The UK would benefit from a strong ‘state aid’ system whether or not it strikes a trade deal with the EU, says a new report from the Institute for Government.

Beyond State Aid: The future of subsidy control in the UK says a strong system of domestic subsidy control would help direct funds towards effective subsidies and prevent harmful ‘subsidy races’ – as seen in the US – between the parts of an already strained Union. 

The report recommends that the government adopts a ‘parallel’ system – that copies core features of EU state aid but with domestic oversight – in time for January 2021. It should then introduce a new regime when it has had time to consult people, businesses and devolved governments on the options. This would offer UK businesses continuity at a time of economic disruption and would allow their views to be included in the design of the final model – an approach committed to by the Conservative Party during the 2019 general election campaign.

But the government has said it will not put such a system in place when the transition period ends on 31 December and will instead follow (ineffective) WTO rules which provide limited restrictions. This is a mistake because it risks public money being wasted on ineffective subsidies and would allow economically damaging subsidy races within the UK – and may rule out hopes of signing a free-trade agreement with the EU.

If the UK government can reach a compromise agreement with the EU on both sides’ future use of subsidies, it would enable the UK to challenge subsidies offered in future by EU countries – which currently make substantially greater use of state aid than the UK ever has done. And if the EU agreed that the UK regime could supersede Article 10 of the NI Protocol – the subject of the controversial Internal Markets Bill published this week – then a compromise could provide a solution to a major source of disagreement between the EU and the UK. As it stands, Article 10 grants EU state aid law and potentially the European Court of Justice some control over UK-wide subsidies.

The IfG paper recommends that a new UK subsidy control system:

1. Has an independent regulator to assume the role of the European Commission, with the power to rule that any subsidies found to be illegal are repaid
2. Takes a more evidence-based approach to deciding when a subsidy is deemed to be ‘harmful’, requiring a stronger burden of proof than the current EU system
3. Increase the de minimis threshold that currently means even relatively small, innocuous subsidies are caught up in red tape

Thomas Pope, an author of the report, said:

“The government’s decision not to replace EU state aid rules in the UK at the end of this year is a mistake. An effective UK regime is possible and is in the UK’s domestic interest because it would help ensure good value for public money and limit the risk of harmful ‘subsidy races’ in the UK. The WTO rules that the government says it wants to adopt would not. If the UK government could reach a deal with the EU on state aid, it could allow them to overrule controversial aspects of the Northern Ireland protocol without threatening to breach international law – but the government’s proposed approach is very unlikely to be acceptable to the EU.”

Notes to editors

1. The full report can be found on our website.
2. The Institute for Government is an independent think tank that works to make government more effective.
3. For more information, including data to reproduce any charts, please contact press@instituteforgovernment.org.uk / 0785 031 3791.

Associated documents: