaps The Treasury “agreed” the consequential to Wales to undermine the DfT and the case for HS2 as a result of adding perhaps £8bn to the overall costs in consequentials….?

  4. The answer is not difficult CapM, take a period of time, say 5 years, and during that period distribute our taxes in an equitable manner!

    It’s not rocket science, but it does need clear administration of resources, most of society should over time become a level playing field, no section of society should be treated less considerately than another, don’t you agree ?

    Are you a politician CapM ?

  5. @John Tyler
    Divying up the contents of the pot is certainly not “rocket science”.
    Neither is it necessarily strategic or a wise use of resources based on needs and benefits.

    If you champion the divying up approach then what do you suggest the transport infrastructure share due to the “rest of Wales” be spent on?

  6. When is it ever wise to treat one section of society at the expense of the other ?

    I don’t know the answer to your question, I suspect a first course of action would be to ask the little people of Wales what are their transport priorities might be, I would ask for electric powered public transport, then to create a “strategic” Plan.

    I wouldn’t ask the public to make a choice from a list created by politicians or their staff, I would be brave and look forward to exploring real needs.

  7. I’m not here to help the UK Treasury but this is an easy argument for them to win. First, HS2 runs north. Ultimately it will benefit Scotland. It can’t get from London to Scotland without going through the Midlands first so the Scots have no case. Secondly rail infrastructure is not devolved to Wales (that’s the Welsh government’s fault; it was offered and they turned it down) so Barnett does not apply. The only people with a claim are the Northern Irish. I’d guess a few well-timed riots could get them the money. The Welsh are better at moaning than rioting so will get very little.

  8. I struggle to see where HS2 will disadvantage Wales as we will see electrification of the line and new rolling stock in 2017 some 9 or 10 years before HS2 phase 1 is completed. It will be then possible to travel to London from Cardiff in some 1:45 hours or less if we were to remove all the stops on the way for some of the train times. Capital city to capital city as it were – distance some 152 miles and with the Hitachi Super Express capable of 140mph with some signal modifications that are already feasible – it could be possible to get to Paddington in about 70 or 80 minutes from Cardiff.

  9. Making London a shorter destination in terms of time spent to travel there will not help; in fact, the opposite is true.

  10. It might be worth reading the follwoing article before popping open the champagne bottle to celevrate Cardiff being a shorter journey to London. :


    “More productive firms in cities like London will be able to serve distant markets in northern cities much more efficiently from their existing base rather than from bases located in the northern cities,” he says.

    “So, if the time to market is reduced between London and the northern cities, that is going to mainly benefit firms that are already located in London. That seems to be what happens in most of the cases around the world where these railway lines have been introduced.”

    I would have thought that it would be common sense that.

  11. I do not see it this way around at all. The cost of living and doing business in London is so high that there are opportunities for companies based in Cardiff to do more business at cheaper costs than those in London. The cost of living and doing business in London will not be reduced. I have no idea who you are David as you do not give your surname for some reason so I do not know your work background but I fear that you are being very pessimistic.
    I have lived in Cardiff and done a lot of my business in London for some years now and the opportunity to travel much faster there would be very welcome. I for one can do more business there and bring more money back over the border.

  12. Tegid Roberts,

    You say that: “I have lived in Cardiff and done a lot of my business in London for some years now and the opportunity to travel much faster there would be very welcome. I for one can do more business there and bring more money back over the border. ”

    So, you’ve done a lot of your business in London and would like the journey to be quicker! So that you could even to more of your business in London? If it wasn’t so convenenient, then maybe you would have had to do that business in Cardiff?

    Making Cardiff in effect easier to get to from London will increase costs in Cardiff thereby reducing it’s attractiveness for companies to relocate there. There are other ways of making Cardiff or other parts of Wales more attractive. Why are cities much further away than Cardiff eg Belfast and Edingubrgh doing better than Cardiff if it’s a matter of proximity to London?

  13. David, what is wrong with doing more business outside of Wales? To export goods and services and do business outside of Wales is surely a good thing. I live and base my business here and tax revenues are generated here on that basis and in effect I am exporting and not just to London but abroad too might I add. I of course do some of my business here in South Wales too. Your argument is one of isolationism and I do not understand it I however wish you well in your endeavours.

  14. My argument Tegid is that when you are in a way ‘isolated’ for the want of a better word, then you have to do things yourself and create links with the rest of the world as opposed to hanging onto London ‘apron’ in the hope that you can get some scraps off the English table. I’ve seen articles on here before which I’ve questioned like I do what you’ve said which have held up Edinbrugh and Belfats as doing so much better than Cardiff economically. Both cities are much further away from London than Cardiff and it’s a physical impossibility for them to be geographically nearer. Yet, the answer for this lack of economic activity by the person who penned the article was to make the journey time to London shorter. How logical is that? The prevailing attitude is amongst those in power in Wales is that if you are not in close proximity to an English center of population, then you are destined to be a basket case. I don’t actually think it’s madness or lazy thinking but more ideologically motivated.

  15. David, the over reliance on scraps from the English table may well be true. I do not have knowledge of that to be honest with you. I do business in the US, Europe and Singapore too but it can not be denied that politics aside London is a very large global centre for business. Those in Belfast and Edinburgh are not isolated from London either are they. It is quick and cheap to fly from either city to London so there is no geographical issue there. It is a matter of time and cost not distance. I would personally prefer a lot more effort made in developing Cardiff and other Welsh airports. We I think need more international flights and more flights to the hubs that exist but are not yet frequent enough. Over a quarter of Welsh exports go to the US and yet we have no direct flights to the US from Cardiff. There’s something obviously wrong with that. Germany, Ireland and Holland are passably served but we need more frequent flights. I digress.

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