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£100bn+ for a railway? What about the nhs?

There has been many calls to cancel HS2, and spend the money on more immediate needs like properly funding the NHS or buying everyone a bike. We all want the NHS to be funded – but HS2 doesn’t work this way: in fact we’d be worse off. Let’s look at why.

We Greens believe in borrowing to invest. Our 2019 general election manifesto proposed £94 billion, to be invested in the national grid, energy storage, renewable electricity, home insulation, R&D, railways, cycle paths, electric vehicle infrastructure and so on.

The point about investing is that you invest in something – an asset which has value and generates a return (in accountant-speak, “CAPEX”).

That’s different from spending, where you spend for something that you need now, which doesn’t necessarily have any lasting value (called “OPEX”). They’re different kinds of money and they come from different sources.

When the Government invests, it borrows the money to do it from the money markets – by issuing treasury bonds (called gilts). These have a fixed interest rate and a date (50 years or more in the future) when they need to be paid back by.

At the moment the rates are very low. In some cases they’re even negative: the government’s being paid to borrow money. So it’s an excellent time to borrow to invest.

The government needs to be doing a lot of this to help stimulate the economy out of the COVID recession. HS2 is a good target: it provides jobs and will help drive down CO2 emissions. (Yes, it will. We talk about that here.)

In HS2’s case, the Treasury will issue gilts each year to pay for that year’s slice of HS2 spending. That’ll be passed to the Department for Transport, who will pay it to HS2 Ltd, who’ll eventually pay the contractors doing the work.

How much are we talking? Roughly speaking, HS2 Phase 1 will need about £40 billion to build, between now and completion in 2033 – so just over £3 billion per year.

To put that in context, Network Rail is investing about £4 billion per year in upgrading the existing rail network (it’s not an either/or situation), whilst the total of government gilts issued in 2018-19 was £98.6 billion.

By contrast, when the government spends on current needs, like the NHS wages, training and materials, that’s OPEX which is set against tax receipts. It can’t use gilt borrowing to fund it, because there isn’t any asset to justify the investment.

So cancelling HS2 wouldn’t release any money for anything else: the money just doesn’t exist until the government issues the bonds for it.

It’s a bit like if you arranged a mortgage to buy a house, then decided not to buy the house. The bank won’t lend you the money anyway to spend on something else.

HS2 is an investment. It will generate a return for the Treasury through ticket sales, taxes paid by its staff, rent on its property etc. And the extra economic activity in the Midlands and North that it will generate. That money can be spent on things like the NHS.

The government could even one day sell HS2, just like it did with HS1 in 2010, and recoup the investment. (No, we’re not arguing in favour of privatisation, this is just an observation of fact.)

And since it has a benefit cost ratio greater than 1:1 even under quite pessimistic assumptions, that return is greater than the cost of building it. So by cancelling it, the Treasury would actually lose money. As a nation we’d be worse off.

So Greens shouldn’t be calling for HS2 to be cancelled. Since government borrowing is so cheap at the moment, we should be demanding investment in HS2 and all our manifesto ideas. And funding the NHS!

Read and comment on the original Twitter thread here

Postscript: @InfraPunk put us right in the original Twitter discussion on one thing – see this correction: