Shearman & Sterling advises on many of the most significant subsidy matters in the UK and European Union. As part of this work, we have seen the increasing role that subsidy has played in the policy choices made by Governments—to support net zero, recover from the COVID-19 pandemic, re-allocate funds after Brexit and onshore industrial supply chains.

Data on subsidy, especially comparable data between the UK and the EU since Brexit is not readily available. The Economist recently commissioned us to research and prepare a comparison between pre and post Brexit UK spending on subsidies and compare it against the EU. That work reveals UK spending on subsidy as a proportion of GDP has increased very significantly—even allowing for the pandemic. This said, we have few full years data to consider, spending is ‘lumpy’ and includes sums that could be considered exceptional. Data for 2023 and 2024 will help show if UK subsidy spending will revert to its pre-Brexit trend or is—as we suspect—now structurally higher.

The UK’s trend to higher subsidy spending needs to be seen in context of higher spending in the EU as well too. Most EU Member States outspend the UK significantly as a proportion of GDP. In fact, only two Member States—Ireland and Luxembourg—would have a lower expenditure as a percentage of GDP.[1]

This might help explain why the EU has not sought to use the provisions of the Trade & Cooperation Agreement to allege distortion from increased subsidy spending by the UK.[2]

Overview

  • UK subsidy spending since the end of the Brexit Transition Period has risen considerably compared to pre-Brexit—even excluding pandemic spending in 2020.
  • In 2021, UK subsidy awards equivalent to those published in the EU’s State aid Scoreboard (“Scoreboard”) comprised €31.36 billion (approximately 1.19% of UK GDP).
  • In 2022, the equivalent awards represented €29.36 billion (approximately 1.13% of UK GDP).
  • The average spending on subsidy for last three years of the UK’s membership of the single market was just 0.37% GDP.
  • Excluding 2020—the year most distorted by the pandemic—spending on subsidies by the UK has almost tripled as a proportion of GDP since the end of the transition period.
  • Despite these increases, it is worth noting that spending by Germany is still almost three times greater at 3.36% of GDP.
  • German subsidies are so significant that they equate to 36.2% of subsidy spending in the entire EU, while the German economy accounts for only 24% of EU GDP.

Why is the UK Subsidising More?

The factors pushing up UK spending are both shared with similar economies and unique to it:

The common factors include:

  • Pandemic: Subsidies played a huge role in preserving the economy’s productive capacity during the pandemic in 2020. While we exclude the surge of subsidy spending in 2020, the runoff of these schemes in some cases ran into 2021.
  • War on Ukraine: There is little direct impact from the war. Almost all military spending is not classified as subsidy in either the UK or EU. Indirect impacts, especially on energy costs, are however significant.
  • Industrial policy: Subsidies to attract industrial investment and research in sectors such as batteries; hydrogen and chips have increased—although the UK lags the EU on these projects and, as such, so have subsidies to support them. We would expect that to change for 2023 and 2024.

UK specific factors:

  • Capitalizing the UK Infrastructure Bank (“UKIB”): The UKIB is designed to replace the UK’s shareholding in the European Investment Bank (“EIB”) providing long term debt financing for UK infrastructure projects.
  • The Government chose to bailout Bulb Energy Ltd., and provided over £3billion in subsidies in order to facilitate its special administration.

Both of these spending decisions could be described as exceptional, and if so, we would expect to see a large reduction in subsidy spending in 2023 and 2024.

Noisy data / difficulty in generating comparison:

The above comparisons have been generated by reviewing the UK Subsidy Award Database and the EU’s State aid Scoreboard. These data require adjustments to be comparable, as explained below.

UK Subsidy Awards in 2021

In 2021, UK public authorities granted subsidy awards of approximately £27.29 billion[3] (this expenditure represented roughly 1.19% of the UK’s 2021 GDP).[4] The total figure comprises all types of subsidies granted by public authorities in the UK including direct grants, loans, guarantees, rescue aid and the provision of goods or services below market prices.

Three areas of 2021 UK subsidy award expenditure require further explanation:

  • The first is the award granted by HM Treasury to the UK Infrastructure Bank, which represented about 80% of the total value of awards granted in 2021.
  • Second, UK public authorities made a total of 24 awards for the purpose of supporting services of public economic interest (“SPEIs”) for a combined total value of £228,264,645 (representing approximately 0.8% of the total value of conferred awards).
  • The final area relates to public authority expenditure associated with railways and rail infrastructure.

