“So low-profile is this document, so deadpan is its assessment of each project — with no condemnation of the bad or celebration of the good — and so beautifully timed was its publication on the day that parliament rose for the summer recess that it took about a week for anyone to notice what was in it.”
William Hague, writing in The Times on 1 August ‘23
It's understandable that really big public finance problems get pushed under the ‘summer holidays’ carpet, and this year is no exception. However, I'm not referring to the downgrading of American debt to AA+ by the Fitch rating agency, which is well-covered in Motley Fool Money's first episode this week: no, this is about two major disasters here in the United Kingdom which between them will cost the taxpayer a quarter of a trillion pounds — that's an additional 10% added to the National Debt, which already sits at £2.53 trillion and is equivalent to £38,000 per person in the UK.
The first of these appeared in the Times on Wednesday 26th July. It was buried deep on page 34 of its business section, and the modest headline says it all, “Bank’s QE losses to cost the Treasury £150 billion”. The second received a bit more coverage when it appeared last week: however former minister William Hague described its very low-key emergence so well that we've included his quotation at the head of this commentary.
It's the fact that the massive HS2 project, now estimated by ‘New Civil Engineer’ to have a completion cost of £100 billion, ‘appears to be unachievable’. It’s ‘coded red’ in the Infrastructure and Projects Authority Annual Report, which means, ‘There are major issues with project definition, schedule, budget, quality and/or benefits delivery, which at this stage do not appear to be manageable or resolvable’.
The Bank of England losses on the Government bonds it bought through Quantitative Easing result from the indemnity given to it by HM Treasury, and the fact that so much of this debt was bought by the central bank at very high prices (i.e. very low yields) and now has to be sold at very low prices (i.e, high yields).
The Bank has a limited number of tools available in its quest to control inflation. Its main alternative to raising interest rates is to remove money from circulation by selling part of its huge stockpile of Government debt: but the more it does this, the more it crystallises those losses — which require HM Treasury to compensate it.
The Bank of England governor Andrew Bailey and Chancellor Jeremy Hunt are therefore between a rock and a hard place: either interest rates go higher and stay there for longer in order to control inflation, or HM Treasury has to pay up for that loss in compensation. No wonder that The Times front page headline on 4th August was 'Economy is caught in a trap, says Chancellor'. This Is Money may ask whether it was right for interest rates to increase again last week, but I would suggest that trying to hold back Government borrowing, as a result avoiding this compensation, has a lot to do with the current emphasis being placed on interest rates.
This first major public finance disaster has been cooking since the financial crash of 2009, and it's coming home to roost now. HS2 has also been cooking for well over a decade: it was, in fact, originally announced in January of that same year, 2009.
It's of course easy to look back over these 14 years with the benefit of hindsight and to criticise both quantitative easing and high speed rail policy. For the former, it was the spectre of prolonged deflation as in Japan which caused central banks to shell out for almost zero-yield Government debt but, in the case of HS2, there was ample warning.
Persistent and loud opposition has accompanied the project at every stage, all the way since the plan was pioneered and published by the then Labour Transport Minister Andreas Adonis in 2009. Opposition was particularly strong throughout solidly Conservative constituencies to the north-west of London, and the decision by the Coalition, and subsequently Conservative, governments to endorse the plan has led to massive reductions in popular support: for example in the loss of the Chesham and Amersham seat in the 2021 by-election, with a swing of over 25% from the Conservatives.
Unfortunately, irreparable damage has now been inflicted on the Chiltern Hills: whatever the outcome of this dysfunctional white elephant, people will therefore have to live with its consequences.
On 28th May 2019 we proposed increasing capacity on the rail network by introducing double-decker trains, and scrapping the HS2 project. There is a prototype of such trains which first appeared in 2016 built on a German design, once the objective of speed had given way to capacity. It provided an obvious solution for more transport at a much lower cost than HS2 — but, in the wake of the pandemic and increased working from home, even placing priority on capacity is no longer appropriate.
We cannot continue loading future generations with the cost of servicing public expenditure mistakes of the past, whether they were caused by trying to keep the economy on the rails or by trying to put railways above everything else in the economy.
These massive additional burdens on the national debt are still more good reasons why we need to build a formal process of long-term governance review into our political system, as we proposed on 9th May. Economics, alongside the environment and conflict between nations, calls for a long-term perspective which is just not evident in today's democracies.
We must do better — and we must own up to our failures when they occur.
Gavin Oldham OBE
Share Radio