10 March 2022

The Government is going the wrong way on subsidies – but it’s not too late to change course


Extricating ourselves from the EU’s costly and bureaucratic state aid control regime was one good reason to support Brexit – but one not without risk. And as it stands, the Subsidy Control Bill may not be dealing with the risks, as outlined in my colleague Matthew Lesh’s briefing published this week. The EU state aid rules are, after all, there for good reason – to prevent member state governments from distorting the single market with subsidies to favoured businesses, sectors or regions or to prop up failing companies and industries.

Both the EU and supporters of free markets were worried that the UK government might use Brexit to embark on unrestrained spending in support of political priorities like industrial strategy and levelling up.

For the EU, this was a question of a level playing field – why should member states keep their markets open to trade with the UK if their competitors here had been given unfair subsidies from the British government?  This, and the Commission’s strong interest in retaining control over a policy area where it has important executive power, drove the EU’s negotiating objective of tying the UK to EU state aid rules.

For those of us who would prefer the government not to subsidise business at all, the concern was that without the discipline of third party enforcement of state aid rules, public authorities would find it much easier to intervene in the economy, wasting taxpayers’ money in ways that crowd out private enterprise.

In the end, the UK’s negotiators got the EU to back down from their position that state aid rules should continue to apply across the UK (though unfortunately they do still apply in Northern Ireland due to the Northern Ireland Protocol). Instead, under the heading of ‘Level Playing Field’, the Trade and Cooperation Agreement between the UK and the EU commits both parties to operating a subsidy control system around certain principles, broadly the same principles that underpin EU state aid law. The UK is implementing those principles through the Subsidy Control Bill that is making its way through Parliament.

But there are key differences between the EU system and the proposed UK system. In particular, the UK system will not require advance notification and approval of subsidies – authorities will self-assess whether their proposed subsidies meet the subsidy control principles. Now, that may sound concerning, but in reality, a series of exemptions apply so that in practice around 95% of state aid in the EU is paid out under exemptions, rather than after notification and active approval by the Commission. This process is costly and bureaucratic – the definitions alone in the block exemption regulation run to 23 pages and carries much legal uncertainty for businesses and public authorities.

So the UK’s move to a self-assessment model may bring efficiency and reduce the operating costs of the system – but this system rests on ex post challenge and enforcement to ensure that the principles are being adhered to by the authorities. And for a subsidy to be challenged – either by affected businesses through the Competition Appeals Tribunal, or by voters and civil society – it needs to be known about.

But as it stands, the bill would probably only require a small proportion of subsidies to be published, as those worth less than £315,000 (over three years to a single recipient) or £500,000 if paid out under a pre-published scheme, do not have to be included in the subsidies database that the Government has set up. These are higher amounts than the EU’s transparency thresholds and in practice could allow £4 billion of subsidies to escape disclosure every year. This is not only a missed opportunity to do better than the EU on transparency, but a flaw in the new system that could allow wasteful and ineffective subsidies to escape scrutiny.

It’s not too late for the Government to put this right. As Matthew notes in his briefing, the marginal cost of reporting all subsidies is negligible and it could even save costs by heading off freedom of information requests. John Penrose is among the MPs who have sought to have the transparency thresholds in the Bill lowered and it is to be hoped that others will support him, in fairness to taxpayers facing a cost of living crisis and carrying the heaviest tax burden in a generation, who should at least be allowed to know where those taxes are going.

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Victoria Hewson is Head of Regulatory Affairs at the Institute of Economic Affairs.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.