Source · Select Committees · Public Accounts Committee
Recommendation 16
16
Deferred
Significant inflationary pressures led Department to pause HS2 and road building projects.
Conclusion
The Department is having to manage significant inflationary cost pressures across its spending on major infrastructure projects, particularly from higher costs of construction materials.37 For example when we examined progress on the HS2 programme in May 2022, HS2 Ltd told us that it was seeing ‘30% to 40% swings in the cost of raw material’.38 In the 2022 Autumn Statement, HM Treasury set out that there would be no increase to departments’ cash settlements for the current Spending Review period to 2024–25 and so departments were expected to absorb the higher costs from inflation within existing cash budgets.39 As a result, the Department announced in March 2023 its decisions to pause new construction work at Euston and on Phase 2a (between Birmingham and Crewe) for the next two years, along with some of its road-building programme, to stay within its cash budgets.40
Government Response Summary
The government agrees with the observation and states that while departments must absorb inflation, they are discussing with HM Treasury how to manage future HS2 cost pressures to protect value for money, and will report back in six months.
Government Response
Deferred
HM Government
Deferred
4.1 The government agrees with the Committee’s recommendation. Target implementation date: January 2024 4.2 HM Treasury’s standard approach, as set out in Consolidated Budget Guidance and reaffirmed in the 2022 Autumn Statement, is that departments must absorb inflationary pressures within their existing budgets in the first instance. This means that in the first instance, pressures have to be managed within the DfT capital portfolio, which is particularly difficult given the size of the HS2 programme. As is also standard, HM Treasury is open to considering the case for additional funding for such pressures if there is clear evidence of how they have arisen, of the steps that have been taken to manage them, and that they are clearly unavoidable, unforeseeable, and unabsorbable. 4.3 To manage these effects, HM Treasury agreed to defer expenditure across a number of transport capital programmes prior to Spring Budget 2023. DfT and HM Treasury have been discussing how they might manage future cost pressures on the programme in order to best protect value for money for taxpayers, including by giving DfT sufficient flexibility to manage HS2’s budgets as effectively as possible, and will report back to the Committee in six months.