Spending on HS2 and its impact on Welsh funding

Eurfyl ap Gwilym says Wales has not had a fair deal on funding for high speed rail.

As a result of the most recent Spending Review there have been various claims and counterclaims regarding the impact of HS2 spending on the Welsh block grant. It is hardly surprising that there is a degree of confusion because the application of the Barnett formula is a good deal more arcane and opaque than many would imagine: the HS2 programme is an illustration of this. In an earlier posting I drew attention to the need for the Welsh Government to anticipate the treatment of HS2 in the next Spending Review and urged them to ensure that Wales got a fair deal. In the event this has not happened.

To understand what has happened is a little complicated but a careful reading of the account set out here may help but be warned it is not easy reading.

In his Autumn Statement the Chancellor of the Exchequer announced that ‘Construction of HS2 will begin during the Parliament, and the Spending Review confirms a funding envelope of £55.7bn in 2015 prices which will deliver HS2 from London to Birmingham by 2026, and to Leeds Manchester by 2033’ (paragraph 2.85).

At the same time as the Spending Review the Treasury released an updated Statement of Funding Policy which sets out the comparability factors to be employed in determining changes to the devolved administrations’ block grants using the Barnett formula. Comparability factors for the various spending programmes of the Department for Transport were set out. HS2 is included in the programmes for the first time and the comparability factor in the case of Scotland is 100 per cent and in the case of Wales 0 per cent (Table C.16) . A comparability factor of 100 per cent means that expenditure is fully devolved and as a result Scotland will receive a Barnett Consequential. In the case of Wales the comparability factor is 0 per cent and this implies that the expenditure is not devolved and Wales will not receive consequential funding.

However a complicating factor is that in applying the Barnett formula  the overall, weighted comparability factor for each spending department, in this case the Department for Transport, is used. In the case of Scotland this is 91.0 per cent. In the case of Wales it is 80.9 per cent with the principal reason for the difference being the treatment of HS2 expenditure. (If HS2 expenditure   had a comparability factor of 100 per cent for Wales as is the case for Scotland then the overall comparability factor for the Department for Transport in the case if Wales would rise to 88.7 per cent.) This means that Wales will receive its population share of 80.9 per cent of changes in the Department for Transport’s expenditure while Scotland will receive 91.0 per cent. The shortfall in the case of Wales arises principally from the differing treatment of HS2. If HS2 for Wales had a comparability factor of 100 per cent then Wales in 2019-20 would receive an additional £25 million.

When looking further ahead the funding loss could be much more serious than this.  At the next Spending Review the comparability factors will be recalibrated by the Treasury and while HS2 spending currently accounts for 7.8 per cent only of the Department for Transport total spending (£762 million out of a departmental total of £9.750bn) as and when the HS2 programme is in full flow the annual expenditure on HS2 will be approximately £3.7bn or more a year (the total cost of £55.7bn spread over 15 years in real terms). By 2019-20 the Department for Transport budget in cash terms is due to increase from the current £8.7bn to £13.2bn. When this factor is taken into account then at the next Spending Review the Wales comparability factor for the Department for Transport could fall to ~62 per cent while that for Scotland could rise to ~93 per cent (we do not know at present what will be the levels of spending on the other programmes of the Department and inevitably the costs of HS2 will almost certainly rise even before inflation is taken into account. It is also unclear at present as to whether or not private funding will be employed partly to fund HS2.). If such a decline in Wales’s comparability factor were to occur then Wales would lose very substantially by not receiving a full Barnett Consequential for the HS2 programme because Wales would only receive 62 per cent of any increases in the Department for Transport’s total budget including HS2. Paradoxically the greater the spending on HS2 the greater the fall in Wales’s Department for Transport comparability factor and the less funding Wales will receive. In the case of Scotland the opposite applies: the greater the spending on HS2 the higher the Department for Transport comparability factor and the more consequential funding it will receive.

Another irony is that according to a study undertaken by the consultants KPMG for HS2, Wales will lose comparative competitive advantage as a result of HS2 while Scotland will gain thanks to shorter journey times between Scotland and England.

The Barnett formula has many weaknesses not least the lack of transparency in its application and the absence of effective challenge. Why does HS2 have a comparability factor of zero in the case of Wales when Crossrail had established a precedent for rail investment and was assigned a comparability factor of 100 per cent? Expenditure for Network Rail had a comparability factor of zero for Wales because such funding is not devolved but is applied on an England and Wales basis with Wales receiving a share of the funding. Thus the argument that HS2 should be treated in the same way as Network Rail is highly questionable. When the Secretary of State for Transport was challenged on this matter in the House of Commons on 30 November 2015 avoided answering the question.

