The client state of crony capitalism 

Darwin Friend

January 22, 2020

The principle that businesses should be treated equally under the law, and that the government of the day shouldn’t decide who the winners or losers are, is at the core of market economics. But business support schemes, which give taxpayers’ money to companies, are currently in use in the UK and USA. And, on the surface, this contradicts the broad free-market message which the governing parties of both these nations espouse.

The UK government first set out its plan to support and invest in specific areas in 2017 by publishing its industrial strategy. Within this plan of action is a programme to support and develop businesses by providing over £20bn to high potential companies.

The Department for Business, Energy and Industrial Strategy administers more of these business schemes than any other department, with their total costs amounting to £2.4bn a year. However, despite the significant outlay of taxpayers’ cash, the National Audit Office recently found that the schemes which this money is spent on did not follow the government’s own guidelines. The NAO report is a devastating revelation of how extensive this network of business subsidy has become.

The report goes on to show that most schemes lacked any measurable objectives from the beginning and had no evaluations as to whether they were value for money. The results clearly show that a department simply picking businesses from their favoured areas is no way to run an industrial strategy, with taxpayers’ hard-earned cash being lost to unsuccessful businesses instead of being spent of their priorities.

The lack of accountability when it comes to public funds only heightens concerns which we at the TaxPayers’ Alliance have had from the outset, questioning why taxpayers are paying to fund business loans in the first place. Lord Smith of Kelvin, chairman of the British Business Bank, exacerbated this point when he said: “We hold their hand and try to explain about business”. Over to him then to explain why, rather than lecturing on the fundamentals of business, the government shouldn’t leave it to commercial banks to invest in viable entrepreneurs?

This is especially important given that many businesses can be zombie companies whereby the company uses the government loan to cover its costs but doesn’t generate enough to pay it back. This means companies are dependent on the government to finance their existence, resulting in a host of companies being on perpetual life support.

Considering that interest rates have remained historically low since 2008 averaging 2.2 per cent, compared to six per cent on average between 1694 and 2008, it should be easier for businesses to fund the materials they need and manage to repay their loans. This creates the sort of crony capitalist client state which has been so discredited recently.

So why should these schemes continue into the 2020s? Another purpose of the schemes is to ensure enterprises outside of London benefited from government loans. “Level up” as one might say. Yet, even on these criteria, the strategy has failed, with London receiving a disproportionate share with 14,000 of almost 70,000 firms loaned £118 million. Meanwhile, less than 4,000 businesses in Scotland received a share of £29 million. These examples only encourage the view that the government is London-centric. Picking winners from Whitehall is rarely good for anyone, let alone the world beyond the M25.

Naturally, these schemes are perceived as an attempt to show the government’s pro-business credentials, presenting itself to support smaller enterprises offering the prospect of growth. Nonetheless, it reflects a lost opportunity to allow real competition between businesses in a dynamic free market, as the prime minister set out in his conference speech last year where he praised the virtues of the market over the state.

Similar government funds exist across the Atlantic, where the Export-Import bank serves as a protectionist fund for some of the world’s biggest companies (including Boeing and General Electric).

This is despite Donald Trump’s pledge during the election campaign to scrap the bank, which directs taxpayer funds and loan guarantees to facilitate the exports of US companies. Just as in the UK, the US government has flopped to the lazy policies of government intervention in the markets, deciding who is worthy of taxpayer funds. While it might be easy in the short term, it fundamentally isn’t good for the long-term health of market capitalism.

Just as the government has done with the Green Investment Bank, it’s time to change course. There should be a reversal in policy regarding business support schemes, whereby commercial banks are the ones making business investment decisions rather than the government interfering in markets. This should start with the sale of the British Business Bank, where a combination of significant rising costs and a lack of performance indicators are resulting in an inefficient use of taxpayers’ money.


Written by Darwin Friend

Darwin Friend is a researcher at the Taxpayers' Alliance.


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