The UK Infrastructure Bank (“UKIB”)

The award to the UKIB is noteworthy for the massive scale of the investment. Although all allocated to 2021, it could also be viewed as a reallocation of funds that were previously contributed to the EIB. We have not excluded it on this basis because capital will be returned from the EIB over a much longer period under the Withdrawal Agreement, so the funds provided in 2021 is real spending not merely a reallocation of capital.

The UKIB subsidy breaks down into £8 billion in debt and equity, £10 billion in guarantees and £4 billion for Local Authority lending. The UKIB’s stated aim is to have fully committed its £22 billion in financing capacity by 2030.

The UKIB was set up as part of the UK government’s strategy to tackle climate change; with boosting investment in clean energy at a regional level being identified as a foundation of the UKIB’s mandate.[5]

Services of public economic interest (“SPEIs”)

SPEIs represent essential services which are provided to the public. The adopted approach is—if it were not for subsidy support—these services would not be supplied to the public in an appropriate way—or possibly even at all by the market.

Postal services are often referenced as the classic example of a service of public economic interest, and in that vein, in 2021, the Post Office Limited received £175 million in subsidy support from the Department for Business, Energy & Industrial Strategy (in the form of £125 million in equity and £50 million by direct grant). The Post Office Limited received approximately 77% of the total value of awards conferred for the purposes of providing services of public economic interest.

The Greater London Authority made twenty awards (totaling approximately £51.6 million) with a view to tackling homelessness and providing social housing; recipients included the Peabody Trust and Notting Hill Genesis.

Rail-related awards

Rail-related awards are an area of analysis which shines a light on the limitations of using the UK Government’s Subsidy Awards database. The database does not provide a clear indication of subsidy schemes which are necessarily a form of subsidy that corresponds with the rail-related awards which fall outside the scope of the EU’s State aid Scoreboard analysis. Consequently, the analysis of these rewards is based on comparing the descriptions of the subsidy schemes under which the awards were conferred and an assessment of the recipients.

What can be seen, however, is that in 2021, a total of £17,692,794 was awarded in the form of direct grants by the Department for Transport under the ‘Mode Shift Revenue Support’ (“MSRS”) scheme.[6] The MSRS scheme is intended to ‘assist companies with the operating costs associated with running rail or inland water freight transport instead of road, where rail or inland waterway transport is more expensive.’[7] Recipients of this support included DB Cargo (UK) Ltd., Freightliner Ltd. and GB Railfreight Ltd.

In addition, the Department for Transport granted £16.4 million to Rail Operations (Freight) Ltd. under the ‘Barcode ticket enablement project’ to allow for wider acceptance of digital tickets at UK train stations.[8]

The Welsh Government awarded a subsidy of £70 million to the Global Centre of Rail Excellence in the form of a direct grant and equity for the development of a rolling stock and infrastructure testing site.[9]

Two separate entities belonging to the Rail Delivery Group received a total of £10,032,800 from the Department of Transport in the form of two direct grants provided under the ‘National Rail Enquiries Alert Me Service’ and the ‘Rail Data Marketplace’ schemes.

Finally, UK Research and Innovation awarded a combined figure of £478,846 in the form of two direct grants to two recipients to develop railway track monitoring services under the ‘Research, Development and Innovation Scheme.’[10]

The total value of the above subsidy awards for rail-related activities in 2021 is £114,604,440.

Reconciling UK subsidy data with European State aid Scoreboard

The EU’s 2022 State aid Scoreboard, which details the total value of subsidy awards falling under the scope of Article 107(1) TFEU conferred in 2021, does not account for rail-related awards or Services of General Economic Interest (“SGEIs”—the EU equivalent to the UK’s SPEI).[11] For the total value of UK subsidy awards in 2021 to be in an equivalent form to the data published in the EU State aid Scoreboard 2022, the SPEI and rail-related activities must be deducted from the total value of UK subsidy awards. Factoring in these deductions, the resultant total figure for UK subsidy awards in 2021 is £26,944,546,859—which represented 1.19% of total UK GDP in 2021.[12]

Using the average currency exchange rates, for 2021, provided by the United States’ Inland Revenue Service, the total value of UK subsidy awards—excluding SPEI and rail-related activities—was €31.36 billion.[13]

Comparison With the EU

Having established the UK’s position in 2021 and created an equivalent framework to the EU’s State aid Scoreboard—we can compare UK subsidy awards in the first year following the UK’s departure with the EU and the broader trends in UK and EU subsidy spending.

