Motion to Approve
My Lords, these draft regulations are made under the powers in the European Union (Withdrawal) Act 2018 as amended by the European Union (Withdrawal Agreement) Act 2020, which I will refer to as the withdrawal Act. The purpose of these regulations is to remove redundant EU state aid law from the domestic statute book after the end of the transition period. This is both appropriate and necessary to provide legal certainty for UK businesses and public authorities that EU state aid rules no longer apply in the UK, except where they apply directly under the Northern Ireland protocol.
I begin by explaining the European Union’s approach to subsidy control, which is known as state aid. State aid is support in any form, from any level of government, which gives a business or other entity an advantage that could not be obtained in the normal course of business. If this advantage has the potential to distort competition within the internal market and affect trade between EU member states, then state aid is present and the rules for state aid are triggered. The state aid rules were devised by the European Union to ensure that EU member states operate in a way compatible with the internal market, and the rules are of course very much a European Union concept. They derive from Articles 107 to 109 of the Treaty on the Functioning of the European Union, which, together with the EU regulations and decisions made under that treaty, control how and when member states can grant aid. Responsibility for enforcing the rules sits with the European Commission. However, having left the European Union and the single market, the UK will no longer be bound by EU state aid rules after the end of the transition period.
If changes to domestic law are not made in time for the end of the transition period, EU state aid law would become part of UK law, as retained EU law through the withdrawal Act, but the law would then contain some fundamental deficiencies. These deficiencies would make this retained EU law on state aid inoperable in the United Kingdom. Revoking the EU law on state aid will make it clear to businesses, courts and public authorities that state aid rules will no longer apply in the UK, except, as I said, where they apply directly under the Northern Ireland protocol. Instead, the UK has announced that we will have our own subsidy arrangements to support a competitive, dynamic market economy.
From 1 January, the Government will follow World Trade Organization rules on subsidies and other international commitments agreed in free trade agreements, and we will consult on whether to go further, including whether to legislate on this matter. We will, of course, work closely with businesses and public authorities across all parts of the United Kingdom to consider how best to design an approach to subsidy control that works for the United Kingdom economy.
In terms of the technical detail, this statutory instrument disapplies and revokes retained EU state aid rules that are preserved by Sections 3 and 4 of the withdrawal Act. As I mentioned earlier, Articles 107 to 109 of the Treaty on the Functioning of the European Union, together with the EU regulations and decisions made under that treaty, govern the state aid regime. Article 107(1), for example, defines state aid and sets out the general prohibition on giving aid. That prohibition operates by providing that aid is incompatible with the EU internal market in so far as it affects trade between member states, unless the aid has been approved by the European Commission.
Article 107(2) and (3) sets out when the Commission must give approval and those areas where the Commission has discretion over whether to approve aid or not. Article 108 sets out the Commission’s role in monitoring state aid and obliges member states to notify aid to the Commission in advance. Aid cannot be awarded until approved by the European Commission; this is known as the standstill obligation. While the Commission has exclusive competence to decide whether aid is compatible with the internal market, national courts can enforce the standstill obligation. In effect, national courts can suspend an aid measure until the Commission has considered whether the measure is compatible with the internal market. However, after the transition period, the UK will no longer be bound by EU state aid rules. The rights and obligations I have just described will no longer be relevant. This SI ensures that they are not retained in UK law by the withdrawal Act.
Other EU regulations that enable the EU state aid regime to operate across member states would, after the end of the transition period, become retained EU law through the withdrawal Act. These broadly consist of procedural and exemptions regulations. The procedural regulations, for example, set out how the state aid regime operates and make clear the roles and responsibilities of the Commission and the member states. They set out the procedures to be followed in notifications and investigations and give the Commission information-gathering powers. The exemptions regulations set out the conditions under which an aid measure is exempt from the requirement to notify the Commission in advance. Yet these provisions would not be able to be complied with or enforced in the United Kingdom because the Commission will not have a role in the UK’s domestic subsidy control arrangements. The SI will therefore revoke these now redundant provisions.
