Press Releases

High Speed Fail – there is no case for HS2

26 October 2011

In a report released today, the Adam Smith Institute exposes the weaknesses in arguments for High Speed 2 and argues that the case for the project is fundamentally flawed. The research reveals the huge cost of HS2 to the taxpayer, and suggests that many of the uptake projections are overoptimistic. Looking at HS1 (London to the Channel Tunnel) and international examples, it is clear HS2 will not make enough revenue to cover operational and construction costs and will bring very few tangible benefits.

The cost to the taxpayer

  • HS2 will become a state financed project. The first phase will cost £17bn and when extended to Scotland, £50bn, – funded at great cost to the taxpayer at a time of austerity and increasing debt interest payments
  • The potential for going far above the £4bn “optimism premium” set aside for overspending is high, especially in light of current inflation. Public pressure for more tunnels (which cost much more per km to build) through environmentally sensitive areas such as the Chilterns will push up construction costs.
  • DfT will have to pay for HS2 mainly through debt markets. This will put DfT’s budget under strain, meaning there is less money available for investment elsewhere on the UK railway network

Demand and profit predictions

  • The figures don’t add up for HS2 to make a profitable return. HS1 (London to the Channel Tunnel) cost £5.7bn but raised only £2.1bn when sold off. Alarmingly, the financial case for HS2 is even weaker than for HS1.
  • Over-forecasting of passenger numbers has plagued previous rail projects in the UK. London and Continental Railways (LCR) forecast passenger numbers for Eurostar for 2004 as being 21.4 million. In reality, passenger numbers were a third of this figure.
  • Predictions of passenger numbers and demand for High Speed 2 may also be overambitious. This would have huge repercussions for HS2’s profitability.
  • Passenger predictions do not take into account the potential response of classic train line franchises and airlines to generate increased demand for their service in the light of HS2 competition.

What benefits?

  • Environmental benefits have been cited as one of the key merits of HS2. There is little environmental case for HS2. Carbon emission reduction projections are weak and real environmental benefits won’t be realised until Phase 3 (extending to Scotland) in at least 30 yrs time.
  • HS2’s analysis suggests that ‘the impact of HS2 on carbon emissions will be between an increase in emissions of 26.6MtCo2 and a reduction of 25.0MCo2 over sixty years’. This is a tiny change, and over that time frame UK rail operations are expected to have generated a stable or lower carbon footprint than currently.
  • The construction of the first phase of HS2 will have a major environmental impact along the route, especially the Chiltern Hills are and may blight house prices locally
  • The justification for HS2 is based on intangible benefits such as a narrowing of the North/ South divide. A similar reason was used to justify the investment of the TGV in France – its losses continue to be underwritten by the French taxpayer.
  • Looking at Europe we see that nearly all high-speed rail projects are subsidised. The TGV in France has caused SNCF’s debt to rise to c£25billion. The World Bank warned in 2010 of the debt created by high speed rail systems talking of the ‘near certainty of copious and continuing budget support for the (high speed rail) debt. The government should take heed of these warnings.

Commenting on the report ‘High Speed Fail’, Sam Bowman, Head of Research at the Adam Smith Institute, adds:

“The case for High Speed 2 is based on wildly unrealistic projections. It will probably end up making a loss, and will mean a lot more borrowing for the government in the mean time. There are no significant benefits to HS2: it will cost a lot of money and achieve virtually nothing.

“Governments are spectacularly bad at predicting the future – taxpayers should not be forced to pay for a project with no significant benefits. To spend at least £17 billion and up to £50 billion on a train network for which there is no demand is wasteful enough; to do so at a time of austerity is obscene.

“The HS2 project has itself become a runaway freight train. If the government is serious about getting tough on wasteful spending, it will hit the brakes on HS2.”

UK needs lower taxes to attract and retain highly skilled workers

 12 October 2011

  • An ageing population means that the government must work harder to keep highly skilled workers from leaving the country, and do more to attract foreign-born highly skilled workers to the UK.
  • Research shows that the best way to attract and retain highly skilled workers is by ensuring that Britain’s tax burden is competitive internationally. That means scrapping the 50p tax, and cutting rates across the board.

New research released today (WEDNESDAY) by the Adam Smith Institute (ASI) calls on the government to scrap the 50p tax, reduce other tax rates, and reform current immigration policies to attract more highly skilled migrants to the UK.

