Every pound lost to tax avoidance is a pound that cannot be spent on vital services
When the coalition was formed in 2010 the government was borrowing £400m a day just to pay the bills. Although there were disagreements over the scale and speed of the cuts, all the main political parties accepted the need to deal urgently with the deficit.
Every pound lost to tax avoidance, tax planning, tax efficiency, or whatever other euphemism is used, by people who simply don’t want to make their contribution is a pound that cannot be spent on vital services. At a time when we are asking individuals and households to make great financial sacrifices, behaviour of this kind from the corporate sector is simply unacceptable.
The example of the water industry that has been highlighted today after a lengthy collaborative investigation by the Observer and my office in parliament has to be one of the worst cases of widespread corporate misbehaviour that has been exposed so far.
Water is an essential industry. Whatever happens in the wider economy, people will not suddenly stop using water. Profits in our monopoly regional water suppliers are stable and predictable, as should be their taxes.
As a result of massive borrowing, we have, however, seen taxable profits drop dramatically in companies that have been taken over by private equity funds. Often these loans have been used to pay off investors through complex debt arrangements routed through one or more offshore jurisdictions. Millions of customers will rightly ask themselves whether this is the best way to use their water rates and the financial strength of the companies built up after years of public investment.
Thames Water stands out as a particularly disturbing case. One in five people in Britain are Thames Water customers. The need to clean up the Thames by upgrading the Victorian sewer system has been known about for 30 years. And the borrowing spree by Thames Water is one reason why it cannot raise the funds itself to finance the construction of the Thames tunnel, a project designed to stop sewage flowing into the river and projected to cost £4.1bn. Instead Thames Water has come to the government for financial support, and is asking its 13 million customers to stump up an extra £80 a year each. I, and others, such as Sir Ian Byatt, the former director of the regulator Ofwat, have argued that the government should look again at this project and at its support for it.
The financial engineering going on inside some parts of the water industry was never considered when it was privatised in the late 1980s. Privatisation was supposed to deliver investment in the industry to improve water quality, the environment, performance on leaks and better customer service while protecting people from a government raiding the proceeds of water bills in times of difficulty. In Scotland, where the water industry is still in public ownership, investment has been slashed as a result of austerity.
But we must now ask serious questions about whether the structure of some parts of the privatised water industry is the right one to deliver essential services. These questions are particularly important at a time when government is considering how more private investment can be brought into our publicly owned infrastructure and when private companies, including Macquarie, are lobbying to make this happen on their terms.
It is now time for the government and the regulator to take a closer look at the activities of our water companies. We must have management in the water industry that makes the sort of responsible and transparent financial decisions which the public deserve.
Simon Hughes is deputy leader of the Liberal Democrats