What is state aid and why is it such a headache for the Conservative Party?

Few things are stranger in the post-Brexit landscape than the Tory party’s newfound interventionism. Will it survive political opposition?

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Yesterday the European Commission published its final mandate for the Brexit trade negotiations. A brief read-through will show you that strong differences of opinion remain.

The EU's concern is that the UK will deregulate its way to competitiveness — primarily over environmental standards and workers' rights. If, for example, a toymaker in the UK can suddenly make his workers do 14-hour shifts, but a toymaker in Germany can still only demand 8-hour shifts, then the UK toymaker may be morally bankrupt, but he is also economically advantaged. The EU want to stop this happening.

The other key area in which to ensure a "level-playing field" is state aid. The EU is worried that the UK government, no longer bound by the need to seek approval from Brussels for any subsidy amounting to more than €200,000 over three years, will artificially prop up ailing companies. Taxpayers' money could be ploughed casually into businesses that in normal market conditions would fail.

"The envisaged partnership should ensure the application of (European) Union State aid rules to and in the United Kingdom," reads the EU's negotiating mandate.

The UK, au contraire, wants to diverge from state aid rules. During last year's election campaign, Boris Johnson said that he wanted to make it "faster and easier" to implement state aid, implying that current EU rules have somehow hindered the government's ability to bail out struggling firms. 

But the records show that the EU is not a significant restraint on state intervention. In 2017, the UK spent a mere 0.38 per cent of GDP on state aid. France spent double that proportion, while Germany spent almost triple. Within the EU legal framework, there is plenty of scope for greater dirigisme. So why the dispute?

[See also: Calls for EU "commitments" on state aid are a fantastical solution to an imaginary problem]

The reason why the UK has spent little on state aid is because, in recent decades at least, the Conservative Party has not believed in it. Government intervention has been regarded as the antithesis of the free-market economics that ought to underpin Conservatism.

But Brexit has reshaped politics in unusual ways. Last year Nissan received £80m from the government. According to the EU's state aid database, since 2017, a company called CF Fertilisers has also received tens of millions in environmental protection subsidies. Since both the automotive and the chemicals industries are assessing their post-Brexit options, it is hard not to read these sudden interventions as face-saving operations. Why else would free marketeers suddenly get the state aid bug?

The question is: how far can Johnson push the boundaries? There is a hypothetical situation emerging in which the pressures of UK exit from the customs union lead to an increasing number of manufacturing firms asking for state aid. How many times can Johnson accede to these demands before angering traditional free-marketeers?

The new economic agenda is already unsettling some Conservative backbenchers, with David Davis publicly criticising planned pension reforms on last week's Andrew Marr Show. And, as Stephen notes today, Sajid Javid has put a face to any potential rebellion by issuing a coded rebuke to the Prime Minister in the Commons.

Make no mistake about it, this is a strong government. But the economic tutting is growing louder, and state aid is one area that might just cause even more unease.

George Grylls is the winner of the Anthony Howard Award 2019.

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