When Britain comes out of the Brexit transition period at the end of this year, it will be governed by World Trade Organisation rules on a number of matters, unless a deal is reached with Brussels in the coming weeks. Brussels sources are saying the biggest hurdle to a trading agreement with the EU is subsidy controls, the Guardian claimed this week.
Brussels sources are saying the biggest hurdle to a trading agreement with the EU is subsidy controls, the Guardian claimed this week.
Also referred to as state aid rules, these govern how much financial assistance the government can grant to businesses.
Before Brexit, the EU’s subsidy control policy determined how easily the UK could provide handouts to firms. But analysts have said Brussels’ system involved too much red tape, affecting even small grants given by local councils.
Now, lawyers and economists have urged the Prime Minister to devise a new, better system on Britain’s own terms – otherwise, harmful ‘subsidy races’ as seen in the United States could result.
The UK’s most recent offer for a subsidy control compromise was rejected by the EU, sources say (Image: Dan Kitwood / Getty)
This week, however, EU officials rejected the UK’s most recent offer of state aid regulations as part of the ongoing trade deal negotiations – though sources ‘welcomed’ efforts towards a compromise, The Guardian reported.
Thomas Pope, senior economist at the Institute for Government think tank, told Express.co.uk subsidy races result when the government is too lax in handing out taxpayers’ money to give a boost to businesses or lure them to certain locations.
Mr Pope said: “An example of effective subsidy would be support to a research and development project that has lots of societal benefits – such as wind farm technology – and it wouldn’t happen without government support.”
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EU negotiator Michel Barnier. The UK and EU this week entered their ninth round of trade deal talks (Image: Daina Le Lardic / Pool / Getty)
According to him, subsidies should always aim to change a business’ behaviour or otherwise make it more productive in a way that benefits UK citizens. Effective subsidy controls would ideally ensure this is the case.
The economist added: “An ineffective subsidy – there are two ways of thinking about that. One, say you offer a subsidy to Nissan to relocate to Sunderland, but they were already going to do that, then you’ve not changed their behaviour and you’ve just wasted the money.
“Similarly, if you’re trying to prop up a company that’s failing and give them some money but ultimately they’ve got an unviable business model so a few months later they go under, that’s a wasteful subsidy, because you’ve not achieved anything through it.”
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Mr Pope explains business grants can be harmful if not controlled properly, pointing to subsidy races in the US (Image: boonchai wedmakawand / Getty)
Offering businesses money to relocate to certain parts of Britain could also lead to what are known as ‘subsidy races’, whereby cities or local authorities will offer a business money or another financial incentive to build a headquarters there as opposed to somewhere else.
This could provide a financial boost for the business in question, but Mr Pope warned it can ultimately be a financial hit for Britain.
He said: “You see this a lot in the US, where cities will offer lots of money for a company to locate in city A rather than city B. And that is damaging for the country as a whole for a couple of reasons.”
Prior to Brexit, the UK was subject to EU subsidy control rules (Image: Bloomberg Creative / Getty)
Brexit timeline (Image: EXPRESS)
The economist puts forward one scenario in which business has already decided it was going to locate to Edinburgh – “And the Scottish government offered million pounds and the UK government offered 900k and therefore they still chose to go to Scotland.
“If we stopped there being a subsidy race, they would have gone to Scotland but they’d have paid an extra million pounds in tax.
“They’ve played off the regions against each other, and the company has gained but the taxpayer has lost.”
David Frost said in February the UK would establish its own subsidy control rules (Image: Dursun Aydemir / Anadolu Agency / Getty)
There is also the issue of productivity. The company may well have performed better in Edinburgh than in London and employed more people, Mr Pope added. In such a case, “the fact that we’ve offered them a bond to move to London actually means that that’s a less effective company,” he said.
It remains unclear what Britain’s policy on subsidy controls will be after Brexit. Negotiator David Frost said back in February the UK would develop its own system, rather than use the EU’s.