Reclassifying water companies into the public sector could have increased public sector net financial liabilities and borrowing, while having a relatively small impact on the current budget deficit. In this box, we explored how reclassification could have affected the public sector balance sheet, receipts and spending, and the Government’s fiscal targets.
This box is based on Ofwat, ONS, and OBR data from July 2025, December 2025, and September 2026 .
Water companies in England and Wales have been classified within the private sector since 1989. The Office for National Statistics (ONS), however, is currently reviewing this classification in response to the Water (Special Measures) Act 2025, which increased the degree of government control over the operation of water companies.a,b The Government has also recently announced its intention to further increase public control of the industry, including by removing caps on government share ownership in water firms.c If the ONS were to reclassify, then the relevant assets, liabilities, revenue and expenditure of providers would be incorporated to the public sector.
The 2025 Fiscal risks and sustainability report assessed the potential impact of reclassifying the full water sector on the public sector balance sheet in 2023-24, showing that this could:
- Increase gross liabilities, which increase PSNFL, by £91 billion (3.3 per cent of GDP), including £66 billion of debt. Borrowing by water companies has increased in recent years with around half (52 per cent) of debt inflation-linked.
- Increase financial assets, which all reduce PSNFL, by £12 billion (0.4 per cent of GDP). This includes £5 billion in cash held by water companies, the only financial assets which would reduce PSND.
- Overall, increase PSNFL by £78 billion (2.8 per cent of GDP). PSNW, as the widest measure of the balance sheet, would additionally include the £94 billion of water companies’ physical assets, including water pipelines, treatment facilities, and reservoirs which account for 88 per cent of their total assets.
This increase in PSNFL would be incorporated as a one-off increase to its level at the point of reclassification. Following the initial increase in the level of PSNFL, only the level of borrowing by water companies would directly affect the trajectory of PSNFL, and so affect the Government’s supplementary fiscal target which is for PSNFL to be declining as a share of GDP in the third year of the forecast.
Table B illustrates the potential impact of reclassification on the level of borrowing and the current budget deficit if the revenue and expenditure of providers were to be moved into the public sector, by using data from the outturn years between 2020-21 and 2024-25.d,e Within these years, we estimate that reclassification could:
- Increase public sector receipts by £13 billion (0.5 per cent of GDP) a year on average. Within this, revenue from consumer bills averaged £12 billion and interest receipts averaged £0.4 billion a year.
- Increase current spending by £11 billion (0.4 per cent of GDP) a year. Within this, operating costs, mainly comprising of wages and contracted services, averaged £7 billion, and dividend and debt interest payments averaged £3.8 billion.
- Increase capital spending by £6 billion (0.2 per cent of GDP) a year. Most investment by water companies is on capital additions of property, plant and equipment.
- Increase the current budget deficit, in most years, by £1.0 billion a year (less than 0.1 per cent of GDP). This is because, in outturn, current spending and depreciation is largely offset by receipts, and most borrowing by water companies is to fund investment.
- Increase net borrowing by £4.4 billion (0.2 per cent of GDP) a year. The increase in borrowing rises from £0.2 billion in 2020-21 to £7 billion by 2024-25. This is because both capital and current spending have increased by more than receipts over this period.
Table B: Estimated impact of reclassification on net borrowing and the current budget deficit
| £ billion | |||||
|---|---|---|---|---|---|
| 2020-21 | 2021-22 | 2022-23 | 2023-24 | 2024-25 | |
| Receipts (a) | 11.7 | 11.9 | 12.6 | 14.1 | 15.0 |
| Current spending (b) | 7.8 | 9.9 | 12.4 | 12.5 | 13.4 |
| of which: | |||||
| Operating costs | 5.8 | 6.2 | 7.1 | 8.1 | 9.6 |
| Interest payments | 2.0 | 3.7 | 5.3 | 4.4 | 3.8 |
| Depreciation (c) | 2.6 | 2.7 | 2.9 | 3.0 | 3.2 |
| Capital spending (d) | 4.0 | 5.1 | 5.4 | 7.6 | 8.9 |
| Impact on current budget deficit (b+c-a) | -1.2 | 0.7 | 2.7 | 1.4 | 1.6 |
| Impact on net borrowing (b+d-a) | 0.2 | 3.1 | 5.2 | 6.0 | 7.4 |
| Source: Water companies, OBR |
The impact of reclassification on borrowing and the current budget deficit over the forecast period would depend on the business plans of water companies at the time of reclassification, and on any future policy or regulatory changes. Recent outturn data, discussed above, suggests that it could have a small impact on the current budget deficit forecast as receipts largely offset current spending and depreciation in the sector. However, the forecast for borrowing will also reflect capital spending, which is set to remain at an elevated level over the next five years as water companies invest to upgrade their capital stocks. The Ofwat Price Review 2024 has approved £104 billion of expenditure (2022-23 prices) by water companies between 2025-26 and 2029-30.f This would point to higher current and capital spending compared to Table B, averaging around £25 billion a year of total spending in nominal terms over this time period.
This box was originally published in Economic and fiscal outlook – October 2026