At present, the UK has the 4th highest number of highly skilled immigrants in the OECD, but also has the highest emigration levels in the OECD, accounting for almost 20% of all OECD migrants. With an ageing population the government must focus on policy changes designed to keep highly skilled workers in the UK, while also attracting highly skilled migrants. Unless it can do this, the UK faces economic stagnation and a pensions crisis.

ASI author Alexander Ulrich, a Danish analyst and consultant at the Danish Confederation of Business, highlights ONS statistics that show that the proportion of people not working, and thus dependent on those employed, will increase by 75% in the next 40 years. The problem of an ageing population is made worse by the fact that the UK only takes in slightly more highly qualified workers than it loses. Almost 10% of Britons live abroad and these high emigration rates constitute a problem to the UK economy. Government solutions must therefore be focused on making the UK attractive to both native and migrant workers who produce more than they consume.

The report, Taxing talent: how Britain can attract and retain the world’s best workers, draws on established academic studies of migration and identifies the overall tax burden as a crucial factor influencing highly skilled migrants’ choice of where to emigrate to. In order to attract and retain the most productive workers, the government must abolish the 50p tax rate and reduce taxes across the board. International competition over highly skilled workers is becoming increasingly intense and to remain competitive the UK must offer an attractive tax regime. The report adds that if the tax burden remains high the UK may experience a ‘brain drain’ in the future.

Concerns about migrants’ abuse of the welfare system could be addressed by the introduction of an ‘open borders, closed public accounts’ system for migrants over whatever level the government deems necessary. This would require immigrants to use private insurers for healthcare and other large welfare state expenditures for the first few years of working in the UK before becoming eligible for full benefits. Such a system would address current concerns without the possible negative economic consequences of the government’s current migration cap.

Sam Bowman, Head of Research at the ASI, adds: “People are the ultimate resource, and Britain should be the world leader in attracting and retaining talent. We should be trying to adapt to migration, not restrict it. That means flexible public services and policies that attract the very best people the world has to offer.

“Of the things that highly-skilled migrants consider when deciding where to move, the tax burden is the only one the government can influence. If Britain is to keep its competitive edge, it needs to cultivate policies that attract the best workers from around the world and keep more Britons at home. That means cutting income taxes – not just the 50p rate, but the 40p and 20p rates as well.”

Response to Public Sector Net Borrowing Figures

19 August 2011

In response to the fall in public sector net borrowing figures

Sam Bowman, Head of Research at the Adam Smith Institute, says:

“Unfortunately, the drop in public sector net borrowing is due to the government taking money out of the economy through the bank levy. As a double-dip recession looms, taxes and levies will make the UK's economic position even more precarious than it is.

“The government should go for growth by cutting taxes and close its deficit by cutting spending. Taxes may make things look better for the government in the short term, but will hurt growth in the long term. We can't afford not to cut spending faster and deeper than the government has planned. The Chancellor should know better than to take money out of the economy through taxes at a time like this.”

Tobin Tax would be economic suicide

18 August 2011

  • European Commission’s proposal to introduce a financial transaction tax would drive a significant proportion of the financial sector out of Britain
  • Tobin tax is unlikely to increase market stability and may even increase volatility
  • Sweden is the only country to have introduced a pure Tobin Tax – it brought in less than one thirtieth of promised proceeds and was scrapped within 5 years

New research released today (Thursday) by the Adam Smith Institute (ASI) shows that the introduction of a Tobin Tax in the UK, as argued for by the ‘Robin Hood Tax Campaign’, would be disastrous for the financial services industry. If the Tobin Tax is introduced in the UK or across Europe (as proposed by the EC), it will be all too easy for financial services to relocate their activities to jurisdictions with lower taxes and less regulatory burdens.

The Robin Hood Tax campaign has argued that £20billion can be removed from the UK financial sector without causing significant disruption through a proportional tax on currency conversions. This is a reckless and ill-informed claim that ignores evidence to the contrary.

The ASI report, ‘The Tobin tax: Reason or treason?’, looks at Sweden, the only country to have previously introduced a ‘pure’ Tobin tax of 0.5%(1). It was a disaster, raising only one thirtieth of the proceeds predicted by its proponents and being scrapped within five years. In an attempt to avoid the tax, 60% of the 11 most actively traded Swedish shares migrated to London and over 50% of Swedish equities had moved to London by 1990.

Many proponents of the Tobin Tax argue that the tax would increase market stability. However there is no consistent, empirically convincing evidence to support this claim. The UK’s experience with stamp duty suggests the opposite is true, whilst in both equity and foreign exchange markets, a large number of empirical studies reveal a clear relationship of higher transaction costs being linked to higher levels of volatility.