Removing retained EU law from the UK statute book that is both deficient and no longer relevant avoids any possible confusion about whether state aid rules must be complied with or not. Importantly, this SI also ensures that domestic legislation can continue to operate appropriately beyond the transition period, when EU state aid rules will no longer form part of domestic law. The SI does this by making consequential amendments to other retained EU law and UK domestic legislation which refers to state aid rules.
It is important at this point for me to make it clear how these regulations will operate in light of the Northern Ireland protocol. While these regulations remove retained EU law from the UK domestic statute book, Article 10 of the Northern Ireland protocol will allow state aid rules to continue to apply after the transition period. The application of state aid rules under the protocol will be limited to measures relating to goods and wholesale electricity affecting trade between Northern Ireland and the EU. The regulations will not affect the application of the Northern Ireland protocol, which is given effect through Section 7A of the withdrawal Act made in 2018: they make amendments only to UK domestic law.
This SI is necessary to make corrections to domestic law, by revoking retained EU law on state aid from the UK statute book and fixing any technical deficiencies in other retained EU law and UK domestic legislation which refers to state aid rules. This instrument will ensure legal certainty for businesses, aid-granting authorities and the courts from 1 January 2021, when EU state aid rules will cease to apply in the United Kingdom. I therefore commend these regulations to the House.
Amendment to the Motion
At end insert “but that this House regrets that the Regulations replace retained European Union State Aid rules with a yet to be defined new subsidy regime, and calls on Her Majesty’s Government to delay implementation of the regulations until (1) they have consulted widely on their proposals, (2) they have sought the agreement of the devolved administrations, and (3) the primary legislation detailing how the United Kingdom’s new subsidy regime will operate after the end of the transition period has received Royal Assent.”
My Lords, I thank the Minister for his introduction of the statutory instrument. My amendment calls on the Government to delay implementation of these regulations until they have consulted widely on their proposals; in particular, until they have consulted and sought the agreement of the devolved Administrations and the primary legislation detailing how the UK’s new subsidy regime will operate after the end of the transition period has received Royal Assent. I will listen very carefully to comments made during the debate, particularly to the response of the Minister, but I give notice that I intend to divide the House on this issue.
This amendment stems from three primary sources. First is the 30th report of the Secondary Legislation Scrutiny Committee, which, inter alia, said:
“The disapplication of EU State aid rules appears to be a reversal of the previous Government’s policy position, which sought a continuity approach in the case of a ‘no deal’ scenario”,
“This approach raises the question whether it would have been more appropriate to take forward such a policy change through primary rather than secondary legislation, enabling Parliament to scrutinise the new approach more fully”.
The second is an amendment in the name of the noble and learned Lord, Lord Thomas of Cwmgiedd, supported by a vote on Report deleting Clause 44 of the internal market Bill, which he said purported
“to make state aid a reserved matter by the device of expanding or extending the competition policy reservation.”—[Official Report, 25/11/20; col. 317.]
The third is the fact that the rollover continuity free trade deal with Japan, discussed in your Lordships’ House last week, replicates the restrictions on subsidies being repealed by this very SI. If we are still honouring international treaties, this will need to be legislated for, so why is this SI being progressed today?
The SLSC commented that when the previous Government laid the 2019 state aid regulations before Parliament, the plan was to transfer the EU’s enforcement functions to the CMA and to enable the continued application of state aid law in the UK in a domestic policy context in the event of no deal. However, these 2019 regulations were withdrawn in February without being made. The SLSC also points out that this new SI is being
“made under the Withdrawal Act which, according to the Explanatory Notes … ‘does not aim to make major changes to policy or establish new legal frameworks in the UK beyond those which are appropriate to ensure the law continues to function properly from exit day’ and commits the Government to ‘introduce separate primary legislation to make such policy changes which will establish new legal frameworks’.”
Why is this happening? Why is there no primary legislation? I hope the Minister will deal fully with the points made by the committee, particularly its general concern about using secondary legislation to introduce policy changes that should be done via primary legislation.
