Subsidy Control Bill (First sitting)

Debate between Kevin Hollinrake and Andrew Bowie

Tuesday 26th October 2021 Public Bill Committees

[Andrew Bowie]

Q Why do other countries around the world choose not to do it?

Thomas Pope: That is a very good question. I think there are various benefits, and in our research we have outlined them. I think there is a particular case, in a system where competing jurisdictions can offer subsidies, for worrying about subsidy races. Actually, that is effectively a co-ordination problem, and a subsidy control regime is effectively that co-ordination.

I also think that, in general, there are benefits to setting out very clearly what the principles are by which you are going to offer subsidies. An interesting analogy—it is not quite the same—is fiscal rules; they are not legally binding in the same way, but these rules are set out by politicians to indicate what we think is sensible policy. They can sometimes help you to resist, for example, political pressure to save a business that is going under but that has no long-term prospects. Those rules can also be quite helpful.

In general, it is quite hard to hold the line on those things, and that probably explains why there are not domestic subsidy control regimes in general, because this is Governments tying their own hands. In general, it is quite hard to do that. It just so happens that we have an international obligation that requires us to do that, but I think that is actually a benefit rather than a cost. That would be my answer as to why there are not lots of subsidy control regimes elsewhere. Professor Rickard may know better than me on that.

Professor Rickard: No, Mr Pope is absolutely right. You are committing to saying that the regions within the United Kingdom will not compete with each other in trying to win business, jobs and investment by awarding subsidies. It is difficult to give up that ability, and say that we will not engage in that type of subsidy war, but we have seen the damage that competitive subsidy provisions have caused. Estimates suggest that in the United States $80 billion a year is spent by states competing for business with subsidies. If they agreed not to do it, and had their own subsidy control regime, real income in manufacturing alone would increase by 5%, so there are real economic gains to tying your hands and saying, “We’re not going to engage in subsidy races.”

Evidence suggests that subsidy races do not work in the long term. Even providing big subsidies does not necessarily guarantee that you will get businesses where you want them to be. For example, the US biotech industry is concentrated in five cities with world-leading universities and very deep and highly educated labour pools. Businesses locate there despite the fact that 41 out of 50 states have very generous subsidies to try to lure them to their regions, so evidence suggests that spending subsidies to try to attract jobs may not always work, and doing so is really a waste, in terms of spending a lot of money in a way that potentially hurts productivity and real income.

[Kevin Hollinrake]

Q Professor Rickard, Mr Pope said that he felt that the level for reporting should be lower than £500,000; it should be £175,000. You agreed, but you did not specify a level. What level do you think it should be?

Professor Rickard: I don’t have a strong feeling on the level. I am not sure where the £175,000 number came from. I heard Mr Pope mention it. I do not know the logic behind it.