The State we’re in and the State to come?

Last week the Financial Times reported on the expected delay until 2021 of the Local Government white paper: ‘Plans for Further English Devolution shelved until next year’. A few days earlier it had reported that Government is planning to rip up the Industrial Strategy and publish a new one in the autumn.   . In the meantime many Metro Mayors, Combined Authorites and LEPs are submitting detailed bids for a Spending Review dedicated to economic recovery and ‘levelling up’.  But in one significant sense, they might all be missing a trick. That is this Government’s wholesale rethinking of the state’s role in the economy, how it pursues economic growth and how it tackles local and regional inequalities. This is partly about ‘levelling up’ and partly how it builds new institutions and policies after Brexit. Importantly the latter, as well as any trade deal with the EU, now hinges on a new UK approach to ‘state aid’. In short the role of the state at both local and national levels and any new iteration of the industrial strategy is completely up for grabs.

The UK has not traditionally or recently been big spenders or policy thinkers on state aid. Even with recent white papers and a dedicated department, nor has it been much committed to industrial strategy either. Governments of both left and right have been more interested in markets and competition in recent decades together with a Treasury firmly committed to free trade, flexible labour markets and low or minimal taxation and regulation regimes.

EU rules have rarely troubled this orthodoxy, except perhaps in times of crisis when Treasury officials have warned against bailouts for struggling firms or interventions preventing foreign takeovers. From cars to steel and technology to nuclear – the favoured approach has been driven by ‘best value’ and a belief that economies function best when free enough to leave losers behind and moving swiftly on to whatever comes next. Responses to big structural changes have usually focused on the supply side – investing in people (not firms or places) – incentivising higher skills, infrastructure and more R&D and then letting firms and people adapt and the economy take its course. But this looks likely to change.

The argument about state aid might have been an unlikely stumbling block in the UK’s negotiations with the EU over a trade deal. As William Hague said in the Daily Telegraph: ‘the EU is worried that we will do things that we won’t, and the UK is trying to reserve the right to do things that wouldn’t do us any good. 

Hague added that the EU ‘know full well that Britain has no recent history, outside the global financial crisis, of bailing out individual firms or sectors with billions of pounds,’ pointing out that in 2018 – Britain spent 0.34% of GDP on state aid, compared to 1.45% in Germany and 0.79% in France. So within the existing rules, the French spend roughly twice as much (as % of GDP) and the Germans over four times more than we do.

That is potentially a very big budget to spend more on firms, places or technologies – as well as a big shift in how government and policy operates – so there is a lot to play for. Nevertheless it has now become a ‘red line’ (alongside fishing quotas and the Irish Border) and Government has indicated that it will consult on and design a new state aid regime.  On 9th September, Alok Sharma, Secretary of State at BEIS, announced after the introduction of the new UK Internal Market Bill, that the UK wanted ‘a competitive, dynamic market economy in which we can back British industries to create more jobs in this country’ and that ‘the UK must have flexibility as an independent, sovereign nation to intervene to protect jobs and to support new and emerging industries now and into the future’.

He added that ‘as we take back control of our money and laws from the EU, we have a unique opportunity to design our own subsidy control regime in a way that works businesses, workers and consumers. Over the coming months I want to work closely hand in glove with businesses and public authorities across all parts of the United Kingdom to consider see how best we can use these new freedoms.’ Within a few days, on 14th September, the Conservative MP, John Penrose was duly appointed to run a review looking at ‘bolstering’ UK competition policy.

EU funds have long been directed at regional assistance – in the UK and in other member states – and ambitions for ‘levelling up’ are not particularly inconsistent with the long term EU funding for regional assistance in skills, infrastructure, business grants/loans, R&D and even industrial transition. In cities and regions in England you might be forgiven for thinking, that in recent years, the EU has been at least as interested in these issues as the UK Government. In 2011, Nissan’s Sunderland manufacturing plant received €220m (£188m) of European funding to support the production of its trailblazing Leaf electric car via the European Investment Bank (EIB). In 2012 the EIB provided £150m to expand Liverpool’s container port extension. More recently EU funding has supported many infrastructure and training/innovation projects designed to preserve as well as grow businesses and jobs. These are funds and programmes that a new ‘Shared Prosperity Fund’ is designed to replace – though as with state aid, the policy details are still be established.

Somewhere in all of this thinking sits the UK’s Industrial Strategy developed under Theresa May in 2017. Likewise a series of Local Industrial Strategies commissioned as part of the broader process. Elements of both including boosts to R&D and infrastructure investment will remain intact – as big increases in spending are already in train. But the growth model is changing and this government wants to actively support and intervene in the demand as well as the supply side of the economy. It wants the ability and scope to support technology, develop clusters, and through approaches like ‘Project Birch’ and ‘Project Defend’ to support large and strategically important businesses or promote resilience and ‘re-shoring’ in key sectors and supply chains. They will offer loans, take equity and as with One Web, buy stakes and back technologies in the pursuit of greater resilience and growth. According to Philip Aldrick, writing in The Times, ‘winners will be picked’.

It would be going too far to say that Local Industrial Strategies will be ripped up too. Plans to boost R&D and to build on key sectors must and will clearly remain. But at local and regional levels there is now much more to think about. The Treasury is already sifting through the latest bids for new science facilities and infrastructure ahead of the forthcoming Spending Review. This is now a well established ‘beauty parade’  – especially for city regions with devolution deals – originally struck with a Treasury seeking economic growth in its own image.

But now there are competing interests from No 10 – driven by politics as well as the economics. It is more than happy to be ‘active’ and ‘interventionist’ and to break existing rules including on ‘state aid’. It doesn’t underestimate the need to be doing something and sometimes anything. It won’t hesitate to invest in businesses – small and large or in new technologies too. It wants to take risks and challenge orthodoxies including those of its immediate predecessors. Rishi Sunak, meanwhile, is playing down disagreements with the EU and claims to be working on his own proposals for a post Brexit state aid regime. In truth we look likely to end up with some kind of hybrid – driven by both No 10 and No 11.

Local and regional politicians need to be watching very closely as ideas and plans develop. They should recognise that the rules of the regeneration game are changing and that they too can think anew about economic development. It brings large firms and their supply chains as well as new technologies into scope, alongside more established investment in skills, research and infrastructure. Relationships with LEPs, sectors and local businesses will become much more important alongside a much broader approach to innovation and R&D investment.  As in Westminster, they too must rethink political and economic orthodoxies too. With a slate of local and regional elections due next year, some delayed by Covid, how mayors and city politicians understand and help influence Westminster’s new economic rulebook will become a source of political as well as economic advantage. There is a lot to play for.