The noble and learned Lord, Lord Thomas, prefaced his introduction to his amendment proposing to delete Clause 44 of the internal market Bill by saying that
“the regime of state aid is plainly necessary, and it is necessary to have one for the whole of the UK”.—[Official Report, 25/11/20; col. 316.]
I agree with him. The Minister has previously made it clear that the UK needs to design a bespoke state aid, or what he calls a “subsidy control”, regime. He has also said he hopes that it
“will operate in a way that works best for all UK businesses, workers and consumers”,
“a consultation on whether we should go further than our World Trade Organization and international commitments, including whether further legislation … is necessary.”
So far, so good. However, with no supporting evidence, he asserts that:
“Reserving subsidy control is the best way in which to guarantee that a single, unified subsidy control regime could be legislated for in future.”—[Official Report, 25/11/20; col. 325-26.]
The noble and learned Lord, Lord Thomas, suggested that this was clear evidence that the Government want to use the internal market Bill to alter the devolution settlement. In the Third Reading debate a few minutes ago, the noble and learned Lord, Lord Garnier, spoke eloquently about the need for all unionists to tread very carefully when progressing legislation that affects the current rights and responsibilities of the devolved Administrations. I agree with him.
Whatever the truth here, this is a worryingly centralising Bill. As we learned in the Autumn Statement only last week, the shared prosperity fund which replaces EU funding for regional and local structural projects will in future be controlled and spent by UK government Ministers from Whitehall. The Minister might wish to clarify whether, under the guise of promoting competition, the Government are set on unravelling the devolution settlement.
There is a bit of a mystery about what the Government are up to here. Why are they currently spurning the sensible and pragmatic way forward suggested by the Welsh and Scottish Governments of using the well-regarded common frameworks process? Reinforcing as it does the need for all four nations to work together for mutually agreed solutions, it seems a complete no-brainer.
On international trade agreements, it is an open secret that level playing field issues are one of the main sticking points in the ongoing EU FTA negotiations. It is said that London has been strongly resisting demands from Brussels for the UK to remain in the EU state aid regime. It has even been suggested that this SI has been brought forward and modified from its original form to bolster the UK’s negotiating position. However, as we debated last week, the state aid provisions included in the UK-Japan free trade agreement are effectively the same as the current EU rules and include what one distinguished commentator called
“hard-edged commitments not to provide open-ended … support”
to UK companies. To give effect to these commitments, there will need to be legislation. I do not need to point out the irony if this SI has to be brought back in primary legislation to give effect to the Japan free trade agreement. Will the Minister comment on this? What are the plans for legislation to implement the Japan free trade agreement?
State aid has received little attention during the UK’s 47 year-long membership of the EU, but its importance has been highlighted repeatedly during the parliamentary stages of the internal market Bill, as well as remaining one of the sticking points in the EU-UK negotiations. We have no sense of where the Government want to take their policy on state aid, other than that it cannot be the same as it has been under the EU. Removing a well-understood policy framework that has been in place for half a century and replacing it with a reliance on WTO rules, which are widely discredited, seems a perverse way of making policy, even if the Government need more time before deciding what to do. There is no doubt that state aid can be beneficial. If deployed as part of a robust industrial strategy, it can help create decent jobs, kick-start businesses, rebalance regional inequalities and power the UK’s internal market. However, it can also be harmful.
The Secondary Legislation Scrutiny Committee said that this change
“is neither a welcome nor indeed acceptable use of secondary legislation”.
Scotland, Wales and Northern Ireland do not understand where they fit into this process, and it is complicated by the Northern Ireland protocol. In the internal market Bill, the Government stand accused of attacking the devolution settlement. Even if that is not the case, they have a lot of ground to make up before their proposals have buy-in from the devolved Administrations and are seen as legitimate and politically uncontroversial in all four nations. The criticism from the SLSC, the gaps in the IM Bill and the need for clarity following international trade treaty commitments suggest in combination that there is a powerful case for delaying this Bill until Ministers have consulted widely and sought the agreement of the devolved Administrations and the necessary changes to existing primary legislation have been agreed. This pause for reflection is what this amendment in my name would achieve. I beg to move.
