Transport funding for Wales and HS2

1. Background Overview of HS2: benefits and costs

High Speed Rail 2 (HS2) is a major project to build a high-speed rail line from London to Manchester and Leeds, via Birmingham, which will eventually connect with the existing rail network to provide direct trains up to Glasgow, Edinburgh and Newcastle.

Official estimates of the costs of HS2 have increased from an initial estimate of £37.5bn (in 2009 prices) to a range of £72bn to £98bn.[1] While there is now greater certainty over the costs of Phase One from London to Birmingham, the costs of Phase Two are less certain.

The latest benefit cost ratio (BCR) for the full “Y” network, comprised of all three phases of the scheme, is assessed at 1.5:1. including wider economic impacts.[2] However, while the business case does not account for the impacts of Covid-19 and changed transport habits, it does present some analysis showing that that if demand for rail drops by 16% then the BCR falls to 0.7 to 0.9 – poor value for money.[3]

Construction of Phase One from London to Birmingham has started. The Government is due to publish an Integrated Rail Plan for the Midlands and North soon, which will set out how Phase 2 of HS2 will be integrated with other rail improvements in these regions such as Northern Powerhouse Rail.

See the Library Briefing, High Speed Rail 2: An overview (CBP- 9313) for more information on HS2.

Responsibility for transport in Wales

The original devolution settlement under the Government of Wales Act 1998 did not equip the National Assembly for Wales with primary law-making powers, and most transport policy remained under Westminster control.

In 2014, the Silk Commission recommended that the National Assembly should move to a reserved powers model like Scotland. This was then enacted by the Wales Act 2017.

Schedule 7A, Part II, Head E of the 2017 Act prescribes those areas reserved to the UK Parliament, including some road and rail transport, and almost all aviation, maritime and transport security matters. Infrastructure planning and the funding of Network Rail in Wales remains reserved, unlike in Scotland where this aspect is devolved. The main devolved areas of transport policy in Wales are in local and public transport and the Wales & Borders rail franchise.

Barnett consequentials from spending on HS2

The devolved administrations in Scotland, Wales and Northern Ireland receive grants from the UK Government, which fund much of their spending. The Barnett formula determines how the largest of these grants – the block grants – change from one year to the next. The formula aims to give each country the same pounds-per-person change in funding as the change in funding for comparable government services in England. However, the formula only applies to areas where responsibility has been devolved.[4] See the Library Briefing, The Barnett Formula (CPB- 7386) for more information on how the formula works.

Unlike Scotland and Northern Ireland, Wales doesn’t receive Barnett consequentials directly from spending on HS2 because national rail infrastructure in England and Wales is reserved to the UK Government and for this reason HM Treasury has assessed HS2 as a ‘national project’ which benefits both countries. [5] This can be seen in the 0% comparability shown in the Statement of Funding Policy, which sets out how the Barnett formula works. This issue is discussed in paragraph 17 of the Public Accounts Committee’s report Funding for Scotland, Wales and Northern Ireland and in Figure 7 of the National Audit Office’s investigation into devolved funding. Wales, however, has received increases in funding indirectly from increased spending on HS2 where the project has driven increases in the Department for Transport’s budget.

Welsh Affairs Committee report on Railway Infrastructure in Wales

In July 2021, the House of Commons Welsh Affairs Select Committee published its report on Railway Infrastructure in Wales. This report covers how rail infrastructure in Wales is managed and funded as well as the case for upgrading rail infrastructure in Wales. On HS2, the Committee recommended that:

HS2 should be reclassified as an England only project. Using the Barnett formula, Wales’ funding settlement should be recalculated to apply an additional allocation based on the funding for HS2 in England. This would help to ensure that Welsh rail passengers receive the same advantage from investment in HS2 as those in Scotland and Northern Ireland.[6]

The Government’s official response to the Welsh Affairs Committee stated that:

The UK Government notes this recommendation. We have responsibility for heavy rail infrastructure policy across England and Wales, and therefore spend money on heavy rail infrastructure in Wales rather than providing Barnett-based funding to the Welsh Government in relation to heavy rail spending in England. This is consistent with the funding arrangements for all other reserved UK Government responsibilities and with the Statement of Funding Policy. However, due to the use of departmental comparability factors in the Barnett formula at spending reviews, the Welsh Government has actually received a significant uplift in its Barnett-based funding due to UK Government spending on HS2.[7]

[1] Institute for Government, High Speed 2 Costs, January 2020. HS2 6-monthly report to Parliament, Gov.uk, Mar 2021

[2] Department for Transport, Full Business Case High Speed 2 Phase One, April 2020 p8

[3] Department for Transport, Full Business Case High Speed 2 Phase One, April 2020 p54

[4] Institute for Government, Barnett formula, November 2020

[5] National Audit Office, Investigation into devolved funding, March 2019 HC 1990 figure 7

[6] Welsh Affairs Committee, Railway Infrastructure in Wales, July 2021 HC 438

[7] House of Commons Welsh Affairs Select Committee, Railway infrastructure in Wales: Government response to the Committee’s First Report of Session 2021– 22, September 2021 HC 715