Where does the money come from for building a tram in the UK?

When trams are discussed many of those with doubts about the idea throw up their hands in horror and say “where is the money coming from”. –  in some way they may think they will be paying for it out of their own pocket, and thus become poorer, particularly in the present environment where we are told we are short of money.  (Which isn’t in fact true). This fear is unfounded – it is worth remembering that after World War 2, the UK with huge debts, proportionately much bigger than now, the govt nevertheless created the NHS, introduced universal benefits, and built 1m houses, all without going bust. In fact, borrowing money under the correct circumstances, outlined below, makes the whole country richer. (In that case not using gilts)

Note, UK debts proportionally were much higher after WW2 than now, and they had to be repaid in dollars, even higher after the Napoleonic Wars.

What are the correct circumstances for Govt borrowing money to increase everyone’s wealth?

Providing an infrastructure project is  carefully assessed and  shows that if  the total benefits to the country that can be counted  meet or  exceed a  3.5% REAL rate of return ( Businesses tend to talk about  NOMINAL which has inflation ADDED to the real rate of return) it doesn’t actually cost the good people of UK anything, as the govt has a number of means of raising or creating money for the purpose of infrastructure improvements, in the same way that it pays for roads, bridges, hospitals, railways etc.

The govt has a number of ways to get money for infrastructure investment that don’t come out of your pocket.

  • Selling UK Government Bonds, also called Gilts,
  • The government’s Bank of England simply creates some money on their ledger and gives it directly to the Treasury – One arm of government to another …no debt? (The private banks miss out on some money-making bonds.) – They did it during covid.
  • Or the government can print money as it has done via quantitative easing since the financial crash of 2008.
  • Taxation

Links explaining this:

Bank of England to directly finance UK government’s extra spending





Richard Werner explaining a lot of this:


Gilts UK Govt Bonds

One-way the UK Govt can raise money long term by selling government bonds also called gilts.  So, it could sell £2Billion worth of Gilts, invest the money in a tram (or a Bridge, or motorway, hospital, education), pay the Bond Holder a mere 1% – 1.5 % of the £2Billion every year for 10 years and then hand the £2 Billion back.  It can then borrow it again if it wants by selling more Gilts / Bonds and so on.  Or there are other shorter or longer Bonds it can create and sell. The interest as can be seen from below is very low between 1 and 4.25%:

Above From Bloomberg

There is no reason at all why these could not fund in this way, city tramways, providing the correct impartial studies have been done and show such an investment returns more than 3.5%. However, we can assume that the other ways cost about the same in terms of interest.

(Inflation is quite irrelevant here, as the latter is already allowed for in the analysis.  “payback” is also irrelevant, all that matters is the over the life of the investment, which may be 30 – 100 years each year on average the interest rate is paid.  If so then the country and its citizens is ahead financially

Cash flow

If the govt has carried out the studies, and found it makes more than 3.5% real, and then let the contract, it may take 3 years to build a fully operational tramway. Thus, it has to fund the gap from Zero years to 5 Years, where all the money is spent cumulatively. So, on average it will have paid out to bond holders the interest on something like half of £2B for 5 years at say 1.5 % p.a. or say £30m for p.a for 5 years = £50m.  This can easily be absorbed into national budgets which are £100sB.  After that point the “Farebox Income ” income kicks in and as the previous studies have shown more than repay the cost of the initial borrowing on an annual basis (or the govt would not have funded it).

How does the govt analyze an infra project?

(Thanks to David Walmsley for this)

Government investments are assessed according to the schema in the Treasury Green Book, which sets out a Five Case Model for assessing projects as follows:

– Strategic dimension What is the case for change, including the rationale for intervention? What is the current situation? What is to be done? What outcomes are expected? How do these fit with wider government policies and objectives?

– Economic dimension What is the net value to society (the social value) of the intervention compared to continuing with Business As Usual? What are the risks and their costs, and how are they best managed? Which option reflects the optimal net value to society?

– Commercial dimension Can a realistic and credible commercial deal be struck? Who will manage which risks?

– Financial dimension What is the impact of the proposal on the public sector budget in terms of the total cost of both capital and revenue?

– Management dimension Are there realistic and robust delivery plans? How can the proposal be delivered?


WebTAG is the Department for Transport’s interpretation of the Green Book for use in assessing transport projects. The Treasury has criticized the DfT approach on the grounds that it places too much emphasis on the Economic Dimension (the cost-benefit bit) and doesn’t pay enough attention to the Strategic Dimension (which basically asks why are we doing this?).


WebTAG isn’t consciously biased against public transport, and it does include an assessment of the softer benefits like reducing pollution, congestion etc. But the softer benefits are harder to measure and quantify, so inevitably the assessment tends to concentrate more on the quantifiable benefits.


There is a further point that WebTAG ultimately derives from the COBA cost-benefit analysis methods of the 1980s, whose primary purpose was to compare one road scheme with another to find the best one to pursue. In that case it is less important to calculate all the benefits in detail than to ensure that all schemes are assessed in the same way. It is different when the method is used to compare different modes of transport which have different cost profiles, types of benefit, timescales, and so on.


Nevertheless, WebTAG is what we have, and is what the Government uses. The cost-benefit analysis uses the standard Treasury discount rate of 3.5 per cent. It is irrelevant whether the Government raises the money through bonds, taxation or printing money; 3.5 per cent is what must be used.

What is the real rate of return of investment over the long term in the UK?


In the UK, on average all investments only grow at the surprisingly low rate of about 2%, so anything better than this, 3.5% in our case is well worth having.

Control of Risks

For private investors and businesses, one of the largest and hard to take account of risks is that of Political Risk, i.e. the govt may pass a law impacting their business model in unexpected and negative ways – for example banning lead in petrol or engine driven cars directly affects the profit of the motor trade.  This is why private businesses demand a higher rate of return because they are risky and vulnerable to political risk and other risks. In the case of a tramway the govt can control relevant risks to a large extent by for example if it chose banning or restricting cars and parking in cities all of which already exist to some extent.  This is one reason why only a low return is demanded as the lower the risk the lower the return demanded by investors.


Some of the ways of raising money may transfer cost to the citizens – through increasing inflation, or increasing taxation, but these effects are short term and marginal – whilst inflation may effectively rob the value of savings and income, the economic tests mentioned earlier indicate that the economy will be stimulated by more than the negative effect on savings and income.  Similarly, loss of wages due to higher taxes will be more than compensated for by the increased growth in the economy due to the investment – higher demand for construction leads to higher wages paid in that sector for labour and materials, which increases the tax base thus spreading any tax rises by more than the individual hit.

Margaret Thatcher’s economics

Margaret Thatcher wrongly claimed that a country is like a family and has to balance its budget.  This is completely untrue.  A country is like a country and is more like a business and so to keep growing has to borrow to invest.

Trickle-down economics

The idea here as that as the economy of wealth rises, all boats float upwards.  This neo-liberal economic idea, currently dominant, has been shown to be demonstrably false – there has been huge transfers of wealth from the less well off to the well off since the financial crash of 2008 and covid.  It is clearly trickly up.  Investing in and providing expensive but cheaper in the long run transport such as trams in preference to cars actually grows the economy for everyone including the less well off. Decent public transport has been shown by academic studies to boost a city’s economy due to the ” connected city effect “.  It is not surprising that British workers have consistently underperformed the continentals due to spending so much time and money sitting in traffic jams and being forced to own and use a car.  The UK has the lowest per capita car ownership, but the highest car mileage in Europe.