UK Government begins to set out its vision for post-Brexit subsidies regime

By Joe Cooper

The Government has today begun the process of setting out its vision for an independent subsidies regime, following the end of the transition period and the signing of the UK-EU Trade and Cooperation Agreement (TCA) late last year.

In a Written Statement to the House of Commons, Business Secretary Kwasi Kwarteng outlined plans for the creation of a new subsidy control regime “tailored to the UK’s national interests” and serving as the long-term replacement for the European Union’s state aid regime.

The new system, Kwarteng claimed, will be designed to be “more flexible, agile and tailored to support business growth and innovation as well as maintain a competitive market economy and protect the UK internal market”. Under these new proposals, local authorities, public bodies and devolved administrations will be given increased power to design taxpayer subsidies, governed by a set of UK-wide principles to prevent nations and regions being played off against each other by sectors looking for a better deal.

The system will also be aligned with the Government’s wider priorities such as the levelling-up agenda and deliver on the UK’s climate change commitments, while also supporting the economic recovery from COVID-19.

State aid – defined as any advantage granted by public authorities through state resources, including grants, loans or tax breaks - had long been one of the sticking points in the negotiations between the UK and Brussels as part of the post-Brexit settlement.

While Brussels had initially insisted that the UK’s rules should remain aligned with those of the EU, the final terms of the TCA saw both sides reach an agreement to maintain separate regimes. Under the TCA, European and British companies retain the right to a legal challenge if state aid awarded by the UK Government or EU is deemed to have violated the common principles of the deal and distorted competition.

Most notably, the TCA also set out plans for the UK to establish its own independent body overseeing the regime, which the Government will now consult on.

The reaction to the new state aid regime has again highlighted the extent to which the Conservative Party has embraced the role of subsidies in delivering it’s economic and political priorities.

The Prime Minister’s former Chief Adviser, Dominic Cummings, had reportedly been a staunch advocate of giving the UK greater control over its state aid regime in order to invest in science and emerging tech as the UK seeks to keep up with the US and China in these new and emerging fields. The Government has also been clear that it intends to use the new flexibilities offered by an independent state aid regime to intervene far more directly in areas it wants to begin to level-up before the next general election.

Those erring on the side of more hawkish conservative economic policy, including Matthew Lesh of the Adam Smith Institute, have however warned of the risk of the new regime ‘making it easier to waste taxpayer money on politicians’ favoured projects’.

Whatever the economic and political arguments around the merits of subsidies, the short-to-medium term priority for the Government will no doubt be on leading the economic recovery from COVID-19, with next month’s Budget providing the next opportunity for the Chancellor to provide an update on the state of the country’s economy and plot the course for recovery as the vaccine rollout continues.

In the meantime, the Government is seeking the views from business on its proposals, with the consultation running until 31 March.

In particular, the Government is seeking views on potential additions to the principles underpinning the regime, as well as thoughts on the role and powers of the independent body governing the scheme.