Not another bloody one: IfG calling for subsidy quango

The Institute for Government has released a new report calling for a new quango to replicate the European Commission’s state aid responsibilities. This would mean a British regulator having the power to determine what subsidies are – and are not – acceptable. 

From the perspective of domestic sovereignty, this would be preferable to leaving the responsibilities in the hands of the European Commission – the untenable demand of the EU in trade talks until recently. Just like any free country, Britain should have the ability to subsidise companies (albeit limited by WTO rules and trade agreements, and good sense). 

 The IfG are also correct to argue for strong domestic subsidy control to prevent devolved administrations, regions and cities from crony subsidy races – a commitment the UK Government has already made. 

We should also not sacrifice a trade deal with the European Union to subsidise domestic industry. As I wrote on CapX last week: this would mean Britain “punching herself in the face in order to have the freedom to shoot herself in the foot.”

The real challenge, once Britain regains this freedom, is to ensure we choose to not subsidise domestic industry. Just because you can, does not mean you should. 

Worryingly, the IfG envisages the test of whether a subsidy falls foul of competition to be much higher – enabling the Government to subsidise unproductive businesses, for “net zero, ‘levelling up’ and the tech industry”. They want exemptions for smaller subsidies to go unquestioned (because what’s a few million of taxpayer pounds here or there?) and to raise the threshold for what is harmful. This would, they claim, create a “more effective” system. More effective simply meaning more subsidies, according to the IfG.  This is because IfG believes there exists “good” subsidies and that there are faceless bureaucrats capable of deciding which fall into that category.

We should also wonder whether we need another bloody quango deciding these matters. It would more likely than not turn into a similar merry-go-round as the European Commission’s state aid proceedings – that ultimately lets countries undertake plenty of subsidies, effectively normalising mass handouts.

It would be preferable to have strong norms against state handouts than a toothless quango. This could be achieved by the Government adopting clear policies, enshrined in legislation, that prevent ministers from ‘picking winners’: giving hundreds of millions of taxpayer pounds to whoever hires the best lobbyists.

Unfortunately, it appears that this Government has the opposite intentions. The Prime Minister’s senior advisor, Dominic Cummings, has a mistaken belief that subsidising companies is the path to creating a billion dollar technology company in the United Kingdom.

Cummings’ plot has echoes of the International Computers Limited (ICL) fiasco. For decades, the UK Government pumped millions of pounds of subsidies into ICL to compete with the big bad American leader in mainframe computers, IBM. Former civil servant Martin Stanley, who led the Business Department’s industry/education team, has explained how:

“I inherited the sponsorship team and initially continued to pour as much money as possible into ICL and to arm twist the public sector to continue to buy its mainframes. But I eventually realised that the company was uncompetitive to the extent that well over 90% of its sales were to the public sector. In other words, any business that had a choice bought IBM. I understand that colleagues subsequently did their best to continue to support the company but it was essentially doomed and was eventually bought by Fujitsu.”

Stanley concludes that he has “absolutely no faith in ministers’ ability to withstand pressure to spend unwisely for political and constituency reasons… Equally, I have little faith in minister’s ability to focus support narrowly enough.” [sic] 

The moral of the story is pretty clear: the state should get out of the business of picking winners, and perhaps spend more time cutting taxes and red tape, if it wants the private sector to succeed.