In reality the Tobin Tax would lead to significant decline in turnover, stock prices and a migration of trading activity. This would lead to job losses in a sector employing over 1 million people in the UK. London is currently the world’s leading centre for foreign exchange, with twice as many US dollars being traded on the UK foreign exchange market than in the US itself. It’s enviable status as a financial centre would be devastated if a politically motivated but economically flawed Tobin Tax was introduced.

Sam Bowman, Head of Research, adds: “When something seems too good to be true, it usually is. The “Robin Hood Tax” is as vague as it is economically illiterate, and would cripple Britain’s financial sector, which is already on the ropes. We can’t tax our way out of this economic depression.

“Brussels wants a fiscal union to save the euro. A Europe-wide Tobin tax would bind Britain into the first real EU-wide tax and be a massive step towards a fiscal union. When Sweden tried a Tobin tax it was a colossal failure – why does anybody pretend this time would be different?”

ENDS

[1] A tax of 0.5% was placed on the purchase of all equity securities (and stock options) in Sweden in 1984. They also implemented a 0.003% tax levied on 5year bonds. Despite this tax being considered low at 0.003%, trading volumes dropped by 85% alone in first week after implementation. Futures trading fell by 98%, and the options market was virtually non-existent.

Notes to editors

  • Economist James Tobin proposed the Tobin Tax: a tax on all spot conversions of one currency into another to manage exchange-rate volatility. However the term is often used interchangeably with a specific currency transaction tax (CTT) and general financial transaction tax (FTT).
  • One of the main proposals of the Robin Hood Tax Campaign is to introduce a financial transaction tax on stocks, bonds, foreign currency and derivatives. This proposal has gained support in Europe where both Barroso and Semeta are publicly in favour, and Germany and France are promoting the tax. Support for an FTT is also high in the UK, where 65% of respondents to a recent Robin Hood Tax Campaign survey were in favour of the tax. Their campaign is focused primarily on raising funds from a tax on banks to tackle poverty and climate change.
  • Author Adam Baldwin is a financial analyst based in the City of London.  
  • Read the full report here

Weaker economies should be allowed to leave the Euro

11 August 2011

In response to Osborne’s statement on the Eurozone and UK’s recovery.

Dr Eamonn Butler, Director of the Adam Smith Institute, says:

On greater fiscal integration in the Eurozone

“Greater fiscal integration in the Eurozone may be the only way to keep the Euro together. But few people in Europe, apart from its leaders, actually want to be part of a tax and welfare union. It would be better to let the weaker economies leave the Euro. Unfortunately the Euro is a political project rather than an economic one. But you cannot defy economic reality forever. It is bound to split, and Britain should be trying to make sure that happens in a measured way rather than as another crisis. And we should be urging that European governments need to do much more to balance their books and get out of debt – which is the whole reason why markets have ceased to trust governments and central bankers.”

On this autumn’s growth agenda

“The Chancellor's promise of further action on the growth agenda this autumn is now vital. He should start by lowering company taxes and national insurance, both of which make firms hesitate to take on workers. The 50p tax rate should be abolished, because it simply drives investment abroad. And most regulation on the smallest firms should be scrapped entirely.

“Claims that the UK recovery have been 'choked off' by public spending cuts are plain daft. The public sector is the least productive part of the economy – indeed, its productivity has been falling. If we are to get out of our debt hole, we must lift the burdens on the private sector, which is our only hope of economic growth.”

Balls’ VAT cut won’t boost confidence or growth

16 June 2011

In response to Ed Balls' proposals for an emergency VAT tax cut:

Tom Clougherty, Executive Director of the Adam Smith Institute, says:

“How ironic that Ed Balls – the man who wanted to extend the reach of the deeply anti-growth 50p tax rate – has suddenly decided that tax cuts would boost the economy. 

“But today’s announcement is pure politics. A temporary cut in VAT would do little to boost confidence or growth. People aren’t fools – they know that you can’t just borrow more, spend more, and raise less without it coming back to bite you further down the line. 

“A growth agenda that coupled lower taxes with less red tape and less wasteful spending would be a good thing. But the shadow chancellor’s reckless, have-your-cake-and-eat-it too approach to the economy would do nothing except march Britain further down the road to a sovereign debt crisis. It would damage confidence, not boost it, and destabilise the economy, not stimulate it.”

