The UK carves a risky new path on state aid

To great fanfare, the UK government has unveiled its new policy on industrial subsidies that will replace EU rules in the wake of Brexit. Kwasi Kwarteng, the business secretary, said the subsidies control bill was “a clear departure from the EU state aid regime”. It is more than that: it may facilitate a fundamental pivot from the UK’s approach to business support — with potential benefits but significant risk.

True to the ideals of Brexit, the bill proposes a “nimble” way for the government to use subsidies to enable its key domestic policies, free from “excessive red tape”. On the altar of speed, it has sacrificed scrutiny. This is worrying from a government that has shied away from accountability and spent lavishly on contracts that have failed to deliver value.

Gone is the EU system of scrutinising state aid before it is granted. In its place is one where, quite deliberately, only a small amount of subsidies are independently probed. The government envisages public bodies largely having a free hand in deciding whether subsidies comply with broad principles, like supporting only viable businesses.

Under the plans, the Competition and Markets Authority will have a standalone unit for subsidy scrutiny. But the bill proposes only that the CMA “advise”, on a non-binding basis, whether the most potentially distortive handouts comply with the principles. Subsidies deemed to support key goals like levelling up would not be referred to the CMA at all.

Legal challenges to spending decisions would only be possible through the Competition Appeals Tribunal; a long, expensive and uncertain step. Moreover, the government’s decision to intervene in the steel market, on the same day the subsidy bill was announced, set a concerning precedent on its willingness to over-rule purportedly independent bodies. 

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Companies may welcome nimbler decision-making — certainly if they are recipients of handouts rather than their rivals. But an ex-post system, where redress is available through the courts and tribunals, is not necessarily more certain; indeed, the system means that subsidies could be withdrawn after they have been paid out.

It is reasonable that the UK wants to forge its own path on state aid after Brexit, and jettison the more intrusive elements of EU regulation. In any case, the UK must now abide by World Trade Organization rules that set global standards on state subsidies, albeit ones that are not as rigorous as those laid down by EU law. It is also true that the UK spent far less than other countries on state aid when it was part of the bloc — in 2018, just 0.34 per cent of GDP, compared with the EU average of 0.76 per cent. There are reasonable arguments that more spending could be beneficial in areas such as supporting tech start-ups. There is merit, too, in levelling up parts of the country left behind by earlier governments’ disregard. But state aid should not be used to curry favour in marginal seats.

Kwarteng pledged that the policy will not amount to “the failed 1970s approach of the government trying to run the economy”. But a new state-aid rule book will only work in the UK’s long-term interests if it is scrupulous in its definitions of failure and success, and if spending decisions are depoliticised as much as possible. The combination of a light-touch system and an interventionist government willing to spend lavishly on special projects creates dangers of a distortive spending spree — and of ministers becoming vulnerable to lobbying by vested interests. If that happens, rather than the government picking winners, the losers may then pick the government.