One area where Brexit should deliver benefits

The phrase “benefits of Brexit” has become increasingly politically loaded over the past two years — for Brexiters it’s a shibboleth to cling to; for Remainers, a self-evident oxymoron.

But there is one area of post-Brexit policy which does hold out the prospect of delivering a tangible benefit from leaving the EU single market: subsidy control, or what Brussels calls ‘state aid’.

Even the most diehard Remainer should accept that the UK, outside the cumbersome and bureaucratic system of Brussels-administered subsidy control, has the capacity to administer grants in a nimbler, better-targeted way. 

That, after all, is why the EU fretted so hard over the so-called level playing field issues during the 2020 trade deal negotiations.

Done right, a bespoke UK regime should be to the benefit of investors, businesses, quangos and local authorities charged with using targeted grant money to deliver better outcomes for their areas — attracting a battery factory, greening the grid, improving community health outcomes and so on.

At least that’s the theory. But will it? Well, with the announcement last month that the new post-Brexit subsidy regime will finally kick-in from January 4 2023, we’re about to find out. 

Business minister Dean Russell trumpeted the new British system with customary Johnsonian hyperbole, promising the UK scheme would provide a “big boost for businesses and further impetus behind the government’s plans to supercharge economic growth”.

As ever, take all that with a pinch of salt, but if the new system works as planned it should make life easier for granting authorities and that, in turn, should lead to some tangible benefits to at least partly offset the costs of leaving the EU single market.

The new UK scheme is intended to be simpler and better-tailored to UK domestic needs than the cumbersome EU set-up which is designed to create a level-playing field between 27 national economies operating inside the single market.

To do this, Brussels has a system of so-called “block exemptions” — a list of 60 or so categories where subsidies are exempted from control which is complex and time-consuming for granting bodies to comply with.

The 10 per cent of subsidies that fall outside these exempted categories must be cleared by the European Commission competition authority — an even more long-winded and legalistic and expensive process that can take months, or even years, to complete. 

By contrast, the UK system is designed to be much more laissez-faire, with subsidies required to meet a set of seven broad principles that were agreed with Brussels during the TCA negotiation and then set down in UK law.

Under the new rules grants of up to £315,000 would be dished out pretty much freely, with all awards above £100,000 to be added to a transparency database to ensure appropriate use of taxpayers’ money.

There will also be three “streamlined routes” for larger awards covering energy usage, R&D funding and local growth; these are effectively the UK equivalent of the EU’s block exemption.

Importantly, explains subsidy lawyer Alexander Rose at the law firm DWF, the UK system is designed to be fundamentally permissive. It turns the prescriptive EU system on its head.

So rather than always seeking permission to give a grant, as in the EU system, in the UK regime a subsidy is presumed to be OK, unless it is found in a court to have breached those seven principles via a judicial review at the Competition Appeal Tribunal. 

For big awards that exceed £10mn over three years, the UK system does require granting bodies to refer them to a new Subsidy Advice Unit at the Competition and Markets Authority which will advise (but not rule, like Brussels) on the legality of the subsidy, and do so quickly.

That’s the theory, at least. Will it work? Well, it’s worth noting that the UK system is considerably more structured than some of the Brexiter politicians wanted — indeed during the Brexit negotiations of 2020 some in the UK system argued for no formal regime at all.

So it’s definitely not a total free-for-all. Indeed, according to DWF analysis, the new UK regime actually goes “significantly further” than was required under the TCA, which demonstrates the UK wants a balanced competition regime. 

As Jacob Rees-Mogg put it earlier this year when he was Business secretary, the new regime seeks to strike “a sensible balance” between allowing public authorities greater freedom to grant subsidies while “protecting the interests of taxpayers by means of proportionate rules and reviews”.

On the positive side, the new regime, now it has been clarified, should be an improvement on the past two years, where granting authorities were left in something of a limbo, having to make judgments on whether grants did — or did not — accord with the principles agreed in the TCA. 

The uncertainty, rather than unleashing the benefits of the Brexit beast, led to surprising amounts of dither and delay.

But lawyers like Rose and James Webber, a partner in the antitrust practice at Shearman & Sterling, say that this can change, but that much will come down to the implementation of the UK system. Can it deliver in practice what it promises on paper?

