The Christmas gift in the Autumn Statement

George Osborne once said he wanted to put an end to the mini-budget occasions of the Autumn Statement. It’s safe to say that is another target he has missed. In what seems like an age ago, Osborne announced a slew of figures, accompanied by a smattering of initiatives. Aside from the disappointment over the state of the economy, most of the announcements delivered with much fanfare were underwhelming. Osborne also pulled another trick out of Gordon Brown’s hat and rushed through many of his tough announcements. One that did draw some attention from inside the chamber however, was his plan to give a subsidy of £50 to every customer of South West Water, in an attempt to help those customers with their water bills. So what’s the big deal? Plenty, actually.

When politicians come up with ideas like this, which are very specific to a certain area, it’s usually for reasons other than the ones they give. The MPs in the area that South West Water operates in are predominantly Tory and Liberal Democrat. Of the 17 constituencies in that region, 2 seats are Labour, 5 are Lib Dem and 10 are Conservative. The majorities in that region are also more marginal than the rest of the country. Minus the ultra-safe seat of Devon South West, the average majority in each constituency in an area which includes the fourth most marginal seat in the country, is 3,181. This is compared to the national average of 8,366. If you remove the neighbouring constituencies of Devon Central and Tiverton & Honiton, the average majority comes down to 2,310.

The fact that George Osborne is treating people in the constituencies of MPs in the coalition government shouldn’t come as a surprise – governments have done it for years. In many ways, this is what is meant to happen; you elect your MP to champion your area, and if all goes according to plan that results in a positive outcome for your area. If this were to be repeated across the country we would be in eutopia. Except, that is not what is happening in this case.

Who will really benefit from the Autumn Statement? Source: PA

Sifting through the deluge of headlines about this announcement was hard work, it must have taken me at least 30 seconds. One thing was common though, they were all deliberately misleading. The headlines, the coverage and the statement itself, were all designed to mislead. All insinuate that South West Water customers will be receiving a £50 rebate from the state. However, this is not the case. the Government White Paper, released on 8th December 2011, confirms that the £50 discount for each South West Water customer will be going straight into the pockets of South West Water, and not their customers. Technically speaking, this will, supposedly, “enable” South West Water to cut the bills for each of their customers by £50. This is very noble/naive of the Government, depending on your view. But if Project Merlin is anything to go by, the results of a government encouragement scheme may not have the desired effect.

This will come as scant consolation for the 700,000 South West Water customers. The deal has been presented as a direct discount to customers, designed to come into play as early as 2013 – indeed, the White Paper even mentions the date, April 13th, as the date when South West Water will be “enabled” to lower the water bills of their customers by £50. Except, this is misleading in itself. The truth is, their bills could be lowered as early as 2012 if South West Water wanted to, but why would they want to? Better to wait for a subsidy from the Government before even thinking about passing on discounts to customers. At the last time of checking, South West Water made over £100m in profit. This is because Ofwat, the regulatory body for the water and sewerage industry, every year decides the limit on what water companies can charge their customers by setting a price ceiling. In theory this is a price ceiling, but in practice it is a price setting. Although Ofwat sets the prices for each year, it only sets these prices every 5 years. The last period that these prices were set for was in 2009, for the years 2010-2015. So even if this extra £50 was to be passed onto the customers of South West Water, it would only be legally binding by 2015 at the earliest – after the price review of 2014.

In the meantime George Osborne can increase the popularity of the Conservative Party in the South West of England by reminding them of the £50 discount on their water bills that he is supposedly giving to them. The way that the water industry is set up, there is no choice of companies to choose from for customers. There is a monopoly in each area. By setting the price ceiling for these companies, Ofwat in reality sets the prices. In turn, by de-facto setting the prices, it also determines the profits of these companies. Seeing as though customers have no choice in what company to choose from, the system is pre-determining a profit level for any company willing to provide water in any given region of the country. The Government has also conceded that the water bills of those in the South West are too high. By deciding to not lower the price ceiling on what South West Water charges its customers, they have chosen not to eat into the profits of South West Water. Therefore, they have decided that South West Water must make over £100m in profit. Is this the way to regulate something as essential as water?

Furthermore, the Government has decided that people of the South West deserve a taxpayers subsidy when it comes to paying for water. This is understandable. Much of the cost of water for customers of the South West are down to sewage bills – which are high due to the maintenance required to keep the beaches of the South West in prime condition. If the Government has decided that these beaches are of national heritage, and therefore deserving of a taxpayer subsidy in much the same way that museums enjoy, then why are they using an “enabling” mechanism? Do we really expect private companies to take the Government up on their offer to lower the bills of their customers, voluntarily? Just like the petrol companies did after George Osborne lowered fuel duty? An appetite for privatisation is an accusation levelled at the Conservative Party generation after generation. By identifying the need for a nationwide subsidy system to lower the cost of water, and a regulatory body capping the cost of water already in place, you wonder if Osborne truly believes that the water industry should be in the hands of private companies. A Tory Chancellor doubting privatisation. Remarkable. Then again, maybe it’s just plain old political engineering.


Posted on December 13, 2011, in Conservative Party, Parliamentary Business, Weekly Round-up and tagged , , , , , , . Bookmark the permalink. Leave a comment.

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