A new Public First report for Water UK looks at the economic cost of water scarcity as a blocker on commercial development in England. In areas of the country, we are already seeing the limiting impacts of water scarcity on development; and with the commercial growth in water intensive industries, rising temperatures and population increase the problem is only growing. Insufficient water is putting breaks on the development that is so desperately needed for growth.

Public First’s report, The Cost of Water Scarcity, estimates the economic impact of water scarcity in the limits it places on business and industrial growth across England with reference to some key sectors and geographies. The aim is to help policymakers and industry to understand the scale of the challenge, to understand how additional growth can be achieved, and the impact of this growth on wider supply.

• Our analysis focussed on three broad areas. Firstly, we looked at how local non-household growth could be impacted in locations where a Government commitment to higher housebuilding targets intersects with a lack of spare supply above the headroom. We combined water supply and demand modelling with growth plans for household development released by the OBR to identify where supply runs out and by how much, and estimate what this means for commercial growth assuming the forecast is met. We estimate that as much as £6.4 billion of economic growth could be lost due to the housing effect in areas where there is limited or little available supply above the headroom. This is driven by an additional demand of 9 million litres of water per day that cannot be met by planned-for water supply, approximately equal to the total water use of a medium-sized town, such as Dudley.
• Although not forecast to be achieved by the OBR, if the Government’s target of 1.5 million homes were to be built successfully, our model estimates that as much as £10.9 billion of economic growth could subsequently be lost due to the knock-on impact on available supply.
• Secondly, we conducted analysis at the sectoral level, focussing on the impact of growth in certain key sectors on water supply. Chief among these sectors is the impact of Artificial Intelligence (AI) and the data centres that are needed to support its growth. We found that if computer capacity is prioritised to meet the Government’s ambitious AI growth agenda that it will further reduce the commercial growth of other sectors assumed in supply demand modelling. We estimate that this barrier to commercial growth could cost the economy £1.3 billion.  However, with economists estimating that the productivity gains over the next ten years due to AI could be as much as £400 billion, the economic cost of not providing the infrastructure necessary to drive AI growth would be far higher.
• The implication of the above is that increasing supply and managing demand in the short-term would unlock economic growth over the medium and long-term. Failing to address the issue could have serious implications for the ability of the Government to meet its key political objectives.
• Finally, Public First built on its analysis that formed the basis of the Government’s growth strategy from January by modelling the extent to which growth in the OxCam Arc could be jeopardised by water scarcity. In the Chancellor’s January growth speech, she announced the OxCam growth corridor could bring £78bn to the UK economy by 2035. This growth was based on a projection of 4.4% growth driven by increase in highly skilled employment which would increase GDP by £7 billion by 2030.  Our analysis estimates that water scarcity could reduce this growth by more than 10%, costing the UK economy almost £800 million.  
• Taken together, these novel approaches to estimating the impacts of a notoriously difficult problem demonstrate the urgent need for action. Accounting for the estimate of 1.3 million homes built, water scarcity results in a total of £8.5 billion in stifled economic growth; this equates to a reduction in £2.5 billion in tax receipts, and over 25% of the £9.9 billion in fiscal headroom announced at Autumn Budget 2024. Over five years, this represents 3.5% of total OBR forecast growth of the UK economy in this time period.

Without swift and rapid policy intervention ahead of 2029 and of the next round of water resource management planning, water scarcity will become the main blocker to commercial development and subsequently, economic growth. Fortunately, there is still time to make these interventions if policymakers act quickly.

You can find the report here: