State Aid (EU Exit) Regulations 2019

Lord Flight Excerpts

Thursday 14th March 2019 Lords Chamber

[Lord Stevenson of Balmacara (Lab)]

My Lords, I am grateful to the Minister for his introduction. He has covered the ground very admirably. I have taken the step of putting down Motions to Regret for both the State Aid (EU Exit) Regulations 2019 and for the European Structural and Investment Funds Common Provisions and Common Provision Rules etc. (Amendment) (EU Exit) Regulations 2019 because I wish to do two things. I want to probe a little further on the detail in the regulations and I will share with the House that my focus will be primarily on the state aid regulations rather than the structural funds arrangements. I also wish to make points on the fact that little consultation and thought has been given to how these very important schemes will be continued in the long term.

In order to help the House, I shall spend a few moments on the second of the two sets of regulations covering structural funds. The main point to make is that the Government are taking the opportunity to continue the existing funds either by paying through to the EU to continue with the existing schemes or by taking on the burden themselves. The problem is that of course the first approach is obviously right, given that these are contracts which are in place, commitments have been made, there are funding streams which are currently in process with recipients who are in urgent need of these moneys. Given that, it is right that they should be continued. However, the problem is that, as and when the Government take over responsibility for these schemes and for the payment of them, that will come under the cosh of the general economic situation at the time and the question of future budgetary opportunities for changing them. To what extent can the Government guarantee that the funding will be maintained at least at current levels and that schemes which need second and subsequent phases to complete will be considered fairly and on their merits as if the original arrangements were in place? I would be grateful for a response from the noble Lord on that point.

I turn to the state aid regulations. The issue here is the question of why it is that we are transferring across into UK legislation exactly the same procedures and processes that have existed up until now through the EU’s policy of state aid. It is fair to say—the Minister should correct me if I am wrong on this—that, prior to joining the EU in 1973 and the passing of the EU Bill and Act in 1972, there was no concept of state aid as such in the UK. The arrangements under which moneys were used to fund regional activity, to promote research and development and to provide for cultural activities were paid out of general taxation funds gathered in by the Treasury and subject to annual approval by Parliament. In a sense, are the Government trying to operate in a rather odd way in this statutory instrument in relation to others that we have considered? The general premise is that the statute book should be complete at the time we leave on a no-deal basis, assuming that we do—although I hope very much that we will not. However, given that this was not a practice before 1972 and did not exist in any form in the years before that, why are we accepting lock, stock and barrel that which is currently happening in the EU?

In order to make the point, I want to spend a bit of time on state aid and how it currently operates. I acknowledge that much of the information that I am going to share with the House is contained in an excellent pamphlet, which I recommend, that was published by the Institute for Public Policy Research in January 2019 called State Aid Rules and Brexit. The first point to make is that state aid is a portmanteau term which does not have direct legal force. It has a definition that is broadly used in the Treaty on the Functioning of the European Union, which states that state aid is any resource made available by a state,

“which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods … in so far as it affects trade between Member States”.

Two important points arise from that. It is for goods only, and it is between member states. These issues are therefore not entirely relevant to a transfer of that particular definition to the UK, where presumably we are talking about trade within the UK because we are not going to be offering state aid for trade outside the UK.

[Lord Flight (Con)]

The EU has used state aid rules effectively in order to tell the British Government what to do with regard to their enterprise investment scheme; that is not goods, it is very much a financial service.

[Lord Stevenson of Balmacara]

I am grateful to the noble Lord for the intervention. I will come on to that; I was quoting a definition only to prove that it did not actually work. He has made my point for me—perhaps I will shorten that bit of my speech. I was going on to say that the rules do not work in practice, because they have been applied to a number of very different activities.

There is a definition—it is not very clear what it means in practice—and it applies to the particular issue of competition between states, and we will not have that situation. Within this, of course, there are a number of variations, one of which we have already touched on. It is generally recognised that state aid can do more than simply reduce distortions in competition. It can enhance public welfare, address inequalities, allow for investment in research and development for which there is no direct benefit to individual companies—which is probably therefore a public good—and address inequalities across various areas and regions. These do not fit very well into the definition, yet they happen and have continued to do so. Broadly speaking, the state aid rules are not really designed to prevent states aiding the enterprises that operate within those states; they aim for state aid to be targeted. Is that one of the issues that will be carried forward in these new regulations, should they be applied and there be no deal? If that is the case, we are talking about a slightly different way in which the Government will be operating to preserve some of the elements being transferred. I could list a number of issues under which state aid has been offered that would exemplify that.

If we are going to accept that state aid has in the past been used, under the general block exemption regime, for regional aid, to help SMEs, to support research and development, to support the environment and for cultural and other reasons, we have to accept that the issues are broadly interpreted. I am anxious to get on the record whether the Government see this historical use of state aid in a European context as the basis on which future state aid arrangements will be made in this country, whether done directly by the UK or by devolved Administrations.

If you look at European spending on state aid, the UK is significantly below the median level and well below the average. It was said in the IPPR document I talked about that,

“UK spending on state aid as a percentage of GDP in 2016 was 0.36 per cent, significantly lower than the EU average (0.69 per cent) and far lower than other western European countries such as Germany (1.31 per cent), France (0.65 per cent), and Denmark (1.63 per cent)”.

State aid should presumably be appropriate to the need that has been defined, but if UK expenditure were on the same level that France spends we would be spending £6 billion more. If we were to raise it to the same level as Germany, we would be spending £19 billion more; if to the same level as Denmark, £25 billion more. These are huge sums of money, and we do not need to spend much time thinking about what would happen to that. Previously, that would have been money funded out of the European budget, in a sense, but obviously that can only come from taxation raised in member countries. If we are bringing this home and bringing back control, we will also have to think about where the resources for that would come. Is there any intention to set a budget figure for what state aid will be, going forward, if these regulations come through? Can the Minister speculate about where the indicative level of spending will be?

What happens after Brexit if we leave on a no-deal basis? Clearly, some of the issues here will work whether we leave with or without a deal. With a deal there will be implications, not just from the transition period but particularly—this is relevant to debates we had only yesterday—on the question of Northern Ireland. If we are working on a backstop arrangement, there are some specific rules, which I am sure the Minister will want to acknowledge, relating to how state aid rules will apply in Ireland, particularly with reference to differential practices across the border. Can the Minister give us some information about how that would happen? If there is no deal, we are back in WTO territory; those are the only rules that generally apply to the use of targeted financial subsidies. They are not as far-reaching or as enforceable as the EU rules, because the EU’s state aid rules come with significant penalties for those who breach them. They will place limits on government, but they are not nearly as bad, so there would be no barrier in a no-deal, WTO environment for the Government to take forward a spending programme which would encourage more spending on state aid in a way which would be helpful to their overall arrangements.