My Lords, I thank my noble friend for his presentation and explanation of these regulations. I recognise the difficult position the Government are in this year as a result of the pandemic’s impact on preparing the UK’s rules after the end of 2021. However, as I explained during the passage of the internal market Bill, I have significant concerns about the Government’s adherence to issues such as the Northern Ireland protocol and the delicate balance of power within all four devolved Administrations of our United Kingdom.
On the measures we are debating today, I have significant sympathy with all the points made by the noble Lord, Lord Stevenson of Balmacara. I too regret that these measures are being proceeded with. The Welsh Government, for example, have particularly expressed concerns that these regulations will amend UK legislation in devolved areas which hitherto were supposed to require consent under the intergovernmental agreement, especially issues that relate to the water industry and other areas. The Welsh Government have stated their concerns about removing current state aid rules without putting any alternative subsidy regime in place.
Concerns about these measures were reinforced by the House of Lords Secondary Legislation Scrutiny Committee saying that this
“is neither a welcome nor … acceptable use of secondary legislation”
and that it should rather be done with full parliamentary scrutiny in primary legislation. Following the concerns expressed by the Welsh and Scottish Administrations, can my noble friend say how the proposed shared prosperity fund will interact with any new state aid regime? When will the details of the future proposals for this regime be produced? What consultation will happen?
Finally, I repeat my concerns at the Government’s proposal to break the terms of the Northern Ireland protocol. Article 10(1) of the protocol requires the UK to follow EU state aid rules rather than the WTO rules, which are more like a free-for-all. I know that we have dealt with a number of these issues in the United Kingdom Internal Market Bill and that a number of these concerns have been addressed by various amendments made by your Lordships’ House. However, I ask my noble friend, in the light of the ongoing free trade negotiations that have been, and continue to be, under way with other nations, and in the light of the concerns expressed by the devolved Administrations and the House of Lords Secondary Legislation Scrutiny Committee, whether the Government might consider it appropriate to delay the introduction of these measures in order to offer time either to agree a deal or to have the necessary consultations and consents from the other areas of the United Kingdom.
My Lords, I am grateful to the Minister for his explanation of these regulations and their effect in revoking retained EU state aid rules so that they are not part of domestic law for part of the United Kingdom. However, nothing in these regulations affects the continued application of EU state aid provisions, as provided for in Article 10 and Annex 5 of the Northern Ireland protocol, after 31 December 2020. The Minister, when he was introducing the regulations, somewhat skirted over that issue. This has significant and far-reaching implications for businesses and consumers in Northern Ireland. I know that time was short, but it was very much an afterthought and will have significant effects on business in Northern Ireland.
Great Britain will have its own domestic subsidy control regime that follows WTO rules and other international commitments agreed under free trade agreements. It would be good to have some idea of what the Great Britain regime is going to be. We in Northern Ireland need to see the detail. Some flexibilities have been promised, given that we are going to have this hybrid situation in the United Kingdom. I would be grateful if the Minister could indicate when we are going to see the Great Britain rules for the subsidy control regime.
In his reply, will the Minister spell out which areas will be covered in Northern Ireland by the EU state aid regime? He mentioned goods and electricity. Services, as I understand it, will not be covered. However, that can lead to a problem when it comes to which businesses will be subject to which regime in Northern Ireland. We know about manufacturing, but a lot of the value is in services. Will businesses in Northern Ireland be under the EU regime, the Great Britain regime or what? That needs to be clarified as a matter of urgency. We are almost four weeks away from these matters having to be settled and it is important that they are settled and clarified very quickly.
In the Command Paper in May 2020, the Government set out that the state aid provisions in the Northern Ireland protocol would apply only narrowly. Again, I would be grateful if the Minister could reaffirm that and answer the questions that I have raised.
