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The subsidy squeeze

Schemes such as HS2 cost billions of pounds while reducing UK productivity


This article is taken from the May 2024 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

Why do so many economists support a free market? By the phrase they mean a market, or even an economy dominated by such markets, where the government leaves companies and industries alone, and does not try to interfere by “picking winners” and subsidising them. Two of the economists’ arguments deserve to be highlighted.

The first is about the good use — the productivity — of resources. To earn a decent profit, most companies have to achieve a certain level of output to attract enough customers and to secure high enough revenue per worker.

If the government decides to give money to a favoured group of companies, these companies can survive even if they produce less, and obtain lower revenue per worker, than the others. The subsidisation of a favoured group of companies therefore lowers aggregate productivity relative to a free market situation.

In this column last month I compared the economically successful 1979–97 Conservative government with the economically unsuccessful 2010–2024 Conservative government, which is now coming to an end. In the context it is worth mentioning that Margaret Thatcher and her economic ministers had a strong aversion to government subsidies of any kind.

According to Professor Colin Wren of Newcastle University’s 1996 study, Industrial Subsidies: the UK Experience, subsidies were slashed from £5 billion (in 1980 prices) in 1979 to £0.3 billion in 1990. (In today’s prices that is from £23 billion to under £1.5 billion.)

Thatcher is controversial, and she always will be. All the same, the improvement in manufacturing productivity in the 1980s was faster than before in the post-war period and much higher than it has been since 2010. Further, one of Thatcher’s beliefs was that if the private sector refuses to pursue a supposed commercial opportunity, the public sector most certainly should not try to do so.

Such schemes as HS2 and the Hinkley Point nuclear boondoggle could not have happened in the 1980s or 1990s. They will result in pure social loss into the tens of billions of pounds and will undoubtedly reduce the UK’s productivity.

But there is a second, and also persuasive, general argument against subsidies and government intervention in industry. An attractive feature of a free market policy is its political neutrality. Because market forces are to determine commercial outcomes, businessmen are wasting their time if they lobby ministers and parliamentarians for financial aid.

Honest and straightforward tax-paying companies with British shareholders are rightly furious if they see the government channelling revenues towards other companies who have access to the right politicians and friendly civil servants. By definition, the damage to the UK’s interests is greatest if the recipients of government largesse are foreign.

By definition, the damage to the UK’s interests is greater if the recipients of government largesse are foreign

Pathetically, the present government has “an automotive transformation fund” which has been created for the explicit purpose of doling out funds to foreign companies. On 17 May last year Nusrat Ghani, as minister of state at the Department for Business and Trade, told Parliament our car industry is “vital”, with the UK’s best-selling car in 2022 being the Nissan Qashqai, built in Sunderland. Has no one ever told her that Nissan is a Japanese company?

One of the obvious lessons of the post-1979 period is that the UK’s comparative advantage lies in internationally-traded business services — whose exports now amount to almost 12 per cent of national output and may rise further in future as the UK catches up in this respect with wealthier city states such as Singapore and Hong Kong.

I do not know that a continuing boom in service exports will be the UK’s future pattern of specialisation. I have nothing against a British car industry, as long as it does not require the artificial prop of large official subsidies which will inevitably reduce the nation’s productivity.

Moreover, I would deplore throwing government money at consultancy, media and information companies even if a civil servant can write a speech for me telling the world that these companies are “vital” and “the future”. Subsidies to the film industry are just as wrong as those to the automotive sector.

In the opening years of the 21st century the Conservative Party was split in a debate between the Thatcherites (who were usually pro-Brexit and often agreed, for example, with Enoch Powell on issues like the economy and immigration) and modernisers like David Cameron, George Osborne and David Willetts (who tended to be against Brexit, and to favour a social and cultural agenda over an economic one). The modernisers won the debate.

In terms of thinkers, an important figure was Nick Timothy, who for a year or so had great influence on Theresa May’s premiership. On 25 March, Timothy wrote a Daily Telegraph article which retained the anti-market, anti-Thatcherite rhetoric. In his words, “our manufacturing sector is too small” and “the result is poor productivity”. How does he know?

Timothy left the reader to conclude that somebody somehow must do something. Perhaps the Government in all its glory should shower subsidies on manufacturing businesses. Especially those owned by foreigners.

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