What will happen to businesses after the Eastern leg of HS2 is scrapped and Northern Powerhouse Rail downgraded?

Last week, the government announced that they were planning to scrap the eastern leg of HS2, with the link now terminating in the East Midlands, and that Northern Powerhouse Rail was set for a downgrade. As both are exceptionally large infrastructure projects worth billions, Business Leader wanted to find out what effect this could have on businesses in the surrounding regions.

What has happened and why have plans changed?

The HS2, which stands for High Speed Two, is the name for a high-speed railway currently under construction that runs between London and Wigan.

Under the original plans for the eastern leg, a high-speed line was due to be constructed that connected Birmingham to Leeds. However, construction will now stop at East Midlands Parkway. According to The Government’s Integrated Rail Plan (IRP), this will allow HS2 trains to join existing lines serving Nottingham and Derby city centres.

£100m was also pledged to look at how best to take HS2 trains to Leeds, whilst £200m for a new mass transit network was also promised for the city.

After the downgrade to Northern Powerhouse Rail, a new railway line running from Liverpool to Hull has also been scrapped.

With the publication of their new Integrated Rail Plan (IRP) – worth £96bn but tens of billions less than the original proposed spend on railway infrastructure in the region – the government has been accused by some of committing a “great train robbery”.

Neil Debenham, an investor and entrepreneur with over 20 years’ of helping companies in the North, is also unsure whether the Government will even be able to deliver its new Integrated Rail Plan.

He comments: “It is difficult to know the immediate impact. While HS2 will now be stopping the eastern leg at Sheffield instead of Leeds, the government has now committed to a £96bn integrated rail plan that will deliver faster and cheaper train journeys.

“In theory, this works to the benefit of local businesses in the North, but the general reaction has been sceptical. It is questionable whether the government will even be able to deliver on this pledge, or if this new plan is even feasible.”

Tory MP Robbie Moore also pointed out that Bradford – the seventh-largest city in the UK – will still not have a mainline station under the new plans.

“I’m deeply disappointed by today’s announcement. The Bradford district has been completely short-changed,” the MP for Keighley said.

According to Cristian Ley, in-house solicitor and employment law expert at Guild Freelancing, the current employment climate in the construction industry makes it extremely difficult to utilise self-employed tradespeople, which is driving up the cost of massive infrastructure projects like HS2. This may serve as a partial explanation of why the government have altered their plans.

Cristian Ley, In-House Solicitor and Employment Law Expert, The Guild

Cristian Ley

He comments: “While marquee infrastructure projects like nuclear power station Hinkley Point, HS2, and Crossrail are key pillars of the Government’s strategy to build back better, all these projects have one thing in common: massive cost overruns. Hinkley Point is expected to cost at least £23 billion while HS2 will set the taxpayer back by £98 billion.

“A key contributor in these gigantic costs is the sheer number of people required for their construction. However, the current operating environment has made it almost impossible for firms to utilise self-employed tradespeople and professionals, forcing them to instead use a PAYE workforce that entails substantial additional costs.

“A critical barrier to the use of self-employed contractors was the change to the IR35 tax rules in April 2021, which saw the Government issue large businesses with a set of complex compliance rules for assessing the tax status of self-employed contractors. This additional layer of compliance saw many firms heading towards versions of PAYE, coupled with the fact that trade unions continued to campaign for workers to be engaged under PAYE mandates. All this drives up wage bills and discourages self-employment.

“Self-employed workers are cost-effective, especially on public projects. But making it harder to use freelancer workers has caused costs on key projects to spiral. These heightened costs are another heavy burden on an already weighed-down taxpayer, and it is hardly surprising that the UK is experiencing its highest tax burden since the end of WWII.

“There has been a sharp drop in the number of self-employed contractors during the pandemic. There are now 4,268,000 self-employed workers in the UK down from 5,025,000 in 2019’s fourth quarter.

“The Government urgently needs to reverse this dangerous bias against self-employment and create a welcoming environment for freelancers. The need of the hour is for HMRC to issue IR35 guidance to demonstrate that compliance for self-employed workers is straightforward and workable.

“Self-employment, when done correctly and in alignment with compliance measures, can be a force of good, speed up marquee projects, and help keep costs manageable, ultimately benefitting everyone.”

So, what do these changes mean for the North and Midlands?

The government’s proposals could have huge ramifications for people and businesses in the North and Midlands.

Neil believes collaboration, productivity and innovation in these regions will all be negatively affected under the new proposals.

He said: “In the short-term, the axing of the Eastern leg will make it difficult for local businesses to collaborate with neighbouring regions and cities. This could have an impact on regional productivity and the potential for growth and innovation. The North is also facing a skills shortage, and this announcement could result in this gap widening.

“There are also other elements to consider. Northern businesses have traditionally felt overlooked by Westminster, and this is likely to feel like another blow to local businesses and could only further the divide between the North and the South. The governments need to instil confidence and reaffirm its commitment to the North.”

Does the UK government have a southern bias?

The government has long been accused of having a southern bias. For example, in November last year, the mayors of Greater Manchester and the Liverpool city region, Andy Burnham and Steve Rotherham, accused the government of this, after the government extended the 80% furlough for the national lockdown but refused to do the same thing for northerners the month before.

With the recent announcement, Neil believes accusations of a southern bias are likely to fall at the government’s door again.

He comments: “This announcement will likely be seen as a reflection of southern bias. The government is trying to change this perception, and this is why it has promised an integrated rail plan in place of the planned HS2 Eastern leg.”

So, how else is the government trying to change this perception and what more needs to be done?

“Westminster is regularly accused of southern bias, and successive governments have responded through bold pledges and policies,” continues Neil. “George Osborne’s announcement of the Northern Powerhouse Strategy in 2014 is a clear example of this. It was originally intended to be a bold economic strategy to upgrade the north. While some progress has been made, many feel it has fallen short of the intended outcomes.

“Business interests need to be placed at the heart of any strategy that attempts to upgrade the North. There are plenty of exciting industries with immense scale-up potential, which will be integral to the future economic growth of the UK. Transports and infrastructure upgrades are core to this strategy, and I would like to see more investment in these areas over the coming years.”

Whether or not the changes to HS2 and Northern Powerhouse Rail are definitive evidence of a southern bias, unless the government commits to further investment – and sees through these commitments – in the North, it is inevitable that accusations of a preference for the South will head their way once again.