State aid remains a slippery slope

The Government is delivering on another Brexit pledge. Kwasi Kwarteng’s Department for Business, Energy and Industrial Strategy has unveiled a new subsidy framework which takes back control from Brussels. The UK will break free from the EU’s bureaucratic state aid regime, allowing our government to provide quicker and more flexible support to UK businesses.

That, at least, is the promise. However, like many other aspects of the UK’s departure from the EU, this change in regime creates dangers as well as opportunities.

On the plus side, UK state aid will no longer have to be signed off by unelected officials at the European Commission. The devolved administrations in Belfast, Cardiff and Edinburgh will have more control too, as long as they stick to some pretty sensible UK-wide principles. These include bans on subsidies that simply displace economic activity from one part of the UK to another, or bail out companies which are no longer viable, and the end of unlimited government guarantees.

It is also good that politicians will not have a completely free hand. There will still be some checks and balances, including judicial review by UK courts, and the need to comply with the terms of other trade agreements, including the rules of the World Trade Organisation. A new “Subsidy Advice Unit” will be set up within the Competition and Markets Authority.

Nonetheless, this begs the question of what there is left for state aid to do. We should certainly resist any temptation to take on the French at their own game of grand projects and state direction, with the huge burden of taxation, regulation and unemployment that has resulted.

To be fair, Mr Kwarteng has explicitly ruled out a return to the failed 1970s approach of government trying to run the economy. But the commitment to “back new and emerging British industries” still sounds like an attempt to “pick winners” to me. 

The plan to use state aid to help “level up” the regions also sits uncomfortably with the ban on projects that merely shift jobs around the country.

As ever, the devil will be in the detail. There are some valid concerns about the strength of the independent supervision. Politicians will still have a large amount of discretion, with many projects not facing any scrutiny at all. Legal challenges can be slow and costly, and hard to apply retrospectively.

Three examples may help to illustrate the potential problems. The first is the announcement that Nissan will be building a £1 billion electric vehicle hub in Sunderland. Most commentators have focused on the Brexit angle, but the ultras on both sides have probably overplayed their hands here. This is because the UK avoided the “no deal” scenario that might have wrecked Nissan’s business model. 

Instead, the more interesting question is the extent to which Nissan’s decision was influenced by support from the taxpayer – and whether this truly represented value for money. Could Nissan really not be left to make a commercial decision about the relative merits of producing components in the UK or importing them from countries that could make them more cheaply? We may never know.

The second example is the Government’s decision to set aside (at least in part) the conclusions of areview of steel tariffs undertaken by the Trade Remedies Authority. This decision was not entirely unreasonable given the disruption caused by the pandemic. But the willingness to overrule an independent body, and the accompanying rhetoric about the importance of defending the UK steel industry, had more than a whiff of protectionism.

At this point someone usually argues that tariffs, or subsidies, are necessary to protect jobs. It is true that free trade is likely to “destroy” some jobs in some sectors. But free trade creates more jobs in those sectors where countries do have a genuine advantage. Jobs in these sectors are also likely to be higher paid and more secure.

Defenders of the various forms of state aid often fall back on “strategic” benefits, such as security of supply. But if anything, buying steel, or electric batteries, from a wide variety of different countries around the world should reduce the UK’s vulnerability to shocks.

My third example is a genuine British success story: the tech sector. According to data from Dealroom and Tech Nation, the UK is now home to 100 tech companies valued at $1 billion or more – a larger number than the rest of the Europe combined. These are precisely the sort of “new and emerging” businesses that we should be trying to encourage.

However, the UK tech sector has thrived despite a lack of government backing – or even because of it. Ronald Reagan famously once said that the most terrifying words in the English language are “I’m from the Government and I’m here to help”. Put another way, there is no shortage of private capital willing to invest in tech start-ups. Why should the state need to get involved?

TThis will be a political battleground for years to come. The apparent success of large-scale state intervention during the pandemic, and the ease with which the Government has borrowed and spent vast amounts of money, is only likely to encourage calls for even more state aid.

In the meantime, some economists (usually far trendier than me) are rewriting history to suggest that the state is actually good at picking winners after all. Of course, if any government spends enough money, it will have a few successes along the way. But it was private entrepreneurs who developed the practical applications of the internet and grew the digital economy.

The Government’s role should therefore still be limited to providing the infrastructure and market conditions in which businesses can thrive. Subsidising political favourites in marginal constituencies is not the right way to go about this.

This piece was first published by the Daily Telegraph on 4th July 2021

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