Nationalisation will simply have the Treasury assume private spending commitments with little knowledge of how to run these businesses, thereby increasing the burden on taxpayers, says Valentin Boboc

For the first time in nine years, Andy Burnham is back in Westminster. With his eyes on the top job and a year rife with debate about the meaning of Manchesterism, the Common Wealth think tank published an economic manifesto in preparation for a potential Burnham premiership, finally attaching a more concrete programme to the phrase. 

The Productive State, by Mathew Lawrence of the Common Wealth think tank, proposes to “reverse” four decades of privatisation by taking utilities into public ownership through administration and standing up state competitors in energy and housing, beginning with water. 

The aims are to reduce bills and to control utility companies’ spending through a combination of administrative levers and public ownership, thus delivering better value for money. 

The key issue, as always, is that nationalisation will simply have the Treasury assume private spending commitments with little knowledge of how to run these businesses, thereby increasing the burden on taxpayers. The worst thing of all, and something that the report is very light on, is that the obstacles that utility firms face that prevent them from being profitable and improving their business models will not be removed by a change in ownership. 

Less successful utility companies currently carry some private debt to finance their daily operations. For instance, Thames Water carries around £20bn of borrowing. That type of debt doesn’t vanish when the state takes the keys. Even if we made the unrealistic assumption that the state could run a business as optimally as private actors, in that best-case scenario, nothing would change. Current private liabilities will be assumed by the taxpayer, who will bear both water charges and higher taxes. In the pamphlet’s own terminology, the ‘privatisation premium’ confuses a change of payer for a saving. 

The state has not retreated from the utilities sector

A more conceptual failing of the pamphlet is the idea that the state spent four decades retreating from the utilities sector. Britain spent decades constructing a capitalist command economy, in which firms remain in private hands but are directed, targeted and fined by ministers until the price mechanism barely functions, with a set of price caps and investment programmes decided by state regulators. The pamphlet somewhat concedes this point, admitting that state interference is more extensive than ever, but uses this as a secondary argument for owning what the state already controls. 

Nationalisation would come at the worst possible moment. The government now spends close to 45 per cent of national income, the longest sustained run of high spending since the Second World War, with the tax take at its highest since 1948. A state this large is a state of competing claims, among them the health service, defence, pensions, welfare and the interest on its own debt. The pamphlet promises that an arm’s-length public water company would be insulated from the scramble and funded for the long term, but experience says otherwise. The postwar nationalised industries were starved of capital whenever the Treasury was squeezed. When money is tight and will remain so until we get serious about fiscal consolidation, a reservoir is easier to delay than welfare payments, public sector pay rises or anything that appears to be ‘essential.’ 

Britain spent decades constructing a capitalist command economy, in which firms remain in private hands but are directed, targeted and fined by ministers until the price mechanism barely functions, with a set of price caps and investment programmes decided by state regulators

This leaves us with planning as the one constraint that nationalisation doesn’t intend to touch. Thames Water first proposed a major new reservoir near Abingdon in 2006. Nearly 20 years later, it still hasn’t received planning permission, held up by regulators, local objectors and, last year, a judicial review. The reservoir is already designated nationally significant and decided by the Secretary of State rather than the local council, yet even that fast track has achieved nothing other than more consultations. If it is approved soon, it will not hold water until 2040. 

Taking the company into public hands doesn’t change any of that. A state-owned Thames Water would face the same obstacles as the privately owned Thames Water currently does. Will a future government rewrite planning laws so its own water company can build things at last? If it were, it could rewrite that same law for the private company tomorrow, drop nationalisation plans entirely and save billions for the taxpayer. 

The most eloquent summary of the contradictions at the heart of these nationalisation proposals is provided by the pamphlet itself. Page 56 tells us that “The Productive State is therefore an alternative allocation of fiscal resources, not a costless one”. Quite so. The government will start a massive borrowing exercise when it has no room for manoeuvre, and the taxpayer will foot the bill. Worst of all, the whole case rests on creative accounting and empty promises, the same ones the nationalised industries of the 1970s already broke. 

Valentin Boboc is a senior economist at the IEA