Boris Johnson has been warned by former chancellor Philip Hammond that Britain risked being on “a fast track back to the misery of the 1970s” unless the government adopts clearly defined post-Brexit state aid rules.
The prime minister has so far failed to say how Britain will control subsidies after the end of the transition period on December 31, arousing fears in Brussels that the UK will use state support to give companies an unfair advantage.
Talks on a post-Brexit UK/EU trade deal have stalled as Brussels demands a clear statement from Mr Johnson on what measures will be put in place once EU competition rules no longer apply in Britain.
On Monday, Jean-Yves Le Drian, the French foreign minister, said: “Negotiations are not advancing due to the intransigent and frankly unrealistic attitude of the UK.”
Informal talks between chief UK negotiator David Frost and his EU counterpart Michel Barnier resume in London this week, amid growing fears in Brussels that a deal will not be in place before the mid-October EU summit and could collapse.
Meanwhile, Mr Hammond stepped up pressure on Mr Johnson by saying that a UK state-aid regime would not only create a level playing field for business but “protect the taxpayer from ministers who find it politically impossible to say no”.
He told the Financial Times there was a debate to be had about whether those rules were aligned with the EU state-aid regime, but said ministers could not buy “competitiveness” by subsidising failed businesses on a case-by-case basis.
“It would be a fast-track back to the misery of the 1970s from which a Conservative government rescued Britain in 1979,” he said.
During the 1970s, successive Conservative and Labour governments tried to keep sinking industries afloat with vast state subsidies. The era, dogged by industrial disputes, earned Britain the title the “sick man of Europe”.
Mr Barnier insists there must be a “level playing field” on state subsidies and cannot understand why, four years after the Brexit vote, the UK had still not set out a regime for controlling them. “For now it looks like the government wants discretion,” said one EU official.
The British government said details of a new domestic regime would be set out “in due course”. Dominic Cummings, the prime minister’s chief adviser, favours a light touch regime with maximum flexibility.
Lord Frost has argued for subsidy control arrangements, including dispute resolution mechanisms, of the kind agreed between the EU and Canada.
“It is the EU’s refusal to agree with us arrangements they have agreed with other major trading partners that is the cause of the difficulties, and will remain so until the EU accepts that the UK’s future subsidy arrangements are a matter for the British people and Parliament, not the EU,” a UK spokesman said.
EU concerns that Britain could try to outcompete the EU through lavish state subsidies marks a definitive shift from the earlier fears that the UK could adopt a Thatcherite “Singapore on Thames” economic model of low taxes and light regulation.
Mr Johnson’s government has reversed plans to cut corporation tax — and may increase rates in future Budgets — while public resistance has put paid to a plan of aggressive deregulation. State subsidies, which former prime minister Margaret Thatcher tried to eliminate, are seen by Mr Cummings as an alternative way to gain a post-Brexit economic edge.
David Gauke, another former Tory cabinet minister, said this was always likely to happen. “They’ve put together a coalition of support based on voters who are pro-Brexit but economically leftwing. Pursuing a low-tax, deregulatory agenda would only alienate those voters.”
Greg Clark, Tory MP and former business secretary, said: “I suspect that the government has not yet determined its intended approach to activism in the economy.
“It will not want to find itself bound permanently by treaty into an old state-aid regime — that outlaws much future government action — before it has decided on its policy.
“That was true for economic and industrial policy post-Brexit and will have been heightened by the need to be able do things differently in responding to Covid.”