Britain's transport sector is cursed by endless intervention by politicians. Investment has tended to be driven by political priorities rather than consumer demand. The emphasis has been on satisfying concentrated special interests rather than the wider populations of taxpayers and transport users. The latest example is High Speed 2 (HS2) - critiqued in a new IEA paper released this week.
HS2 exemplifies the government's flawed approach to transport policy. It is a centrally-planned, highly political project with all the deficiencies that implies. In particular, central planners struggle to allocate resources efficiently because they cannot access the dispersed and subjective information held by individuals. This problem is exacerbated on the railways since policymakers are operating in the absence of genuine market prices. Indeed, a wide range of economic distortions, including price controls, large state subsidies and an artificial industry structure, make it very difficult to make efficient investment decisions.
The incentive structures facing politicians and transport planners also lead to the misallocation of resources. Financial risks are offloaded on to taxpayers, often many years in the future, while in the short-term politicians and senior civil servants can gain prestige from their 'grand designs'.
Accordingly, it is unsurprising that the government's economic case for HS2 is deeply flawed. The passenger and revenue projections are hugely optimistic compared with other, independent, estimates. There are also several unrealistic assumptions - perhaps the most ridiculous is that business people can't do any productive work on trains. It is also clear that the route of HS2 has been 'gold-plated' with little regard to the costs imposed on taxpayers and property-owners: it will be hugely expensive to tunnel the line to Euston and the implications for overcrowding on London Underground may lead to billions more in infrastructure expenditure (funded largely, once again, by taxpayers rather than passengers).
An alternative to the politicisation of the transport sector is provided in Chapter 10 of the IEA's recent release Sharper Axes, Lower Taxes. Clearly cancelling big, uneconomic projects such as HS2 is a first step. But reform must go much further. Genuine privatisation is needed, not just on the railways but also on the roads. This means more than transferring nominal ownership. Subsidies to public transport should also be phased out, the tax treatment of different modes should be harmonised and the sector should be deregulated. The chapter identifies £15 billion of annual savings to taxpayers in 2015 from such a policy, plus considerable privatisation receipts that could be used to cut fuel taxes. Getting the government out of transport will also ensure that investment serves the needs of consumers rather than inflating the egos of politicians.
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