New state subsidy rules “a recipe for disastrous waste of taxpayer money”, warns new report

Disclose all state subsidies to tackle waste and corruption, argues new IEA briefing paper

• The Subsidy Control Bill, which replaces the EU’s state aid rules, could make it harder to identify, scrutinise and contest state subsidies.


• Under the new regime, it is estimated that £4bn of subsidies could escape public scrutiny.


• Subsidies keep unproductive businesses alive, discourage innovation and waste taxpayer funds.


• Requiring disclosure of all subsidies, or lowering the reporting threshold, could help reduce this waste, increase democratic accountability, and lessen corruption.

A new briefing paper from the Institute of Economic Affairs, Transparency in the Subsidy Control Bill: Lowering the reporting threshold, warns that the Subsidy Control Bill will allow UK public authorities to subsidise private enterprise for a range of purposes, with less supervision and transparency than under EU state aid rules. 

Report author Matthew Lesh recommends that the Bill, which is currently passing through the House of Lords, be amended to ensure all state subsidies are disclosed. At the very least, the threshold at which subsidies must be reported should be lowered considerably.  

The government’s own impact assessment estimated that requiring disclosure of all subsidies would cost just £20,000 per year – a miniscule cost in the scope of the billions spent on subsidies each year. It would take just a single additional inappropriate subsidy to be identified and repaid to pay for itself.

Currently, EU state aid law requires subsidies of €500,000 (£415,000) and above to be published online. The proposed UK regime only requires transparency (through publication in a database) if a subsidy is worth £500,000 or more pursuant to a pre-published scheme, or £315,000 or more if not part of a scheme

These arrangements raise significant transparency issues. The Centre for Public Data estimates that over £4bn of subsidies will not be disclosed each year because of these thresholds. Further, once a scheme is approved, it will be possible to hand out multiple subsidies to the same business with no further public disclosure.

The paper warns that, theoretically, multiple subsidies of just less than £500,000 could be made to the same business within a scheme without the total amount ever being disclosed.

The government is expected to increase subsidies over the coming years, from the current level of around £8bn a year. If the Bill is left unamended, there is a significant risk that billions of pounds of subsidies will escape public scrutiny and challenge. 

As Lesh explains, state subsidies can be damaging to the economy for several reasons. They can unfairly prop up one firm at the expense of its competitors; they can keep alive unproductive businesses, preventing workers and capital being reallocated to more productive uses; they can waste taxpayers’ money by supporting projects that would have happened anyway; and they can encourage damaging rent-seeking, for example when firms seek handouts from bureaucrats rather than innovating or improving customer service.

John Penrose, MP for Weston-super-Mare, and United Kingdom Anti-Corruption Champion at the Cabinet Office, said:

“Leaving the EU means we can decide for ourselves if we want to subsidise particular industries or not. And, in general, every free-marketeer should choose ‘not’. 

“If we let politicians hide how subsidies are being spent, the risks of cronyism and waste will only get worse, because politicians are terrible at picking winners but losers are brilliant at picking politicians. 

“This excellent paper identifies the dangers at a time when we need to embrace competition. I welcome the IEA’s intellectual heft in the most transparent regime possible.”

Anna Powell-Smith, Director at the Centre for Public Data, said:

“The Government says it wants to put data and evidence at the heart of policymaking. The Subsidy Control Bill creates an excellent opportunity to do that – but the new UK subsidy database will not include around half of all subsidies.

 

“Instead, the Government should publish all subsidies over £500. This is low-cost to implement, reduces burdens for business, and will improve the evidence base on future subsidies – in short it’s a no-brainer.”

Matthew Lesh, IEA Head of Public Policy and author of Transparency in the Subsidy Control Bill, said: 

“This Bill will reduce restraints on handing out taxpayer funds while making it harder to know when and where our money is being spent. This is a recipe for disastrous waste of taxpayer money. 

“The very least the government can do is require public authorities to publish all information about how they are spending money on our behalf.”

ENDS

 

Notes to editors

Contact: Emily Carver, Head of Media, 07715 942 731, ecarver@iea.org.uk

IEA spokespeople are available for interview and further comment.

Transparency in the Subsidy Control Bill: Lowering the reporting threshold is under embargo until 00.01 Wednesday 9th March. An embargoed copy of the paper can be found here: https://iea.org.uk/wp-content/uploads/2022/03/Matt-Lesh-subsidy-control-paper.pdf

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.