The United Kingdom Internal Market Bill has been mentioned. The Minister and noble Lords will know the concern in Northern Ireland that rules will be applied under the protocol, not least in this area, over which there will be no democratic oversight or input for anyone from Northern Ireland. Stormont, the devolved Government, the Executive and the Assembly will have no say in those rules, and neither will Westminster. There is a massive democratic deficit. That is unacceptable, and yet it has been imposed upon Northern Ireland. Yesterday, we discussed a democratic consent statutory instrument in Grand Committee, and we were told that, in four years’ time, the Northern Ireland Assembly would be able to vote on the matter. The Northern Ireland Assembly and the people of Northern Ireland would like a vote now. It is entirely democratic and reasonable to expect such a thing.
In closing, can the Minister outline how Her Majesty’s Government will ensure that Northern Ireland companies will not be placed at a competitive disadvantage compared to their counterparts in the rest of the United Kingdom? If Northern Ireland companies are following EU state aid rules and their counterparts in the rest of the United Kingdom are following a different subsidy regime, that has the potential to cause problems for Northern Ireland companies. Will he ensure that Northern Ireland businesses can access the United Kingdom schemes as well, or at least offer compensation in some shape or form to make up for that competitive disadvantage, if there is any?
It is important to put on the record that, while these are technical regulations, they seem to be putting in place the state aid rules that will apply after Brexit for the whole of the United Kingdom; but in fact, they will apply only to part of the United Kingdom. For Northern Ireland, these regulations have very serious implications indeed, and that needs to be highlighted and addressed.
My Lords, it will not surprise the House to hear that I strongly support these regulations and do not support the amendment tabled by the noble Lord, Lord Stevenson of Balmacara. I particularly welcome any statutory instrument that removes EU-derived law from our statute book. It may take a long time to remove it all, and it is clearly not a top priority, but when excellent opportunities such as this arise, we should grasp them.
The amendment in the name of the noble Lord, Lord Stevenson, mirrors the concerns expressed by the Secondary Legislation Scrutiny Committee of your Lordships’ House in relation to not using primary legislation to introduce a new state aid regime. We are not being asked to approve a replacement state aid regime. We are being asked to approve this statutory instrument, which should be judged on its own merits and not in relation to the legislative process that may or may not be followed for any replacement state aid regime. The merits of these regulations are clear. They will remove from our statute book the state aid rules that apply to those within the single market. We will no longer be in the single market at the end of this year, except to the extent required by the Northern Ireland protocol. That should be the end of the story.
I have to say to my noble friend Lady Altmann that I do not understand the concerns expressed by the Welsh Government that she relayed. The legislation is redundant and keeping it would be confusing.
The question of what kind of state aid rules we need for the UK’s own internal market is an entirely separate issue and should have no bearing on this order. As noble Lords are aware, the Government have committed to consulting on their plans for a scheme of subsidy control for the UK’s internal market. I am sure that this will include consultation with the devolved Administrations, and so we do not need this amendment to bring that about.
A regime for the UK’s internal market is not an urgent issue, and it is important that the Government take their time to get the details right. As my noble friend the Minister has said, the UK will of course be bound by the WTO’s rules and the terms of any free trade agreements, as it will whether or not we create new rules for our own internal market.
Equally, whether or not the mechanism for creating any new state aid scheme is by way of primary or secondary legislation does not affect these regulations. As noble Lords know, the Government had intended to use the power in the United Kingdom Internal Market Bill before your Lordships’ House took another swipe at the Bill with its wrecking ball last week. Whether the Government decide to use primary or secondary legislation is not a big issue for me, provided that their consultation is thorough. Primary legislation can take a big chunk of the finite time available under our parliamentary processes. I would prefer to use up any spare legislative time for things such as our levelling-up agenda. I would certainly not get excited if secondary legislation were used.
The Secondary Legislation Scrutiny Committee also seemed to misdirect itself when it said, at paragraph 17 of its 30th Report, that part of the reason for drawing the order to the attention of the House was because,
“on this occasion, the policy is one that appears central to the UK’s negotiation position with the EU.”
Your Lordships’ Select Committees never miss an opportunity to drag Brexit into the story, which is, I am afraid, another sign that many noble Lords—perhaps a majority—still have not yet come to terms with the fact that we have left the EU. But our negotiating position with the EU on our future relationship is nothing whatever to do with this statutory instrument. The EU may well be making a fuss about our future internal state aid regime and may want to try to dictate its terms, but that is not relevant to excising irrelevant law from our statute book.
