The Government are at it again, contorting statistics and economics to try to prove their point and, unsurprisingly, failing to convince. In this case, it has just re-published its estimated of the net benefits from the proposed HS2 high-speed rail link. Somehow, the implied benefits have fallen, due to a more 'realistic' assessment of the scheme's massive cost. As we're talking about tens of billions of pounds here, even small percentage errors can have a big impact.
The reaction to the new estimates can probably be summed up with one word: 'meh'. I have yet to meet any financial officer, let alone any economist, who really believes the HS2 numbers that the Government has put together. Public projects have a long history of being over-egged in order to get them approved, only for the fantastical forecasted benefits to then fall a long way short. The Olympics last year were a great example – the massive boost to the economy confidently predicted by the Government simply did not materialise.
In part, this problem with cost-benefit analysis (CBA) reflects the fact that it really struggles to properly incorporate general equilibrium concerns. The Olympics' proponents completely missed the fact that 'normal' tourists might be put off visiting London and the West End; in the case of Eurotunnel, the impact on the price of substitute transport was pretty much ignored. But even aside from this, the standard kinds of input-output analysis and modelling techniques – let alone quantifying intangible benefits – are wide open to criticism, such that the uncertainty around CBA numbers for public projects is truly massive.
Personally, I suspect this is why no one really believes CBA anymore. If I'm right, the Government can produce all the 'evidence' it likes, but won't really shift what people think.
In truth, it might be better to consider CBA on an ordinal basis, rather than a cardinal one. Getting the precise benefit of some project right, even to the nearest million pounds, is nigh on impossible. Instead, rank ordering different projects next to each other might make more sense. Even though each project's net benefit would be wrong, the ordering from 'best' to 'worst' use of money might be less affected. There is some evidence from recent work on stress testing that this might be the case.
There would be challenges to the Government using rank-ordering instead of point forecasting. Not only would they hate to admit that their numbers are even flimsier than normal economic forecasts; but actually putting projects side-by-side would expose their personal sops and favourites. I predict that if the £42.6bn cost of HS2 were instead spent on youth employment measures then the economic (and life) impact would be bigger. Throwing it at tertiary education (lower tuition fees) and encouraging younger people into community-led projects would be a good start. (Londoners, for instance, will have seen the Standard's admirable campaign against gangs, where having an impact costs a lot less than £42.6bn.)
So would the Government ever use CBA in this way? Of course not – because that sort of cost-benefit analysis might actually tell us something useful. Instead, it prefers to keep us in the dark with ever-increasing volumes of meaningless data.