Labour HS2 the rescue?

There is light at the end of the railway tunnel.

The tide might just be turning against HS2, the nightmarish money pit of a plan to build high speed rail links between London, Birmingham and other Northern cities.

Currently only UKIP (see "The best and worst of UKIP") and a few MPs whose rural constituencies are in danger of being disfigured by the line against HS2.

With the Coalition seemingly wedded to the plan however much business case for it is discredited, the best hope for stopping HS2 is Labour.

Officially the Opposition support HS2, but Labour bigwigs like Lord Mandelson and Alistair Darling are voicing strong doubts and threatening to break up the big party consensus in favour of HS2.

Mandy even admitted that the last government's backing for the proposal was "politically motivated".  It certainly looks like the cost-benefit analysis done to back it up consisted of numbers picked out of thin air to justify a weak economic case.

The cost projections are clearly a joke.  They keep changing every week and no one seems to be factoring in any interest costs on the money that will have to be borrowed to fund the £50bn they now say is required.

There can be little doubt the real investment cost will be higher but also it is very likely to run at a loss as most high speed networks do.  This is mainly because the estimated passenger traffic never materialises as the public choose cheaper alternatives.  HS1 and the Channel Tunnel are used nowhere near half as much as was originally claimed.

The idea that HS2 will be good for the environment is highly debatable and essentially unknowable this far from its launch date (2026 although these projects are almost always delayed).  By then we could all be using driverless cars powered by algae fuel.

The worst element of the business case though is the tens of billions claimed for the so-called wider business and economic benefits.

The economy is supposed to benefit from spreading growth from London and the South East to the North but any objective analysis would allow that the benefits are just as likely to flow in the opposite direction.

Most of the business benefits are calculated by placing a value on every hour saved by the shorter journey times, as if businessmen don't work on trains.  This is clearly nonsense: given the rate of technical advance I imagine by 2026 businessmen will be able to hold virtual conferences in a toilet cubicle if they had to.

Finally there is the lie that the Coalition has been putting around - that tickets will be no more expensive, or maybe even cheaper, than regular fares.  This is completely implausible but if it is true then the line will run at a massive loss.  So the taxpayer will be on the hook for £50 bn, the inevitable cost overruns, interest on the debt and operating losses for decades.

I hope to God Miliband listens to his party grandees and turns on HS2.  It could be one more thing he could do to make Labour a shoo in for the 2015 election (see The bold policy that could put Miliband in No 10) but more importantly save Britain from a horrendous and costly mistake.

The bold policy that could put Miliband in No 10

Ed Miliband could transform the UK economy and his electoral prospects at a stroke by adopting radical tax reform policies.

The thought occurred to me during the Labour Leader’s spat with Google over its policy of routing profits to low tax Ireland.  Miliband attacked Google’s legalistic defence, proposing tougher rules and increased international cooperation to make multi-nationals “pay their share”.

He will no doubt be pleased by the ensuing headlines but I don’t think this rhetoric on its own will do much to improve Labour’s chance of a return to power in 2015. 

The public will see it like they do banker bashing.  They may agree with the sentiment but talk is cheap and not entirely convincing coming from Labour which toadied up to banks and business something rotten during the Blair/Brown years.

But what if Ed turned the issue into something more than speech-filler and put tax reform at the heart of his manifesto?  Rather than promise a few tweaks to transfer pricing rules and an international conference, he could propose to scrap the bulk of company tax reliefs in return for halving the corporation tax rate to 10%.

Although the Treasury would lose out from a lower headline rate they would gain from the abolition of tax reliefs and, more importantly, remove any incentive multinationals have for funnelling profits abroad.  Indeed the UK would gain from multinationals shifting revenues and profits in the opposite direction.

The knock-on benefits are potentially even more significant: more foreign investment in Britain, more home-grown start ups and billions saved in accountants’ fees.

And why stop at corporation tax?  A similar, although somewhat trickier, deal is begging to be done on personal tax: simplifying the structure, perhaps including NI abolition, lowering marginal rates and abolishing reliefs.  Tax receipts overall should hold up if enough new income is declared at the lower rates and the more efficient system feeds through to economic growth.

There’s a snag of course and that’s why it will almost certainly never happen.  

Labour is traditionally dead-set against lower tax rates and made a lot of political capital by raising the top rate of income tax to a damaging 50% and calling the Coalition “the millionaire’s friend” when it partially reversed the rise.  The left has never bought the argument about lower tax rates paying for themselves by reducing the incentive to avoid and boosting the economy.

But it’s the very unlikely nature of Miliband promoting such a policy that would make it a master stroke equal to anything Blair came up with.  Tony was the master of stealing his opponents’ clothes.  

When he adopted an apparently right wing policy he wrong-footed the Tories and used the resulting opposition from within his own ranks to his advantage.  Standing up to his internal critics made him seem strong and non-partisan to moderate voters.

That’s exactly what Miliband needs to bury the Red Ed tag.  Facing down some left-wing carping about tax cuts for the rich would do wonders for his standing with the majority of the country.  He would also have a substantial economic policy which isn’t just about spending and borrowing more which would finally distance himself from the Brown legacy.

Most importantly he would sew dismay and discord in the Conservative ranks.  They would be shorn of one of their key arguments (Red Ed’s is weak and has got nothing new) and the right wing of the party, including already wavering financial backers, would be further disillusioned seeing Cameron outflanked on their territory.

There are a myriad different ways of reforming the tax code on a lower-rates-less-breaks basis.  Ed Miliband could pledge to do it in a more Labour-friendly way by focusing more on the closing of loopholes than the lower rates.  But I don't suppose he will which is perhaps just as well because Labour's return to power would in general be a nightmare.

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