Good morning from New Economy Brief.
Last week, reports emerged that the Government was on standby to put Thames Water into special administration. Despite the initial promise of efficiency and investment following privatisation in 1989, critics argue that Thames Water and other privatised water companies have neglected essential infrastructure upgrades, leading to pollution and mounting corporate debt. With debts reaching approximately £14 billion (roughly 80% of the value of the assets of the business), Thames Water faces the risk of collapse, prompting concerns about the continuity of water and sewerage services for its 15 million customers. While the UK government may step in to manage the company temporarily, many see this as a much needed opportunity to renationalise.
In this week’s newsletter, we explore the lessons from Thames Water, the problems with water privatisation and what can (and can’t) be done about it.
A lost three decades? The potential collapse of Thames Water isn’t the first time that water privatisation has been deemed a failure from across the political spectrum. Amid droughts last summer, former David Cameron advisor Camilla Cavendish wrote that it was “time to admit that water privatisation has been a failure”. One of those who actually worked on the privatisation of water in 1989, Jonathan Portes, has called the policy an “organised rip-off”.
Investment has declined since privatisation. Privatisation has failed to deliver what it was supposedly introduced to achieve: increased investment, argues Professor David Hall of the University of Greenwich. In fact, companies have invested “no net additional shareholder funds (equity) since privatisation” meaning that “money has been taken out, not put in”.
Who are the shareholders? The privatisation of water has been described as “a cash cow for investment firms and private equity companies”. According to Professor David Hall, English water companies paid shareholders a total of £18.9 billion in dividends from 2010 to 2021. Thames Water alone has paid out a total of £7.2 billion in dividends since privatisation. But who are the shareholders receiving these payouts while failings continue? Well, the answer to this question has been described as “as murky as the water in the river”.
So, what now? It is possible that the shareholders of Thames Water could bail out the company. But failing that, the government will have to step in in some way. One option is that Thames Water will be put into special administration, a power outlined in the Water Industry Act 1991 which can be used when a private company is on the brink of collapse. This would enable the company to carry out its functions and provide a public service until either being transferred to another private company (in the case of Bulb in 2022) or into public ownership.
Lessons from Thames Water. You’d be hard pressed to find anyone who could enthusiastically defend the record of water privatisation over the last 34 years. As the climate crisis worsens and debt becomes more expensive, reforming the water sector so that investment is put before shareholders has never been more urgent. The legacy of years of privatisation can be difficult to unravel, with high debts and the need to make up for historic deficits in infrastructure investment both providing significant barriers to action.
NHS workforce plan. The Government released its NHS workforce plan last weekend. Chris Thomas from the Institute of Public Policy Research explains why the plans fall short of solving issues with staff retention and ignores the problems in the social care sector. (We explored the issues of funding pressures and staff shortages in the NHS earlier this year.)
How to match higher taxes with better taxes. The Resolution Foundation’s Economy 2030 Inquiry has released a new report calling for a tax strategy to boost economic growth. Their recommendations include “a revenue-neutral package worth around 1 per cent of GDP comprising reforms to business, environmental, income and wealth taxes.”
The macroeconomic case for £30bn additional public investment. The Institute for Public Policy Research’s Carsten Jung has modelled the economic implications of a £30bn public investment in the UK economy and made two interesting conclusions: the multiplier effect on growth means that a £30bn investment is compatible with a falling debt to GDP ratio over a 5 year period and that the impact on inflation will be limited.
Fiscal rules and electoral success. David Klemperer has written an article for the New Statesman explaining why Keir Starmer should learn lessons from the failures of the left-wing former French president François Hollande, including not to let adherence to fiscal rules derail the rest of the electoral agenda.
Is it time to get rid of the 2% inflation target? Writing for the Financial Times, economist Adam Tooze explains how getting inflation back down to a 2% target is a “profoundly conservative political argument dressed in the garb of economic necessity” that will necessitate renewed fiscal austerity. He questions whether subordinating all other macroeconomic goals to reducing inflation to 2% is “fit for purpose in an age of polycrisis”.
Tackling inflation beyond monetary tightening. A new peer-reviewed paper looks at the role of fiscal and monetary policies in tackling inflation, using Denmark as a case study. The authors conclude: “a close coordination of fiscal and income policies can help reduce the effects of adverse shocks to income without increasing inflation. Furthermore, we find that of all the policies implemented, monetary policy has the most dramatic effects on public debt sustainability.”
Fiscal price caps help reduce inflation. Pierre-Olivier Gourinchas, the IMF’s Chief Economist, has explained how “unconventional fiscal policies” to tackle inflation in the Eurozone worked by reducing inflation-expectations. IPPR’s Carsten Jung explained how fiscal price caps could achieve the same result in the UK.
Corporate profit margins are propping up inflation. The Observer’s Phillip Inman documents the sectors in the UK economy accused of profiteering from the cost of living crisis. He comments on a report from Capital Economics’ Simon Macadam which found that UK corporations have used their market power to maintain profit margins in the face of surging costs, which is unusual amongst other advanced economies: “In the second half of 2022, UK inflation was about four percentage points higher than it would have been had profits absorbed rising costs as they did before the pandemic.”
Monetary tightening is benefiting savers. Bloomberg analysis has calculated that UK households on aggregate are actually about £10 billion ($12.7 billion) a year better off as a result of a jump in interest rates, as savers are benefiting from higher rates but the increase in costs of borrowing are yet to fully pass on to mortgage holders. The fact that so many people are on fixed rate mortgages mean that the Bank of England’s blunt tool for slowing inflation is acting slower and less effectively than it has in the past. (Read our previous New Economy Brief on the ‘mortgage timebomb’ for more.)
Sharing the benefits of growth. A new report from the Resolution Foundation argues that “to make sure economic growth raises living standards without raising inequality, we need predistribution and redistribution: higher employment, pay, and reform of the benefits system.” The authors suggest that social security benefits should be uprated in line with wages rather than prices, and LHA rates should keep up with growth in housing costs, following recent social security reforms in New Zealand, Germany, Belgium and the Netherlands.
‘Levelling up’ buses. IPPR have published a report explaining how the rest of England’s metropolitan areas can achieve the same level per head of public transport provision as London to help decarbonise the transport system.
Community Wealth Building and Bidenomics. The Biden Administration has released a new fact sheet explaining their plans to embed a community wealth building approach into their federal agencies. Their policy memorandum outlines actions federal agencies can take to advance equitable development in American cities and urban communities.