European rules on ‘state aid’ shape sensitive decisions, including those about support to British Steel or payments under the Northern Irish Renewable Heat Incentive (RHI) scheme.

This Insight looks at how state aid is used and whether the rules will change in the event of a ‘no-deal’ Brexit.

What is ‘state aid’?

When a business enjoys government financial support in any form it has an advantage above its competitors. Such support could include: tax reliefs, local authority grants, access to buying public assets below the market price, and many more. If such government support has a potential to distort competition and trade between EU Member States, it is prohibited under the Treaties of the EU.

However, governments may use state aid to intervene in their national economies and promote certain policies like regional economic development, research and innovation or investment in low carbon technologies. EU state aid rules limit the volume and form of such support.

Member States’ authorities notify the European Commission of their planned state aid measures. The Commission has strong powers to assess and declare whether state aid is compliant with EU law. It may also enforce stringent ‘claw-back’ mechanisms when aid is deemed unlawful.

State aid rules and UK industries

While the UK is a Member State of the EU, government decisions that financially benefit specific businesses must comply with EU state aid rules.  

For example, these rules consider direct government interventions to rescue plants and jobs in the steel industry as particularly distorting to competition. Responding to the British Steel insolvency in May 2019 the UK Government emphasised that “any support for any business in the steel sector has to be commercial, to fulfil state aid rules.” The Government has entered a commercial agreement with British Steel to support the producer’s obligations under the EU greenhouse gas emissions trading system. This type of support is permitted under the state aid rules.

Another example of the impact of state aid rules can be seen in the changes to the Northern Irish RHI in April 2019. Chapter three of the recent Commons Northern Ireland Affairs Committee report explains how the Northern Ireland Executive’s commitments to the European Commission under state aid rules played an important role in shaping the changes to that scheme.

State aid rules after Brexit

To what extent is leaving the European Union bound to change the state aid regime in the UK? Successive UK governments have supported rigorous state aid controls as a means of guaranteeing a level playing field for UK businesses in Europe and have spent less on state aid than most other EU countries.

A graph depicting relative total state as a per centage of GDP for the EU28 and the UK between 2008 and 2017.

Against this background, the Government has been setting up an independent UK-wide state aid regime. The regime will mirror the EU rules in substance as they were on the ‘exit day’. The EU Withdrawal Act 2018 will maintain a general prohibition of state aid. The Competition and Markets Authority is set to become an independent UK state aid authority and take over the current role of the Commission.

Yet, the proposed State Aid Regulations 2019 – which incorporate most of the detailed EU rules into UK law as they stand – has yet to receive final approval in the Commons. If passed, it would become effective in a ‘no-deal’ scenario.

Signalling a somewhat different approach to state aid, the Labour leader Jeremy Corbyn has repeatedly said his party would seek exemptions or clarifications from EU state aid rules where necessary as part of the Brexit negotiations. This would be to support cutting-edge industries and local businesses. This implies that Labour might seek changes to state aid policies under a ‘no-deal’ scenario if in government. However, one should bear in mind that in a ‘no-deal’ scenario the UK is also bound by the World Trade Organization Agreement on Subsidies and Countervailing Measures, which limits government subsidies.

Can state aid help mitigate effects of ‘no-deal’ to businesses?

Among its ‘no-deal’ contingency plans, the Commission has clarified what governments can do under the existing state aid rules. For example, when small and medium-sized businesses which trade with the UK are facing cash flow problems as a result of a ‘no-deal’ Brexit, governments may offer temporary restructuring aid and state-financed loans or guarantees. Member State governments can also pay for consultancy services or training to help small businesses prepare for changing customs rules.

Ireland and the Commission have discussed possibilities to maximise state aid to support businesses immediately affected by the UK leaving without a deal. Other Member States are also taking steps to prepare. However, any aid would have to fit under the state aid framework.

The proposed UK state aid legislation allows for similar measures in support of UK-based businesses.

What about under future trade agreements?

EU trade agreements with non-EU countries include varying degrees of state aid controls. In general though: the closer the market integration, the more state aid rules form part of the agreement. We don’t currently know how big a part state aid rules will play in future trade between the UK and the EU. However, it is very likely that state aid provisions will be part of any agreement, not least because both the UK and EU are keen on preserving a level playing field for their businesses.

Further reading

About the author: Ilze Jozepa is a Senior Library Clerk at the House of Commons Library, specialising in trade policy.

Image: Металургыя / Inna67895 / CC BY 2.0