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What a new era of post-Brexit state aid means for the UK

Tom Belger
·Finance and policy reporter
·7-min read
Prime Minister Boris Johnson elbow bumps a welder during his visit to Appledore Shipyard in Devon which was bought by InfraStrata, the firm which also owns Belfast's Harland & Wolff (H&W), in a �7 million deal.
Prime Minister Boris Johnson's government plans to revamp state aid rules. Photo: PA.

The coronavirus pandemic has forced the UK government into drastic measures to prop up struggling firms, thrusting state support for business into the centre of political debate.

The issue looks set to remain high on the political agenda for years to come, reflecting not only the pandemic’s long shadow but also newfound Brexit freedoms.

Governments in Britain have often said their hands are tied by European Union state aid rules when pressed to intervene in the economy.

But outside the bloc, Britain now has much greater ability to shape its own rules on support for business.

The government began inviting suggestions for reform on Wednesday. Yahoo Finance UK looked at what business chiefs, unions, public officials and experts hope and expect to see from the new era of state aid.

How to replace ‘bureaucratic’ EU rules

A key priority for the government is simply making the state aid regime work more easily and effectively for firms.

Officials promise a “clear departure from inflexible and bureaucratic” EU rules.

The government hopes handing greater discretion to devolved administrations, local authorities and other public bodies will ensure funding is better tailored to the needs of firms and regions.

A spokesman for the Local Government Association, which represents England’s local authorities, welcomed the focus. “The LGA has long called for local communities to be put at the heart of decision-making, and so it is good to see this reflected in the government’s announcement today.”

READ MORE: UK government warned ‘little appetite’ for post-Brexit shakeup of employment law

But the government says decisions will still follow “a set of UK-wide principles,” suggesting many continued prescriptions from above.

Greater powers for ministers will likely increase political pressure for more top-down interventions in future. Firms and unions alike say transparency is key.

The level of flexibility will also depend on how any new regulator and Britain’s courts actually operate and interpret their rules, as Thomas Pope, a senior economist at the Institute of Government, has noted.

The government’s request for help shaping the new regime has been broadly welcomed, however.

“The more people who participate... the better the chances of getting a system that works effectively,” tweeted Alexander Rose, a subsidy control lawyer at law firm DWF.

WATCH: Chancellor Rishi Sunak to review economic support in March Budget

Tej Parikh, chief economist at the Institute of Directors, told Yahoo Finance UK: “Businesses leaders will welcome the opportunity to engage with government to help shape it to support economic growth.

Rose has said one major improvement on EU rules would be clearly establishing many kinds of subsidies as “safe harbours,” limiting the need for officials and firms to fret over the legality of grants.

Who gets state aid?

One of the biggest challenges for this and future governments will be establishing the key goals state aid should actually serve.

They will likely face a chorus of potentially conflicting and limitless demands, with pressures already beginning to grow.

Ministers themselves have already set out a long list of areas they want to support: COVID-19 recovery, the UK’s “strategic” interests, a “competitive and dynamic” economy, job creation, start-ups, small firms, new industries, research and development, “levelling up” worse-off regions, tackling climate change.

"It is a crucial time to be considering how any newfound flexibility outside the EU can be used to support our economic recovery,” said the IoD’s Parikh.

READ MORE: CPTPP explained as UK applies to join Pacific trade bloc

The government may face the biggest clamour to support ailing firms, sectors and regions hammered by the pandemic, not least when temporary crisis measures like furlough and rate relief are cut back.

Dominic Curran, an adviser at the British Retail Consortium (BRC) said any new system should enable current crisis support to retailers to continue.

“We want to see the government maximise the flexibilities afforded by Brexit by creating a new system that allows it to help industries that need it, at the time they need it,” he said.

“Businesses don’t want handouts — just targeted support that isn’t fettered by arbitrary rules during an exceptionally tough time.”

Another key demand among business and union chiefs alike is linking aid to a long-term industrial strategy, prioritising key sectors to support growth.

READ MORE: UK factories keep growing but hike prices over ‘unworkable’ Brexit rules

“This must be considered hand in hand with a clear, powerful, ambitious and funded industrial strategy so that business can develop the confidence needed to restart investment,” said Fergus McReynolds, director of EU affairs at manufacturers’ group Make UK.

“For years, we've been calling for proactive government intervention as the basis for a desperately needed industrial strategy,” said a spokesperson for the Unite union.

“It fits with the levelling up agenda,” added Kate Bell, head of economics at the Trades Union Congress (TUC).

She argued for state aid to be made conditional on creating jobs, both directly and indirectly by seeking to use UK supply chains, such as Britain-made steel or electric buses for greener transport initiatives.

‘No return to the 1970s’

The UK government pushed hard for greater control over state aid and other areas in the Brexit talks, prioritising it over securing smooth trade with the EU.

But there are still question marks about how far it intends to use its freedom. Much of Britain’s political right has been instinctively hostile to state aid for decades, arguing it prevents markets working properly.

The government’s latest press release even said the new system “will not be a return to the 1970s approach of government trying to run the economy or bailing out unsustainable companies.”

While chancellor Rishi Sunak has unleashed vast spending to prop up firms in the pandemic, he has also resisted many calls for bailouts—and repeatedly sounded the alarm over public debt soaring to its highest in decades.

WATCH: State aid was at the centre of Brexit talks late last year

Firms and unions both note the UK has used traditionally state aid far less than France, Germany and other countries even within EU limits.

“I can’t imagine we’re about to do things Europe aren’t doing or going to do,” said Confederation of British Industry (CBI) chief Tony Danker at an event on Wednesday.

Bell of the TUC added: “We always thought the government could be using state aid in a much more activist way.”

Unfair advantages for firms and Britain

Meanwhile some business chiefs are wary of change after years of Brexit uncertainty, disruption and the pandemic.

Reynolds of Make UK said it was right to review policy, but said: “After years of uncertainty, a period of stability is needed before we completely change the environment in which businesses operate.”

There are also questions over exactly how far the Brexit deal lets Britain diverge from EU rules, with even experts uncertain but EU tariffs a risk if it strays too far. World Trade Organisation rules also impose constraints.

The government should “clearly assess the impact on our ability to trade with international partners,” according to Reynolds.

Richard Ballantyne, head of the British Ports Association. Photo: BPA
Richard Ballantyne, head of the British Ports Association. Photo: BPA

For some business chiefs, the biggest worry is undue government influence or handing some firms unfair advantages.

Richard Ballantyne, chief executive of the British Ports Association, said ports were among those wary of “populist” decisions, and policy must be “fair and consistent, not politically motivated or ad hoc.”

Port operators typically valued being financially and strategically independent of government, unlike some of their continental rivals, he said.

“Broadly the industry line is - it’s market-led, and the sector should not be distorted by these things. However there are certainly operators who’d break rank if there’s an opportunity to receive funding. Who are we to tell them they can’t do that?”