State-Aid Proposals are a Window into the Government’s Domestic Ambitions

UK Policy Economy & sustainability

State-Aid Proposals are a Window into the Government’s Domestic Ambitions

Posted on: 15th September 2020
Jeegar Kakkad
Head of Productivity and Innovation

Until this week, the UK government had been cagey about exactly how it wanted to structure its domestic state-aid regime once the transition period with the EU ends on 31 December. This lack of clarity created a rift with the EU and hampered negotiations on reaching a post-Brexit trade deal.

But through the recent Internal Markets Bill (IM Bill) and the government’s intention to only use WTO subsidy rules, it has become clear that not only is state aid a critical issue in getting a deal with the EU, but it is also a window into the government’s ambitions to profoundly reshape the economy and the state. If the government implements this incredibly light-touch state aid regime, it will have three damaging consequences for the economy.

First, it gives Ministers the power to direct state intervention to such a degree that it could subject decisions to political whims, undermining any strategy or structure for reshaping the economy. In particular, the ‘Financial Assistance Powers’ set out in Part 6 of the IM Bill grants Ministers unfettered powers to provide grants, loans or guarantees for economic development, infrastructure investment, cultural and sporting events, and education and training. And while the government states the UK will follow WTO state aid rules, these rules only cover goods – only 10 per cent of our economy – and only cover subsidies that might distort competition in international trade. While the UK-Japan trade agreement provides slightly stronger constraints on state subsidies, relying on a patchwork of international trade agreements is an insufficient replacement for a robust domestic state-aid regime. In total, this means the legal framework and notifications process that guide Ministerial decision in the current EU regime will be swept away.

Domestically, therefore, the only check on these spending powers would be after the fact: the Competition and Markets Authority could open a reactive, drawn-out inquiry if it believed the aid unfairly distorted competition in the UK market. Internationally, the only check on these will be the WTO dispute resolution regime, which has been dysfunctional lately. In either scenario, there would be no real-time notifications or institutional checks on Ministerial largess.

Second, far from enabling the economy to thrive, pulling down the legal frameworks, policy processes and institutions that create a stable economic environment will have a chilling effect on investment. Despite No10’s ambitions to direct state intervention to grow the UK’s tech sector, the sector itself sees state aid as a side issue. And at a time when Brexit- and Covid-19-related uncertainty remains high, what business wants is political and economic stability, access to markets and the rule of law. Yet, by stripping out domestic frameworks and undermining the Withdrawal Agreement, the proposed state-aid regime not only breaks international law, it also adds to uncertainty and raises the commercial risk for private sector investment in the UK.

Third, it will leave taxpayers’ money wide open to capture by vested interests, stifling competition and putting off entrepreneurs. Politicising the decision-making process for state subsidies will simply favour large corporates that can afford teams of lobbyists and wealthy or well-connected individuals. As these companies and individuals use state-directed subsidies to boost profit, market share, or both, many entrepreneurs and investors will be left on the outside looking in, unable to bring new technologies to market. While the government denies it, this harkens back to 1970s-style picking winners, and threatens to undermine the credibility of a modern industrial strategy.

The uncertainty and costs of distancing ourselves from our largest trading partner are already hurting investment and growth. While there might be a political consensus around a greater role for the state, eroding domestic institutions in favour of politicised state intervention will only compound the economic damage, not generate the prosperity we need.

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