John Macdonald: Are the Tories becoming the party of high taxes and picking industrial winners?

10 Feb

John Macdonald is the Head of Government Affairs at the Adam Smith Institute.

The idea that British state should pursue an “industrial strategy” was a key feature of the Mayite years. But it has received a substantial boost as a result of the pandemic. Last week, Business Minister Kwasi Kwarteng announced that, now free from EU state aid rules, Britain would design a more expansive homegrown subsidy scheme to support British industry. On this site last week George Freeman set out his stall and personal record in picking winners as a guide to his expected future success as head of the new Taskforce for Innovation and Growth through Regulatory Reform (TIGRR).

The latest ambitions for government involvement in industry claim that Britain needs to be both more self-sufficient and can achieve success by focusing on certain industries, like vaccines but also environmental technologies, agriculture, and digital. If only they’d realise businesses mostly want to be a bit more free from government in all areas.

Some of the focus has been on reducing red tape — like unscientific restrictions on genetically modified foods. This is extremely welcome: now Britain is out of the European Union the Government should be doing everything it can to make the UK a more welcoming place for innovation and entrepreneurship. Reducing both homegrown and EU-derived red tape is key to that mission.

On the other hand, the focus on allowing greater use of domestic subsidies to back certain industries is retrograde. There are no doubt a number of fields with huge potential, but it is folly to presume that politicians and bureaucrats have the necessary skills and knowledge to assess which technologies and specific companies have the most potential. If they did have those skills they would perhaps be in the private sector, making lots of money. Inevitably state subsidies will be given out more for political reasons than good economic reasons.

The recent case study of vaccines — in which the Government provided advance order purchases and subsidised manufacturing — is now being trotted out as a counter example of how the state can do good.

The Government has good reason to feel chipper about the vaccine. Kate Bingham’s prepayment for vaccines will ensure the country access to seven vaccines: the three mRNA vaccines (Pfizer, Moderna and Curevac), the Novavax vaccine that has been shown effective against the South African variant, the Astrazeneca vaccine, the Valneva vaccine and the single-shot Johnson & Johnson. We’ll have an oversupply of doses that will enable a shot of vaccine diplomacy to deliver immunity to friends and allies of our choosing.

But we should be extremely cautious about applying the lessons from a once-in-a-century pandemic to every day policymaking. Vaccine Taskforce chair Bingham was successful because she, rightly, had a very clear short term goal and a practically unlimited budget to purchase lots of different vaccines.

There is a clear and obvious difference between buying a product from a company, and extrapolating this one win in a pandemic full of state-failures to think ministers or Whitehall have any grand oversight of the direction an economy of millions of people should go next as we reopen.

The pre-purchase of vaccines from companies with strong pharmaceutical track records, including the front-runner which took no public money to develop their product, is no reason to conclude that the Government should take equity stakes, engage in secured or unsecured lending, grant giving, or underwriting debt positions of whole industries just because someone has decided they’re sexy.

Even less so when they’re subsidy blackholes or nascent industries when the creative destruction of our market system and extensive financial industry’s risk taking is best placed to deliver.

The Government claims that the new state aid scheme is not “intend to return to the 1970s approach of the Government trying to run the economy or bailing out unsustainable companies”, in which taxpayer money used to protect certain businesses and industries, usually with little success.

But of course the intention is never to pick losers. That doesn’t make it so. Just last year the Chancellor launched Project Birch, a scheme intended to offer loans to (and in some cases a government-ownership stake in) companies deemed too big to fail. This was in addition to all the other state transfers and loans on offer to companies to make sure they could survive the Covid storm.

Just a quick glance at the industries Freeman listed as bets he’d like to see back has hydrogen, biofuels, and supposed “superfoods”. There is a qualitative difference between handing cash to companies in sectors you want to be seen with at a photo-op, and removing red tape from others you think might flourish without. Reviewing GDPR, expanding CRISPR research in agriculture and removing the precautionary principle might well be worth legislative change but need to be sold on their own merits, not as part of a package of subsidy for unrelated industries that have lobbied their way to prominence.

Even the UK’s existing programmes to support supposedly innovative companies are not achieving much success. A National Audit Office (NAO) report last year found most business support spending lacked measurable objectives, making it impossible to know if they provided value for money. In the one case that evaluation was available, Innovate UK’s flagship Smart Scheme, there was no statistically significant performance improvement between companies that did and did not receive grants — meaning they are not achieving very much.

A productive, high-potential enterprise can currently borrow at extremely low rates without the good graces of the Government (and without exposing itself to political risk). If the state begins offering a wide range of subsidies, it will inevitably chase those enterprises that are less efficient (in an attempt to, say, level up), wasting taxpayer money, crowding out private sector investment and potentially pushing up interest rates. There is also evidence to suggest it could lead to the growth of “subsidy entrepreneurship”, in which firms waste time seeking state aid instead of creating value.

This would be undesirable in normal circumstances, but here could seriously hamstring the post-pandemic recovery and return to growth.

Time and time again, we have been shown that the state fails to pick winners, wasting people’s money in trying to do so. Removing obstacles to growth, forgoing rumoured tax hikes that could choke it off, and giving the private sector new regulatory space to take advantage of innovations is the only way to truly “level up” — rather than through the artifice of taking from the taxpayer to give to the corporation.

It is time for the Tories to choose. This is not the time for policy experimentation or a new model of capitalism, like some have brazenly claimed. Excessively directing the economy, and pursuing policies that are either unproven or debunked, risks prolonging the downturn. They would do well to disabuse themselves of cronyism and reclaim their mantle as the party of low tax and free trade. Leave the case for subsidies and state intervention to Her Majesty’s opposition.