Kwasi Kwarteng’s post-Brexit rules on state aid can shape a high tech and green economy but only if they are used wisely
This article was written by By Iain Martin and originally published by The Times. You can view it here.
It’s not only left-wing governments that try to pick winners. Kwasi Kwarteng, the business secretary, has unveiled rules allowing more state aid to back key industries now that we’re outside the European Union.
In time, this will prove one of the most tangible benefits of Brexit. Outside the EU, Britain can cut out the Brussels bureaucracy and set its own terms. This is the chance to be (in Brexit parlance) nimble in encouraging industries of the future where competitive advantage may lie.
That means technology, AI, high-value manufacturing, services, and the life sciences sector where, post-vaccine, Britain has huge strengths.
Kwarteng talks of channelling subsidies to government priorities such as levelling up growth across the UK and driving what he calls a green industrial revolution. In the same breath he promises this will not mean a return to 1970s-style industrial intervention.
Kwarteng is an intriguing pro-enterprise figure to have his light-touch hand on this tiller. A respected historian who published a colonial chronicle, Ghosts of Empire, he entered parliament in 2010 before backing Brexit and Boris Johnson. He is little known so far, but that is likely to change.
While it may strike some as surprising that a post-Thatcherite Conservative government appears to be relishing wading into the marketplace, it’s worth remembering how much of this stuff has always gone on, quietly. Even Thatcher’s government, committed as it was to ending government intervention in private industry, rushed to the aid of favoured sectors. With full-blown state aid, or sometimes just a tweak in the tax system, the Thatcherites intervened when it suited.
In 1984 Nigel Lawson and Norman Tebbit did just that. Promises had been given to the Japanese car manufacturer Nissan when it decided a few years earlier to build a plant in Co Durham. The chairman had a carrot-dangling letter from Thatcher alluding to a 100 per cent first year capital allowance, a big saving for companies that built and invested in Britain.
In his first budget Lawson, who tells the story in his memoir, proposed to phase out the allowance in order to level the playing field. But he could not create a special clause in the bill just to help Nissan, for fear of an outcry. Quietly, Lawson and Tebbit, the trade and industry secretary, exempted projects being built in poorer “development areas”. Britain’s ambassador in Tokyo assured the Nissan board its capital allowance was secure. No one in parliament or the press noticed. Nissan kept the dough and stayed quiet.
And why not? The northeast in the mid-1980s needed — what’s the Johnson phrase? — levelling up. Nissan delivered valuable investment and employment that continues to bring benefits. This week an announcement is imminent from the company on the construction of a battery gigafactory in Sunderland that may, if it goes ahead, help power the green switch to electric vehicles.
Helping Nissan in the 1980s turned out to be a winner, unlike many of the investments, bungs and entanglements undertaken by governments in the 1960s and 1970s. As they tried in vain to grapple with deindustrialisation amid an energy crisis and trade union strife, worried ministers nationalised shipyards and, in 1971, Rolls-Royce, the troubled aircraft engine manufacturer. It was privatised only in 1987.
Hence Kwarteng’s assurance that he is not in the business of repeating history. His bespoke British rules will, he says, permit faster decision making. Public bodies, including councils and devolved governments, will be able to deliver support direct, if they stick within seven broad principles. The tests rest on ensuring value for money and “strong benefits” for local communities.
The EU’s strict provisions on state aid we have left behind had roots in its founding Treaty of Rome in 1957. These were strengthened in subsequent treaties in an attempt to move countries away from the “corporatist” model that encourages excessive closeness between business and government, conspiring in a cartel against the interests of the consumer. Member states can provide state aid, but in most cases they have to apply to Brussels and wait for approval. It is a slow and unreliable process. After the banking bailout in 2009 Brussels ruled that Lloyds, taking over HBOS, would have to sell off TSB. This has been an unhappy, messy affair characterised by IT problems. The Spanish owner Sabadell is still trying to turn around the loss-making British bank and may try, again, to sell it. The Brussels orders on state aid have contributed to a saga that has lasted a dozen years.
Kwarteng knows the territory. “Kwasi talks about this myth of the 1980s,” says a friend, “that they never intervened. They did. There is a role for an active government in a dynamic free-market economy.”
That’s right, but there is a big risk involved, too. Government can easily get too active. The tide has been flowing in the direction of greater government intervention ever since the 2008 financial disaster, when taxpayers were left with the bill for the mistakes of globalised banking and deficient state regulation. Now there seems to be no limit to the help many voters expect from the government, and in the pandemic the state has accrued even more power. All this under a prime minister who loves to say “yes” to pleas for infrastructure, boondoggles or anything that boosts his concept of global Britain.
If in several years Johnson were to fall — under an electric bus, powered by a battery made in the northeast, for example — Kwarteng is worth watching as a potential contender. First, he will need to learn to say no to his boss.