New subsidy rules ‘a recipe for disastrous waste of taxpayer money’, warns think tank

A new briefing paper from the Institute of Economic Affairs 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, the Conservative MP for Weston-super-Mare, and the United Kingdom’s “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.”