When preliminary expenditure on HS2 arose in October 2013 Wales received a full 100 per cent Barnett consequential corresponding to that expenditure. The Finance Minister of the Welsh Government was quick to express her satisfaction but ominously the Treasury, having initially denied that Wales had received such a consequential, then pointed out that the position would be reviewed at the next Spending Review. Having failed to ensure Wales continued to be allocated a comparability factor of 100 per cent for HS2 may be the reason that the Welsh Government is now claiming that Wales is receiving a Barnett consequential for HS2. But those who have stayed the course in reading this note will appreciate that the position is not nearly as clear cut or as satisfactory as that claim suggests.

Eurfyl ap Gwilym is Plaid Cymru’s Economics Adviser

18 thoughts on “Spending on HS2 and its impact on Welsh funding

  1. Surely even more reason for Plaid to keep reminding us of the benefits of an independent Wales and having the decency to campaign electorally on this matter.

    Time for another Leanne U turn.

  2. Well I did finish the course. The explanation is most helpful on many levels; though I’m too nervous to utter an attempt on what the levels are! Nevertheless, thank you for describing the political context of the explanation.

  3. Truly Wales is treated as a third-class nation. Not only does the Treasury display open contempt, but the current Wales Bill in Westminster proposes restrictions on the Assembly’s ability to legislate. Parliamentary questions and Freedom of Information requests by Jonathan Edwards MP show that Labour Ministers in Cardiff Bay have made no representations to Westminster on HS2 funding for Wales for the last three years. Unbelievable, but true.

  4. Eurfyl ab Gwilym’s warnings and fears about future transport funding are apposite and should be addressed. But the argument that Wales is being badly treated in the current spending round is premature. We can ask for devolution of rail but we can’t have our cake and eat it too; we can’t expect the UK to fund rail investment in Wales and then give us a Barnett allocation as if they weren’t doing it.
    Network Rail’s budget is spent in England and Wales. None of it is spent in Scotland and Northern Ireland. Any rail investment undertaken in those countries has to be financed via the Barnett formula. In Wales rail investment is not financed via Barnett because it is not devolved. To see whether Wales is getting its fair share of transport spending you have to look at both the Barnett allocation AND Network Rail’s spending in Wales.
    If the rail network were devolved, Wales’ consequential would be higher but then Wales would have to finance all rail investment from the block grant. So the question is: does planned Network Rail spending in or for Wales exceed the bit of the transport budget that is the difference between a 91 per cent and an 80.9 per cent consequential? In the near future it is quite likely to do so. Only £760 million is budgeted for HS2 in 2015-16 and Eurfyl estimates our “missing” consequential is worth £25 million. If Network Rail’s spending in Wales exceeds that, we’re doing OK.
    As total rail investment (HS2 and Network Rail) ratchets up after 2017, Eurfyl is right to caution that Wales may not get its 5 per cent share of the total. If the London-Swansea line is electrified at the cost of a couple of billion pounds and we get another half billion for valley lines by 2020 we’d surely be getting our share. Those things are very far from guaranteed however so in the absence of rail devolution we must lobby hard. Do we strengthen our position by premature grumbling? It’s matter of taste and tactics, I suppose.

  5. What I and I expect most ordinary punters don’t understand is what building a railway in England, albeit a fancy high speed one, has to do with the Barnett formula or ‘consequential’ funding of Wales or even the Welsh Government. I realise that the sainted Eurfyl ap Gwilym has made that difficult explanation above but it is still counter intuitive.
    What we need to do, if it is better transport links that we need, is to build our own railway, our own North South motorway, sort out Cardiff airport and rebuild Swansea docks.
    Building infrastructure like this, in essence, means clearing out a few sheep from hillsides, getting rid of a few holiday homes and houses, digging some tunnels, laying some concrete, tarmac and some new rail with electrification and building some hangers and longer runways. Being a Nation that has done all this in the past (mainly for others regrettably) I don’t see a technical problem or even a real ‘challenge’!
    It is a matter of mindset and political will.
    What is so difficult? Oh yes the money! Well there is an answer to that but that necessitates a stream of invective that would be deleted.

  6. One always listens very carefully to Gerry Holtham and any points he raises merit a considered response. In the first place Gerry conflates investment by Network Rail and investment in rail infrastructure. He accurately describes the funding arrangements for Network Rail but HS2 spending does not come under that organisation but under HS2 Limited which has a remit limited to England. The spending by HS2 Limited does not extend to England and Wales as is the case for Network Rail and as such is more akin to spending on Crossrail which comes under Transport for London. In the case Crossrail investment, Wales, in common with Scotland and Northern Ireland, is assigned a comparability factor of 100 per cent. If this is the treatment for Crossrail (and one hopes it will be the same for Crossrail 2 which is now being planned) why is it not the case for HS2? Gerry raises a good point regarding the planned Swansea to London rail electrification and the £2bn he quotes will of course be of great benefit to south Wales as well as to English cities such as Reading, Swindon and Bristol. Thus the sharing of the cost appears to be a fair arrangement although as ever the devil will be in the detail. I do take issue with Gerry’s comment regarding ‘premature grumbling’. I first drew attention on Click on Wales to the need for a fair funding deal with respect to HS2 in October 2013 and urged the Welsh Government to be alert to the various possible funding options, the opportunities and dangers and the need to press the case for Wales. Sadly the Welsh Government appears once again to have failed. One can be sure that the Scottish Government will have been much more alert and will have lobbied hard in Westminster and Whitehall to ensure a good deal for their country with respect to HS2 although, ironically, Scotland stands to gain from HS2. Gerry talks about having one’s cake and eating it: well the Scots appear to be rather good at doing just that.

  7. Another classic case of the Treasury’s inconsistent approach to applying the Barnett Formula! Gerry is surely right that the status of rail infrastructure as a non-devolved function was the hook on which the Treasury based this decision. But rail infrastructure was equally non-devolved at the 2007 CSR when Crossrail was designated as an England-only scheme with 100% programme comparability factors for the three devolved administrations. Like Crossrail, HS2 is a rail infrastructure mega-project that is wholly separate from Network Rail because of its cost and complexity – HS2 is simply on a different scale to electrification schemes that have taken place far more regularly up and down the UK in recent decades. And as both Gerry and Eurfyl point out, although the sums are relatively small at the moment, there will be distortive effects to the blended DfT average once HS2 spending ratchets up, by which time a 0% programme factor may be very difficult to budge. Finally, although past precedents seem to carry little weight in decisionmaking over Barnett, a 0% factor now surely makes it more likely that it will be applied again if and when the next mega-project (Crossrail 2) is authorised.

    The current HS2 funding situation revealed at Spending Review is certainly better for Wales than if the Treasury had set up a single UK funding stream for HS2 without triggering consequentials, but Eurfyl and Gerry are right that concerns over the likely effects on Wales’ future funding shouldn’t be lightly dismissed. It may be overly optimistic here, but the inconsistent and unexplained nature of designation decisions carrying significant budget consequences should be seriously addressed in the new fiscal framework accompanying Scottish, Welsh and Northern Irish tax devolution.

  8. So a question to those that may know: How much of Network rail’s budget currently is spent in Wales – an average over 5-10 years might be fair. Are we getting a fair proportion [ on a population basis 5.4% of the England and Wales total 56Million]. If it isn’t an average of 5.4% of the annual budget of a given period then we are at a loss. Is indeed measuring on a population basis a fair way of apportioning the budget itself. What I do know is that getting from Cardiff to Aberystwyth would take nearly 6 hours on a train despite being 140 miles apart. Swansea to Bangor takes about 7 hours.

  9. If we really want to talk rail infrastructure how about a tunnel under the brecon beacons from Merthyr to Llanwrtyd run rail there. Then Knighton to Newtown and Porthmadog to Blaenau Ffestiniog.
    The Swiss would.

  10. @ Chris Jones

    The jargon may be somewhat obtuse but the principle is simple. If England spends money on a railway that benefits only England then the other countries of the United Kingdom should receive a proportionate amount to spend on their railways. London and the South East currently receive a disproportionately high amount of government spending on its transport network despite the supposed principle of economies of scale. It is only right that politicians of all parties argue for Wales to receive their fair share of the cake, especially in view of our current economic performance published yesterday.

  11. Chris,

    Just picking up on your building transport links North to South etc. Has anyone evaluated the times to travel North to South by Sea – what is the shortest possible time to travel from Caernarfon to Abertawe by Sea (could it be done in 2 hours by a superfast ferry or hovercraft?- or if that’s too unfeasible then maybe Barmouth to Fishguard – could you transport 50 vehicles with passengers from say Barmouth to Fishguard in 1 hour?. Following on from that could we develop a link to a major town and a port with travel times of less than an hour?. Should we have a challenge with a prize to see if what is feasible?. How far could you travel in 1 hour by sea? – from where to where and could be build infrastructure around that. Could we have Greek style superfast hydrofoils that hop between destinations along the irish sea and atlantic coast – joining Wales more effectively to Ireland France and Spain, with multiple destinations and purposes?

    Just a thought?

  12. The word ‘fair’ crops up again and again in these discussions. Since when has anything in life and politics ever been ‘fair’? If @RBJ above is correct in explaining that HS2 funding has to be proportionately shared amongst other nations (as an established principle) then surely our politicians have legal recourse to claim our proportion. Fairness has nothing to do with it.