The European Union’s State Aid Scoreboard

In 2021, the 27 Member States spent €334.54 billion on State aid, corresponding to 2.3% of the Union’s total 2021 GDP.[14]

Germany, the biggest spender in the EU, provided almost four times as much in State aid in nominal terms as the UK, spending €121.21 billion (3.36% of Germany’s 2021 GDP). German expenditure is only just eclipsed by the outlay of the next four countries—France, Italy, Spain and the Netherlands—combined (who between them accounted for €131.49 billion in aid).[15]

The UK’s 2021 awards would rank it in fourth place in the 2022 State aid Scoreboard—just behind Italy (which spent approximately €31.53 billion in 2021). Whereas the UK’s expenditure as a percentage of GDP was about 1.19%, expenditure in Italy represented 1.77% of total GDP. In fact, only two Member States—Ireland and Luxembourg—had a lower expenditure as a percentage of GDP, with percentages of 0.74% and 0.9% respectively. Thirteen Member States provided State aid representing a figure greater than 2% of their annual GDPs.

UK expenditure prior to departing the EU

In the years preceding the end of the transition period, the data does not provide any discernible trend and is so skewed, in 2020, by pandemic-related expenditure that we have excluded 2020 from this note:

UK Subsidy Awards in 2022

The total UK expenditure in 2022 was £25.67 billion, accounting for approximately 1.13% of UK GDP. As a percentage of GDP, the UK’s 2022 expenditure is similar to the 1.19% provided in 2021 and represents a significant increase on the expenditure between 2017 and 2019, albeit a marked reduction from the pandemic-related expenditure in 2020.

Renewable energy and energy security

In 2021, approximately 80% of the expenditure was related to the creation of the UKIB whereas in 2022 there was a much greater focus on supporting the energy sector directly. In July 2022, BEIS oversaw the conferral of £14.51 billion in the form of 93 variable premiums under the ‘Contracts for Difference for Renewables Allocation Round 4.’ This scheme is intended to encourage low carbon electricity generation whilst ensuring supply security.[21] Four individual awards in the scheme were greater than £1 billion in value and the Orsted Hornsea Project Three offshore wind farm received the largest sum in the form of a £4.185 billion award.

In 2022, BEIS awarded £2.48 billion in the form of 775 direct grants to ensure energy supply commitments were met under the ‘Capacity Market’ subsidy scheme.[22] A further £759 million was awarded through 56 direct grants by the Scottish Government and BEIS for the purpose of environmental protection under the ‘Renewables Obligation Scheme.’[23] Finally, about £3.07 billion was awarded by BEIS in the form of loans to Bulb Energy Ltd., during its Special Administration.

This energy related support comes to a total of £20.82 billion and represents 81% of the total subsidy award expenditure in 2022.

SPEIs

In 2022, approximately £595 million was awarded for services of public economic interest (representing an 160% increase on 2021). This figure includes two direct grants awarded by BEIS to the Post Office Limited totaling £335 million. Other significant expenditure included a £92.8 million direct grant awarded by Transport Scotland to Highlands and Islands Airports Limited.

Rail-related activities

For the data which can be attributed to rail-related activities, 2022 represents a significant reduction in subsidy awards when compared with 2021. In 2022, approximately £31 million can be attributed to rail-related activities which represents an almost 73% reduction on the £114.6 million awarded the preceding year.

A total of £18.68 million was awarded in the form of direct grants by the Department for Transport to nine recipients under the MSRS scheme. Although total rail-related expenditure is lower in 2022, this shows an increase in money disbursed under this scheme. A further £11.8 million was awarded to Network Rail Infrastructure Limited by the Department for Culture, Media and Sport.

Comparison with the EU for 2022

We must still wait for the EU State Aid Scoreboard 2023 before we can gain the next point of comparison with the UK’s 2022 data.[24] For completeness, however, the UK’s equivalent 2022 data would have to account for the deductions of rail-related and SPEI awards—and to that end, this resultant figure would be €29,362,722,228 (and represents 1.13% of total 2022 UK GDP).[25]

Fig. 1[26]