Tax Freedom Day: We're Slaves to the state until 30 May

30 May 2011

  • Britons have worked 149 days to pay their taxes in 2011 – three days longer than in 2010.
  • Regional figures reveal that Londoners have to work the longest to pay off their income tax burden (51days) whilst the Welsh spend the least time paying their income tax (35days)
  • UK income taxpayers would have to work for almost a year and a half with all their money going to the government to pay off our national debt.

The Adam Smith Institute, the libertarian think tank, has released calculations today (Monday 30th May 2011) revealing the shocking length of time we work to pay off our tax bill. Britons have worked for a full 5 months this year to pay their taxes, with every penny earned in the UK between January 1 and May 29 taken by the taxman to support government expenditure.

This means that Tax Freedom Day, the day when people stop working for the government and start making cash for themselves, will come on May 30 in 2011 – 3 days later than in 2010.

The main reason for this is that the government has raised VAT, in order to help reduce the UK’s record budget deficit.

New calculations by the ASI also reveal the worrying extent of the UK’s debt. Our burden of debt is so great that UK income taxpayers would need to work for nearly a year and a half (525 days) - with their entire wage packet going to the government, and not a penny being spent on public services – to pay off the national debt.

Dr Madsen Pirie, President of the Adam Smith Institute identified the linkage between the lateness of Tax Freedom Day and the government’s attempt to tackle the deficit and UK debt:

“The last government left an appalling legacy. Its reckless spending has driven Britain into record levels of debt that threaten the lives and happiness of future generations. Bringing down that debt has to be an absolutely urgent priority. However it isn’t enough to merely cut spending. We need targeted tax cuts to encourage economic growth.”

Sam Bowman, Head of Research added: “Tax Freedom Day underlines the huge burden of government on working people’s lives. For five months of the year, we are slaves to the state. No wonder growth is so slow – we need robust tax reform now, bringing lower, simpler, flatter taxes. The government should resolve to make Tax Freedom Day something we can celebrate earlier and earlier each year.”

A full breakdown of how long it takes Britons to pay off each tax can be found in the Notes to Editors (below). The tax burden also varies by region, falling more heavily on some and more lightly on others. The figures below show, in ascending order, how long each region has to work in 2011 to pay income tax:

  • Wales 35 days
  • North East 36 days
  • Northern Ireland 37 days
  • North West 37 days
  • Yorkshire and the Humber 37 days
  • West Midlands 37 days
  • East Midlands 38 days
  • South West 38 days
  • Scotland 38 days
  • East of England 42 days
  • South East 44 days
  • London 51 days

ENDS

Britons as a whole work the following amount of days to pay each of the following taxes:

  • Income Tax 39 days
  • National Insurance 26 days
  • VAT 29 days
  • Corporation Tax 12 days
  • Fuel duties & petroleum revenue tax 7 days
  • Local taxes (business and council tax) 13 days
  • Capital gains / inheritance tax 2 days
  • Duties on alcohol and tobacco 5 days
  • All other taxes 17 days

How is Tax Freedom Day calculated?

  • Tax Freedom Day aims to answer a very basic question: ‘how much are Britons actually paying for government?’ It is calculated by comparing general government tax revenue with the Net National Income (NNI). The total of all government tax revenue – direct and indirect taxes, local taxes and National Insurance contributions – is calculated as a percentage of NNI at market prices. This year it comes to 40.8 percent. That percentage is then converted to days of the year, starting from 1 January. The first day of the year that Britons work for themselves rather than the taxman is Tax Freedom Day.
  • The Adam Smith Institute is Britain’s leading innovator of free market economic and social policies. For more information on our work, go to www.adamsmith.org.

For more information

Response to Commons vote on EU bailout

24 May 2011

In response to today’s vote on Eurozone financial assistance

Sam Bowman, Head of Research at the Adam Smith Institute, says:

“The eurozone bailouts haven't worked, and MPs are right to try to block Britain's participation in future bailouts. Greece is almost certain to default in the near future, and Ireland will have to default within the next two years on current trends. Portugal is not far behind. Saddling eurozone countries with even more bailout debt will only make their problems worse.

“The government has risked £12.5bn on bailouts for Ireland and Portugal. Throwing more and more money at the eurozone bonfire does nobody any good except senior bondholders who should have known better. Even if it was possible to do so, saving the euro would not be worth the cost to them and us.”

To arrange an interview with Sam Bowman, please contact Sally Thompson, Communications Director, on 07584 778 207, sally@adamsmith.org

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