All things to all people: Britain’s wide-ranging new subsidy regime


Leavers had promised that Brexit would improve people’s lives. With its ‘levelling up’ policy, the British government is now promising large state aid investment in poorer regions, which it argues would not have been possible in the EU. Expectations are high and the potential for abuse and cronyism is significant, says Ros Taylor.

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British Prime Minister Boris Johnson visits the Carland Cross Windfarm ahead of the G7 Summit in Cornwall.

As any policy geek will tell you, the UK government’s policy of ‘levelling up’ is fraught with contradictions. The policy promises to ‘ensure no community is left behind’. How do you redistribute limited public resources without relatively better-off places losing out? Is it even compatible with Conservatism, which is historically a philosophy that seeks to reward personal effort and reduce dependency on the state? These objections, however, have not stopped ministers from invoking the phrase at every opportunity: any announcement of a new factory outside the well-off Southeast is ‘levelling up’; the ‘Levelling Up Fund’ is devoted to reviving high streets and investing in local culture; and the new state aid regime will, we are told, enable the government to pursue its ‘levelling up’ agenda. 

Subsidy reform has an extra appeal for the Johnson government. It is largely possible because the UK has left the EU, no longer subject to what the business secretary, Kwasi Kwarteng, calls its ‘bureaucratic’ state aid rules. Previously, the European Commission scrutinised subsidies that did not fall under the block exemption regulation.

Nonetheless, the low state investment by former British governments was not solely due to EU membership. The UK did not deploy state aid as much as the rest of the EU. In 2017, for example, it amounted to 0.4% of GDP, compared to 0.7% across the rest of the EU. According to the Institute for Government, much of Britain’s aid went into environmental protection, energy saving and R&D.

The new rules, which were set out in the Subsidy Control Bill at the end of June, are intended to be ‘simple’ and ‘nimble’. Self-assessment will enable the ‘great majority’ of subsidy decisions to go ahead without further scrutiny. The rest will be deemed either ‘subsidies of interest’ or ‘subsidies of particular interest’, and a new UK Subsidy Advice Unit, which will sit within the Competition and Markets Authority, will examine the latter. 

Vague new criteria for state aid in post-Brexit Britain

We have only a basic idea of which industries the government will seek to support: ‘government priorities such as levelling up [that phrase again] and achieving net zero carbon, as well as supporting the economy’s recovery from coronavirus.’ We do, however, already know that employers at the eight new freeports will enjoy tax breaks. In early July, the government promised £100 million to Nissan, the battery supplier Envision and Sunderland city council in order to keep the carmaker in the region. Johnson’s Ten-Point Plan for a Green Industrial Revolution is not feasible without extensive government subsidy, and those parts of northern England that have recently switched to the Conservatives, such as Teesside, expect to benefit from the government’s largesse.

Approval for subsidies like these will normally be based on a foundation of seven guiding principles. However, in some cases – the ‘streamlined routes’ – public bodies will be able to award them according to a looser set of criteria. These streamlined routes will apply when a subsidy is thought unlikely to distort competition, trade and investment, and if it promotes the government’s strategic objectives.

Given the conceptual vagueness of both the ‘levelling up’ agenda and the drive for post-COVID recovery, it is not difficult to see how these streamlined routes might be exploited. Very few industries and places have not suffered to some degree from the pandemic, and the clamour for more money and investment is relentless. As Britons headed to the beach in late July – largely in the UK, as foreign travel is currently difficult and expensive – England’s chief medical officer pointed out that even pretty seaside towns like Torbay suffer from poor health and bad housing. Many of them would be pleased to make the case for subsidisation of their tourist attractions, and given that Boris Johnson recently deplored low life expectancy in a speech about ‘levelling up’, the scope for state intervention is enormous.

A spending spree with uncertain winners

Critics of the planned regime have pointed out that the government already has a poor record in public procurement, with billions of pounds of COVID-related contracts awarded to friends and contacts of prominent Conservatives and cabinet ministers. Will these plans create opportunities for more cronyism?

The Financial Times is certainly wary: ‘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.’ In the past 18 months, Johnson has floated plans for a bridge across the Irish Sea and a roundabout under the Isle of Man. Neither is remotely workable, but his fondness for large and expensive infrastructure is well-known.

There are also concerns that companies will have little opportunity to challenge state aid decisions. The window in which to lodge a complaint is short, and the process will be expensive.

Kwarteng is at pains to stress that the government will not ‘pick winners’ and that state aid will not benefit one region at the expense of others. Nations, while they will have more autonomy than before, will not be able to ‘poach’ jobs and economic activity by offering higher subsidies than other parts of the UK. In practice, it is not clear how this can be avoided, particularly if the subsidy is ‘streamlined’ because an area is deemed to be in need of ‘levelling up’.

The situation in Northern Ireland is more complex because the terms of the NI Protocol mean that any state aid decision that affects goods traded there has to be referred to the European Commission. The decision to abolish tariffs on imported sugar will be a test case for the European Commission’s reach in this area. British Sugar argues that it disadvantaged their product, which is made from British-grown sugar beet rather than cane sugar. However, the UK is currently trying to renegotiate the Protocol.

Infrastructure over welfare and public services

In short, the justification for fast-tracking state aid is now so wide that the scope for deploying it is vast. It might be prudent for the government to narrow the criteria for assistance if it wants to avoid disappointment and, more inconveniently, legal challenges.

Whether it is really the best way to improve Britons’ lives is, of course, moot. ‘Levelling up’ has come to mean intervention at a geographical and business level: it is perhaps easier to reconcile with old-style Thatcherism that way, since the party likes to see itself as a champion of British industry and the ‘One Nation’ ethos. But the London School of Economics’ Henry Overman has argued that this approach has serious drawbacks: ‘We should care more about the effect of policies on people than on places. Policies should be judged on the extent to which they improve individual opportunities and on who benefits, rather than whether they narrow the gap between particular places.’ However, that would imply a focus on welfare and public services rather than state aid – and if the government were minded to spend money on those, it could have done so without pursuing Brexit.