Serious implications for devolved administrations
4 Oct 2021
The post-Brexit framework for the UK’s State Aid regime has serious implications for the devolved administrations, which were laid bare during the Bill’s Second Reading on September 22nd.
In this blog, DRD Analyst Harry Barber assesses whether the Subsidy Control Bill offers equal treatment across the United Kingdom.
The Impact of the Subsidy Control Bill on the Devolution Settlement
The Government took an ‘out with the old, in with the new approach’ when it introduced the Subsidy Control Bill on June 30th. Dubbed a major departure from the EU State Aid rules, it was crucially celebrated by Ministers for its removal of the United Kingdom from the jurisdiction of the European Court of Justice in the resolution disputes over state aid.
The underlying politics are more nuanced. The UK is compelled to enact the Subsidy Control Bill if it is to stick to its international obligations in treaties and trade agreements, particularly reflecting those principles and prohibitions in the UK-EU Trade and Cooperation Agreement (TCA). The Bill is far from a cut and paste job, however, with serious implications for the devolution settlement. It is complex and three-dimensional, ceding a lot of power to the Secretary of State to define “subsidies of particular interest” and to the Competition & Markets Authority, which can rule on the compatibility of a subsidy with the provisions of the Bill.
While the Westminster Government was studied in its celebration of the Subsidy Control Bill, reaction has been more muted in Belfast, Cardiff and Edinburgh. The Welsh government withheld consent under a Legislative Consent Memorandum (LCM), as Senedd views the Bill in its current form as a tool to serve narrow UK government political interests. It objects to the unnecessarily tight timetable and lack of meaningful engagement with devolved government Ministers, who have not had the opportunity to influence the content of the bill. This has resulted in a formal legal challenge brought by the Welsh government to take the UK government to court over the Bill’s provisions. Scotland is yet to give legislative consent and the situation with Northern Ireland is complicated by negotiations over the Northern Ireland Protocol with the European Union.
The key question is: what is the freedom of the devolved administrations to make independent decisions over which industries they try to help out?
Gaps and Uncertainties Exposed
The scheme of the Bill is to require all public authorities (including the devolved governments and public bodies in Scotland, Wales and Northern Ireland) to satisfy themselves that any subsidy is compatible with a set of “subsidy control principles”, found in Schedule 1, which cover issues such as achieving a policy objective without distorting competition, ensuring subsidies are proportionate and necessary and changing the economic behaviour of a beneficiary.
During the Second Reading, it was clear that the impact of the bill on devolution is going to be the prevailing controversy. The Secretary of State claimed that during the second consultation, the UK government and devolved administrations agreed on the fundamentals of the regime, including the seven principles, the objectives for the regime, and the need to respect the devolution settlements and support levelling up. However, MPs across the board such as Stephen Flynn MP, Kirsty Blackman MP and Liz Saville-Roberts MP expressed their deep concerns with gaps and uncertainties found in the Bill.
The Good, The Bad & The Ugly
We start with some good news. Principle F in Schedule 1 levels the playing field for businesses in the same industry. It requires all granting authorities to ensure that their subsidies are consistent with the principle that “subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom”. Therefore, a grant to a car manufacturer on Wearside would have to consider the impact on competition with car manufacturers in Belfast.
Additionally, clause 18 places a prohibition on subsidies with the express condition that the receipt of the subsidy is subject to the relocation of an enterprise, its economic output and/or its workforce. This patches over possibilities for heightening economic inequality between England and the devolved administrations, or between different regions of the United Kingdom as a whole. Whilst this is welcome clause in the Bill, the incidence of subsidies which explicitly request the relocation of a business and its economic output is likely to be low, though some have observed that this could act as a blocker to a crudely applied ‘levelling up’ agenda.
The prior EU State Aid Regime was greatly unpopular not only with anti-EU Tories but with the devolved administrations and the UK Parliament, due to the need to get prior approval from the European Commission before granting subsidies. Despite a strong dislike for the European Commission’s veto powers, at least everyone had to play by the same rules. That is no longer the case.
The Secretary of State, Kwasi Kwarteng, will have the power to define what “subsidies of particular interest” will be investigated by the Competition & Markets Authority. Additionally, the Secretary of State can issue a call-in direction that requires a granting authority to refer subsidies to the CMA and will have automatic standing to challenge any subsidy decision before the Competition Appeal Tribunal. The devolved governments have no such matching powers to identify subsidies of particular interest, nor is there a requirement to consult them before such powers are exercised. It is also worth noting that nothing in the Bill provides for the devolved governments to have a say on Competition and Markets Authority panel members, who will adjudicate on subsidy disputes.
The result is distinctly unequal. Spelling out the potential issues, George Peretz QC detailed how the Secretary of State could object to a subsidy granted by a devolved government and has the standing to challenge it before the CAT, refer it to the Competition & Markets Authority and issue guidance against ‘types’ of subsidies being granted again by the same devolved government. Conversely, if the devolved government opposes a subsidy granted to English industry by the Secretary of State, then the Scottish government has no structural avenue for redress or to vocalise objections.
At present, Northern Ireland will remain subject to a dual subsidy regime, following the introduction of the Subsidy Control Bill. EU State Aid rules are imposed on Northern Ireland under Article 10 of the Northern Ireland Protocol, as well as those provisions in the Subsidy Control Bill. Public authorities in Northern Ireland would be placed at a practical disadvantage, having to wait a year for approval from the EU for grants, whereas public bodies in England, Wales and Scotland can secure approval in a matter of 20 days under the new Subsidy Control Bill framework. In practice, businesses in Northern Ireland would not have access to the same grants when they need them as the rest of the UK. This is an inherent flaw in the government’s contention that the Bill treats the whole UK equally and will support the government’s “levelling up” agenda.
Furthermore, the Bill ensures that devolved legislation can be over-ridden. Paragraph 6 and 7 of Schedule 3 make it clear that the subsidy control principles and prohibitions apply to devolved primary legislation, which can be challenged and amended where inconsistent with the Bill. The same is not true for primary legislation enacted in Westminster, delivering a regime which is only really popular with English politicians. A challenge cannot be brought before the CAT, rather it would be heard in the general administrative courts of each administration.
The Subsidy Control Bill regime as a whole is much more complex and three-dimensional than its EU State Aid predecessor, placing a lot of power in the hands of the Competition & Markets Authority and is likely to satisfy no-one.
Superficially, the Subsidy Control Bill appears to be more permissive to the devolved governments than the EU State Aid regime. In practice, the UK Government and Secretary of State for Business retain the ability to set the subsidy control agenda as they see fit, while also constraining the law-making powers of the devolved parliaments. The Competition & Markets Authority, as a non-devolved body, now holds UK-wide powers, which may frustrate politicians of all nations. We only have to look to the recent gas and CO2 crises to see how this can quickly become a political hot potato.
Those provisions and principles which disadvantage Wales, Scotland and Northern Ireland were hotly debated on Second Reading in the Commons. As we await a date for the Committee Stage, significant changes will be needed to get the legislative consent of the devolved administrations. The Subsidy Control Bill is likely to prove to be the latest in a long line of sources of political friction between Westminster and the devolved parliaments, as we see the same ‘Auld’ story of Westminster gifting itself the upper hand.
For further coverage of the Subsidy Control Bill, visit our previous submission, written by DRD Partner Jon McLeod and Intern Dulcie Brennan – Subsidy Control Bill: Tory Backbenchers are in for a shock
Photo Credit: The Guardian