  13. @ Chris Jones

    HS2 funding doesn’t have to be distributed if it can be shown that it benefits either the UK as a whole or, in our case, Wales in particular. This is clearly a matter of interpretation and thus the subject of political negotiation. It is not the responsibility of the courts to resolve political disputes and they would be very reluctant to do so. You would have to have a case in law, not just an argument and you would have to consider the costs involved. Political negotiation is a lot cheaper. The question of fairness is in the original principle. England could use its demographic majority to spend money on itself every time. But as a member of the UK, the principle of fairness is used to argue for a fair distribution of resources. How that happens is of course a matter of politics.

  14. Sorry Eurfyl, the manifest stupidity of HS2 should in a rational world fall over and never be built. The strategic, transportation and business cases for it are risible. The only transport route (rail or highway) leading into London that won’t suck more into it than goes out? Tell me another one.

    Transportation does not have a policy base in England or Wales. The WG’s draft National Transport Plan was a travesty. and the Transport Department should be renamed the Department of Wilful Construction. The New M4? Huh! And don’t forget the gratuitous environmental damage (post-Paris). The Metro (in its present nebulous form)? Huh! There are no policy rationale or data benchmarks to evaluate such proposals against others and reduce opportunity costs.

    These are just schemes designed to transfer public money (lots of) into the private hands of contractors and consultants. As is the whole austerity gambit. Goodbye NHS, social welfare, education…

    Benefits to Wales? Negligible. PR of having Wales onboard HS2? Significant.

    Meanwhile, there are many small-scale projects – road safety, cycleways, footways, local traffic improvements – starved of funds while egotistical ministers seek the glamour of mega-projects.

    And more important sustainability and air quality requirements in our cities – where most movement is – for conversion to light rail. We are saddled with the wrong advice, the wrong leadership and the wrong priorities.

    Instead, we need to ask what is the transportation task? Why are we intent – in the country with the lowest productivity in Europe – on encouraging more people to travel, further, faster and more often? Where is the gain (other than to the above, oil companies and rail operators?)? Why not ultra-speed broadband to reduce the need to travel (and its impact)?

    Don’t people know that some of the least productive areas in the UK have the most roads? Where is, or to whom has the benefit that has purportedly arisen from the the investment in the A55 and the A465 accrued? It is a myth (refer to the letter that 32 professors of transport wrote to the UK Secretary of State for Transport in 2013) that transportation investment will generate economic growth. The link is tenuous at best. All hail the Infrastructure Commission, determined to waste more of our taxes!

    Transport does not add value (to goods or people), and offers poor compensation for the time, energy and cost the commuters pay.

    We need to ask what transport demand will be on all road and rail routes in Wales for both freight and passengers in 2025, 2040 etc to act as a guide to our future investment policy. The WG does not even have that data for 2015!

    Then we could rationally determine the appropriate mode and scale of future investment for each route. The Metro proposers don’t know, and have asked the private sector for suggestions!

    This is all part of the Do Something school of government. Without thinking. I wouldn’t start from here!

    We should start with much more thought, new and better ideas, best practice, holistic thinking about energy use in transportation, the urban form, quality of life and what people really need!

  15. Two points: it is immaterial that HS2 is being carried out be another company from Network Rail. Both companies are building rail infrastructure and both fall under the Department of Transport budget.. The fact that the rail network is not devolved in Wales is therefore relevant to both. Crossrail had a 100 per cent consequential because the devolved territories managed to get it classified as a local project – local to London. Local transport is devolved everywhere. Whatever one thinks of HS2 it cannot be classified as a local project. If it speeds times from London to Birmingham it will speed times from London to parts of mid and north Wales. I have been as energetic a critic of the Barnett formula as anyone and we all agree there are battles ahead. It would be cleaner if rail were devolved to Wales. Meanwhile I prefer to keep my powder dry for when there is a real complaint.

  16. The question is therefore how do we get to the point where we can transfer power over rail infrastructure from Westminster to Cardiff Bay. This is ciearly in the offing. The Wales & Borders franchise will be coming to Wales in 2018. Network Rail is looking to break up its constituent Routes into separate departments that can compete against each other. If they remain nationalised, as looks likely, then it would not take a great deal of effort to transfer the Wales route to Cardiff control and would be commensurate with the W&B franchise. The political question is do we wait for this to happen in accordance with bureacratic convenience or can we move Welsh responsibility for rail infrastructure up the political agenda. Clearly nothing is likely to happen before 2018 but railway planning and investment timescales would be greatly enhanced if the franchise and the Route were synonymous under the one authority in Cardiff.

  17. It’s disappointing to read the likes of Gerald Holtham pretend that there is a real benefit to Welsh train passengers, due to a faster journey time from Birmingham to London. This will make little or no difference and as independent analysis has suggested, HS2 is likely to be detrimental and not beneficial to the Welsh economy. I am not sure what he is ‘keeping his powder dry’ for, when Wales is paying through the nose for a project that will actually benefit English regions in competition with Wales.

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