One concern for Rose is whether the CMA’s new advice unit will be able to handle referrals as quickly (a few months) as intended. He argues that £10mn is not that high a threshold, so a fair number of grants will be referred. If a backlog starts to form, that will start to obviate that all-important post-Brexit speed advantage.

A recent public accounts committee report on regulators adjusting to the post-Brexit world raised a possible alarm by noting the “challenges” the CMA was facing with recruiting lawyers and economists when they could get paid a lot more elsewhere. “We have done reasonably well so far, but it is an ongoing concern for us,” is how a senior CMA executive put it in evidence to the committee.

The second area of concern is whether the “streamlined” routes — which are very broad and were drawn up without proper consultation, according to Rose — will actually improve the regime, rather than limit or complicate it.

For Webber, who has consistently argued for a permissive UK regime that doesn’t slip back into replicating the problems of the EU system, the concern is whether UK grant-givers can break out of the conservative mindset created by 40-plus years under Brussels’ system.

In the two years since the TCA, where there was no regime other than a requirement to adhere to the seven broad principles on subsidies agreed with the EU, Webber concedes that granting bodies didn’t rush to use their new freedoms. 

Instead we saw what he calls a “race to the bottom on cautiousness” that demonstrated the UK has yet to overcome the psychological and cultural barriers that are a legacy of EU membership.

Webber reckons breaking out of this “managerialism” mindset is possible, driven in part by competition, where conservative-minded granting authorities get more ambitious when they see their neighbours and competitors stealing a march — and not coming a cropper.

Because as Webber points out, in a judicial review-based system, a granting body that has demonstrated that it has asked the right questions and considered the right evidence is most unlikely to have its decision to fund a project overturned by the court.

Over time, he argues, authorities should therefore become more ambitious, not less so, as they stop trying to constantly find the analogue to the old EU system in the new UK regime, and embrace the new approach.

Time will tell on this point. Part of the issue will be educating authorities on the system, which is why the business department is now running a series of online and in-person workshops ahead of the January 4 launch to help get granting bodies into the swing of things.

I’m sure BEIS will get the hang of it, but reports from those who attended a session this week didn’t inspire confidence. “It was a shambles,” one person tells me. “IT issues meant it started 15 mins late, multiple people were talking at once and very little useful information was provided.” 

Still. Get this right, and there is a Brexit dividend to be had. Out there. Somewhere.

Brexit in numbers

This week’s chart provides a reminder of how exposed some industries are to EU trade, and therefore how the new red tape that comes with being outside the single market can quickly tie them up in knots.

In this case, the meat industry is fretting that Defra’s move to gold-plate EU regulations on animal welfare will hit tens of thousands of farmers who are outside schemes like Red Tractor.

The data from the British Meat Processors’ Association shows that the total value of exports being sent to the EU in 2021 across beef, sheep and pig meat sectors was £966mn, or 67 per cent of the total GB export value. Strip out pork and that figure becomes 87 per cent.

From December 13 this year these farmers, many of them smaller sheep farmers, will need to get a vet to sign off that they have complied with welfare standards, ending a system of self-certification that has worked up until now.

Defra, perhaps fearful that an EU audit of the current system wouldn’t pass muster, has introduced a more onerous system in part to catch those farms where there probably aren’t sufficient welfare visits. 

This is a good thing, in theory. Everyone wants high welfare standards. But in practice, the industry says there aren’t sufficient vets, or a good enough IT solution in place, to make this manageable. At least for now. 

Past experience suggests the solution will be another delay. As noted above on the subsidy regime question, when it comes to managing Brexit, implementation is all.

And, finally, three unmissable Brexit stories

As the new prime minister Rishi Sunak and his chancellor Jeremy Hunt prepare for the autumn statement they must not sideline the growth agenda, argues the FT’s editorial board. Central to that is support for skills and training, they say.

The home secretary’s talk of “invasions” of migrants and “dreams” of deporting asylum seekers and government briefings about cracking down on “woke” policing are forms of “alibi Conservatism”, argues Robert Shrimsley. Voters are presented with headline-grabbing stances designed to show that ministers share their values while failures are blamed on supposed proxies. But what voters want from government, he says, is efficiency.

Older workers have been leaving the UK workforce because they are choosing to retire early, not because of ill health, according to new analysis that could force a reappraisal of the challenges facing the economy.