Five Questions to Ask About Britain’s Post-Brexit Subsidy Policy

UK Policy Brexit

Five Questions to Ask About Britain’s Post-Brexit Subsidy Policy

Commentary
Posted on: 2nd July 2021
Anton Spisak
Policy Lead, Trade and Productivity

Few questions were as controversial in last year’s Brexit negotiations as Britain’s future rules governing state subsidies. During the negotiations with the EU, the government insisted that it needed freedom from “excessive” rules to support British businesses. This week, the government has unveiled its new legislation on post-Brexit subsidy policy.

Described by government ministers as “the most important bit of post-Brexit legislation yet”, the Subsidy Control Bill proposes a pivot from the current regime to business support. According to ministers, the new rules will be “simple, nimble and based on common-sense principles”. But while the future policy promises to be more flexible than the EU’s, it carries significant risks too.

The new subsidy regime: what changes and what doesn’t change

The new regime introduces three big changes to the rules that have governed the use of public subsidies for over three decades.

First, the UK introduces a principles-based regime. The new system will be based on several uncontroversial principles – for example that subsidies should be proportionate – which public authorities have to follow. Unlike in the EU where larger subsidies have to be pre-approved by the Commission, there will not be a similar requirement, except for limited instances.

Second, there will be an independent regulator overseeing the new regime. The Competition and Markets Authority will act as the independent arbiter on subsidies, with a new Subsidy Advice Unit established to issue advice when necessary. Third, the Competition Appeal Tribunal, not national courts, will hear subsidy cases under the law.

The new system will be more permissive than the EU’s, since public authorities will have greater discretion. Businesses might also welcome shorter approval processes. But there are at least five broader questions that cast doubts over this new policy.

Five questions to ask about the Subsidy Control Bill

1. How far does the new regime provide a clear and predictable legal environment?

Greater flexibility might be desirable for the government. But businesses and investors want clear and predictable rules so that they can make decisions for the long term. The cost of an overly flexible regime for the government is a lack of certainty for businesses.

Much of the effectiveness of the new system will, therefore, depend on the interpretation of the “principles” by public authorities and the assertiveness of the new Subsidy Advice Unit. There is a risk that many subsidy decisions might end up being litigated in courts, deterring public bodies from granting aid and businesses from receiving it.

2. How will the new rules change the government’s spending calculus?

Most government priorities – post-Covid recovery, levelling up and net zero – require active business support. And, with China lavishly using subsidies to gain technological advantage from the West, advanced economies face new pressures to level the playing field in the global economy. There is scope for Britain to use the levers of subsidy policy better. The UK has historically granted far less support than countries such as France and Germany (chart below). However, as the pressures on ministers to use state support intensify, the country might lack a system that stops them from handing out aid that is excessive or wasteful to the taxpayer.

3. What does the new regime mean for the union?

The new regime assumes that the regulation of subsidies is a reserved matter for the UK government alone. And it is reasonable for the government to try to prevent the zero-sum game of devolved authorities seeking to lure economic opportunities from one part of the country to another. But for the new system to be effective, it requires the buy-in of all devolved administrations. Without it, subsidy decisions will only add to the long list of grievances in devolved nations.

4. How does the new regime interact with the Northern Ireland Protocol?

The new rules largely exclude Northern Ireland. EU state-aid laws continue to apply to Northern Ireland for subsidies that relate to industrial goods and energy. Furthermore, because EU rules might apply to GB firms when they operate in Northern Ireland, the new regime might be undermined. An ongoing judicial review case shows that the boundaries of the new regime will be decided in the courts. What is clear today is that public bodies and businesses will face a complex legal environment, with competing jurisdictions to navigate.

5. How will the EU respond to the new rules?

Finally, the EU will look closely at the future subsidy policy. Not only is Brussels interested in how the UK evolves its economic model after Brexit, but the TCA also includes legal obligations concerning the use of subsidies. Should large subsidies be handed out by the UK, the EU could trigger a novel and untested “rebalancing” mechanism and impose temporary tariffs on sensitive British exports to the EU.

Conclusion

The government’s proposals are best described as an example of mixed signalling. On the one hand, there are the words; the ministers say that new subsidy policy will not mean “the return to the failed 1970s approach of the government trying to run the economy”. On the other, there are the actions; just this week the government provided public funds to lure Nissan to invest in a new gigafactory and, on the same that the new policy was announced, it decided to intervene in the steel market.

Then, ministers say that the rules will be simpler when in practice the new system will create a more complex legal environment. They claim that it will strengthen the union when it is likely to weaken it.

The risk is not so much that the government is trying to run the economy, but that it tries and does it badly. The need for a system that can promote good subsidies and discourage bad ones has hardly been greater than now. The new regime falls short of providing adequate safeguards to prevent politically-motivated decisions, a clear and predictable legal environment for businesses, and a system with the buy-in of all four UK governments. It is a risky bet that carries great uncertainties.

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