Is Thames Water the first real test for Manchesterism?

Good morning from New Economy Brief.

With Andy Burnham expected to take over as Prime Minister in the coming weeks, attention is turning to what his economic agenda might mean in practice. Much of the discussion has centred on "Manchesterism": an approach that argues the government should move beyond regulating markets and towards directly owning the essential services that underpin everyday life and reducing their cost.

Thames Water could be the first real test of that agenda. Its future is still uncertain, and ministers may soon have to decide whether to keep searching for another private-sector rescue, or instead bring England's largest water company under public control.

Critics argue that public ownership is unaffordable. Supporters counter that Britain's existing model imposes enormous costs on households, the public finances and economic growth. This week we explore the case for incremental public ownership  – and how a government committed to fiscal discipline could still expand public control of essential infrastructure.

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The first test of Manchesterism in action?

Manchesterism begins from a simple proposition: ownership and control of essential services is a key determinant for the cost of living. Rather than relying only on markets coordinated by regulators, or redistribution after the event, it argues for a more active "Productive State" that owns, builds and coordinates strategic assets.

As Mainstream’s The Productive State: A Framework for Manchesterism paper argues, government should intervene "by investing public money into public assets for public provision of the essentials required for a dignified life." The priorities are sectors in which private markets have consistently failed: where monopoly infrastructure encourages rent extraction, where prices have macroeconomic importance, and where private capital systematically underinvests.

The obvious question is how that translates into practice. Thames Water may provide the answer.

Thames Water: a brief history of privatisation and extraction. With the company's finances still precarious, ministers may soon have the opportunity to invoke the Special Administration Regime. Unlike wholesale nationalisation, Special Administration already exists in legislation to ensure continuity of essential services where licensed utilities become insolvent or can’t fulfil their statutory obligations. 

Few companies better illustrate the extractive model critics associate with Britain's privatised utilities. Since privatisation in 1989, English water companies have accumulated more than £80 billion of debt while paying out over £85 billion in dividends. Thames Water alone distributed at least £7.2 billion to shareholders while accumulating almost £20 billion of debt.

The company has also failed to invest enough to maintain the water system. The consequences have become increasingly visible: illegal sewage discharges, record leakage, deteriorating infrastructure and repeated environmental failures. Meanwhile, almost 28% of the average English water bill now goes towards debt servicing and shareholder returns, compared with around 10% under publicly owned Scottish Water.

The 2025 Cunliffe Review acknowledged many of the sector's regulatory failures, recommending a new single regulator and stronger consumer protections. But as New Economy Brief explained last year, critics - including 24 campaign groups, trade unions and community organisations - argue it largely sidestepped the structural problem. It failed to address the financial engineering that loaded companies with debt, and continued to assume that better regulation alone could solve problems rooted in ownership. It even recommended waiving environmental fines in some circumstances.

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Incremental nationalisation within fiscal constraints.

Opponents of public ownership often claim bringing water companies into public ownership would cost taxpayers around £100 billion. But that figure rests on highly contestable assumptions – and was based on work commissioned by water industry interests. As our previous briefing argued, legal analyses suggest compensation based on "appropriate value" could be far lower where there have been clear breaches of the public interest.

The greater obstacle is the fiscal framework. Concern about adverse bond market reactions has encouraged the incoming government to retain the current fiscal rules, making large-scale public ownership of essentials harder in the short term.

Charting a path through PSNFL and the bond market. Under current fiscal rules, Public Sector Net Financial Liabilities (PSNFL) must fall, and day-to-day spending must be financed from tax revenues, by 2029/30. Some – like IPPR and the IFS – argue that meeting these rules will create a "position of strength" from which the government could reform the fiscal framework in the next Parliament.

There is, however, some flexibility within PSNFL to enable a more incremental approach to public ownership of essentials within this Parliament. Because it recognises financial assets as well as liabilities, the government can borrow to acquire minority stakes in private companies without worsening the headline fiscal measure, provided the ONS still classifies those companies as private. This creates a route towards gradual public ownership through strategic investment rather than wholesale acquisition.

Tweaks to the fiscal rules? Common Wealth's Chris Hayes explains how Burnham can do public ownership without scaring the bond markets: the government should use “cheap public finance to build up ownership stakes over time…these stakes should sit within a public corporation, not within Whitehall. Designated public financial institutions like the National Wealth Fund can be enlisted to support the process.” As set out above, this would let the government take minority stakes in water companies without compromising the PSNFL rule.  

Accelerating the Manchesterism agenda would likely require further reforms. One option would be to exempt commercially operating public corporations—such as the National Wealth Fund, Great British Energy and others—from the investment rule, as many European countries already do, allowing them to borrow independently of the state balance sheet.

As Mainstream’s The Productive State argues: "The vehicle for change is the public corporation. Operationally independent, commercially mandated, and borrowing in its own name, public corporations are able to deliver patient investment at lower cost, price fairly, and can eliminate the privatisation premium…without sovereign borrowing implications." Former Transport Secretary and Burnham ally Louise Haigh has argued for this approach in her Tribune essay, while insurers and institutional investors have made comparable cases for a National Housing Bank.

A further step would be moving from PSNFL to Public Sector Net Worth (PSNW), allowing productive physical assets as well as financial ones to be classed as fiscally neutral when calculating national debt. (Reported Burnham advisers Lord Jim O’Neill, Andy Haldane and Richard Hughes have all been advocates of PSNW in recent years.) Such reforms could come later in the Parliament, or after a renewed electoral mandate, or after achieving a predefined ‘position of strength’ and credibility. The answer may determine how quickly a Burnham government can put its commitment to greater public control of essential services into practice.

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Threading the needle.

Water bills aren't the only cause of the cost of living crisis. But water companies have become symbols of something larger: an economic model in which households face rising bills while monopoly providers accumulate debt, extract dividends and underinvest in essential infrastructure, adding to a growing sense of impotence and distrust of state capacity.

That diagnosis increasingly cuts across Labour's intellectual traditions. Whether from the Tribune Group, Labour Growth Group, Mainstream or ThinkLabour, there is growing agreement that Britain's model of privatised essentials creates both an economic and a political problem.

Combining ‘cost of living populism’ with fiscal sustainability. Recent Persuasion UK polling suggests there is substantial electoral potential in a coherent policy platform centred on a ‘cost of living populism’, and particularly on making essentials like water, food, rent, and energy cheaper.  Steve Akehurst explained that “the thread here is control: short-term relief on essentials…paired with longer-term control over them.”

Voters want to see politicians taking on sources of economic unfairness and showing they are prepared to intervene on behalf of ordinary households. That does not necessarily require sweeping nationalisation overnight. It needs visible examples that government will act where markets have failed.

Thames Water therefore represents something much larger than one troubled utility. It will test whether public ownership of essentials can help the government out of a political and economic morass, while remaining within fiscal constraints. If Manchesterism is to become more than an intellectual framework, Thames Water is likely to be the new government’s proof of concept.