Kwarteng hails 'dynamic' state aid system to replace EU rules 

Officials says there will be no return to 1970s approach of ministers trying to run the economy or bailing out unsustainable companies

Kwarteng
Britain is breaking free of EU state aid rules with its own subsidy system, under new Business Secretary Kwasi Kwarteng Credit: Geoff Pugh

Ministers will today launch a new more interventionist era for the British state by tearing up European Union aid rules and replacing them with a homegrown subsidy scheme.

New rules - which will  be set out in consultation documents due to be released on Wednesday - are expected to radically speed up the state aid process and slash bureaucracy so it is easier to direct public money into industry.

The Government is seeking to funnel taxpayer cash to private firms in the British regions in a bid to turbocharge their economies as part of Prime Minister Boris Johnson's levelling up agenda.

State aid was a key sticking point in the Brexit negotiations, with former Downing Street adviser Dominic Cummings keen for the power to stoke further investment in UK tech. 

But as well as marking a decisive break with Brussels, the plans point to a radical departure from post-Thatcher Tory orthodoxy. They are already drawing the ire of free marketeers who fear a return to the failed 1970s policy of "picking winners" that forced the state to prop up failing firms such as British Leyland.

Business Secretary Kwasi Kwarteng said: “We said that leaving the EU would give us more control over our money and laws. One year on from our historic exit from the bloc and just one month after striking an unprecedented trade deal with the EU, we’re seizing those new-found freedoms with both hands.

“Our plans for a bespoke subsidy control system – designed by the UK, for the UK – is a symbol of how, having left the EU, we can become much more agile in what we do – empowering public authorities and devolved administrations to decide how taxpayers’ money is spent and which businesses need assistance the most.”

The Government is set to rack up the biggest peacetime budget deficit on record in large part due to measures to help businesses and the economy through the pandemic, pushing the national debt up to levels not seen since the early 1960s when the public purse was still recovering from the Second World War.

Mr Kwarteng hinted that these massive life support programmes have opened the door to a permanently more interventionist state. 

He said: “The pandemic has really shone a light on the importance of us having full control over how we support our fantastic firms and entrepreneurs here in the UK.

“Rather than getting tied up in EU red tape, decision makers in Edinburgh, Cardiff, Belfast and London will be able get help to business men and women who urgently need it without having to second-guess what the European Commission might think.”

A key moment for the EU regime came in the financial crisis when it only approved the bailout of Royal Bank of Scotland on the condition that it committed to spinning off 300 branches into a new bank.

This was beset by IT problems and spiralling costs, and was eventually replaced with a scheme under which the state-backed lender offered hundreds of millions of pounds to smaller rivals.

More recently, businesses have complained that Covid support packages were becoming bogged down in EU red tape.

The new system aims to set out a series of principles on which the Government and the devolved administrations will dish out cash to companies, with a focus on innovation, research and development, as well as local job creation.

However, critics fear it risks a return to an era when attempts to pick winners and pump money into national champions resulted in expensive and embarrassing failures.

Victoria Hewson, of the Institute of Economic Affairs, said: "It is concerning that the government sees intervention and subsidisation in the economy as under-pinning our post-Covid recovery, as welcome as it is to see a move away from the EU bureaucracy.

"Governments are notoriously bad at picking winners, whether that’s in the UK or at the EU level. Using taxpayers’ money to prop up failing businesses is likely to distort competition, slow down innovation and favour incumbents."

She added that it will be another test of the post-Brexit Northern Ireland Protocol, adding: "We have already seen signs that the European Commission intends to take a more expansive view of the application of EU state aid rules in Northern Ireland than the UK government wishes to allow."

Officials are adamant that this new system will not be a return to the 1970s approach of Government trying to run the economy or bailing out unsustainable companies.

It came as economists called on the Chancellor to extend the taxpayer-funded furlough scheme beyond the end of April cut-off in a sign of how dependent they private sector has become on state support.

Speaking to MPs on the Business Select Committee, Mike Brewer at the Resolution Foundation said: “The first thing the Chancellor has got to do is not phase out the job retention scheme too soon.

“He is currently planning the end of April, it doesn't look like the economy will be functioning normally on 1 May, so I think the first thing is to make sure he is phasing that scheme perfectly in line with the easing of restrictions.”

This should include tailoring the scheme to focus on those industries hit hardest by the limits on socialising, he said.

Mr Brewer said: “If it is still the case that we are in tier four or tier three where we cannot fully open hospitality, then of course the job retention scheme should carry on existing, that is the absolute minimum."

Mr Sunak is expected to use the budget to unveil the next stage of his plan to get through the pandemic and begin the recovery.

The Treasury declined to comment.

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