My Lords, it is always a pleasure to follow the noble Baroness, Lady Noakes, who is such a strong and loyal Member of the Benches opposite. I particularly liked her reference to the “wrecking ball” that we took to the internal market Bill, because, obviously, we were in fact helping the Government not to break the law. I think that is part of what we should be doing in your Lordships’ House. I know that when I follow her, all I have to do is go in the opposite direction and I will be absolutely fine.
The Minister was very soothing in his description of what this statutory instrument does, but I had some fears about it being done through secondary, and not primary, legislation, which were reinforced by the comments of the noble Lord, Lord Stevenson. It seems that, rather than the usual EU exit tweaks that most statutory instruments do, this is actually repealing the whole body of EU state aid laws—all the rules—except for Northern Ireland, under the Northern Ireland protocol, leaving us only with WTO rules and anything that is agreed with other countries in our future trade deals. Somehow it seems quite a lot within a very simple mechanism that, I feel, is not perhaps appropriate for it. It does feel like too big a change to be a legitimate use of the statutory instrument powers in the EU withdrawal Act and goes way beyond anything the Government actually said they would use these powers for.
The change should be made by primary legislation. There has been lots of time to do it; there has been time in our schedule but, because the Government have not actually decided their policy, they are just falling back on WTO rules. Also, the fact that this statutory instrument is coming so late in the day rather suggests that this is another hard-line tactic for the EU negotiations, which I think is very sad. What kind of state aid rules are the Government negotiating in their trade deals? Is that something we have access to? What kind of state aid restrictions will the UK subject itself to? Are the Government going to ensure that public authorities are aware of the state aid rules and the changes that will result from this SI?
EU state aid law is well understood by public authorities at the moment, but I would argue that this fast change to WTO rules and trade agreements creates uncertainty—and none of us wants any more uncertainty. I am minded to vote for the amendment to the Motion, because consultation with the devolved authorities does seem like something we really ought to do—if not just through courtesy, at least through gathering more information and understanding exactly what is going on elsewhere. I thank the Minister for his explanation, but I would, if possible, like an answer to my questions.
My Lords, I thank the Minister for introducing these regulations and welcome them. They are necessary to prepare for the introduction of a UK domestic subsidy control regime. As my noble friend has made clear, the EU state aid rules, which would otherwise have been transposed into UK law, would have been inoperable under the withdrawal Act and, in any case, they would have been redundant.
The Government have made it clear that the UK will follow the WTO’s subsidy rules and will also adhere to any relevant obligations entered into under free trade agreements. Among those obligations are those entered into under the CEPA with Japan. Could the Minister explain what the difference is between the Government’s offer to the EU on state aid, which, I understand, is similar to that included in the EU-Canada free trade agreement, and what has been agreed between the UK and Japan? The Financial Times has reported that the UK-Japan agreement replicates the restrictions on subsidies in the EU-Japan deal that went into effect last year. That agreement prohibits the Governments from indefinitely guaranteeing the debts of struggling companies or providing an open-ended bailout without a clear restructuring plan in place.
Of course, as far as state aid is concerned, the EU should put its own house in order. Accusations of dumping cannot easily be made against the UK. As the Prime Minister said in his inspiring Greenwich speech in February:
“France spends twice as much on state aid as the UK, and Germany three times as much … In fact, the EU has enforced state aid rules against the UK only four times in the last 21 years, compared with 29 enforcement actions against France, 45 against Italy—and 67 against Germany.”
But as my noble friend Lady Noakes pointed out with her usual forensic acumen, today’s debate is about our domestic state aid rules. In that regard, I do not support the amendment to the Motion in the name of the noble Lord, Lord Stevenson of Balmacara.
Of course the Government will consult widely on our new domestic subsidy regime, including with the devolved Administrations. I am not quite sure whether creating a statutory requirement to seek the agreement of the devolved Administrations goes further than the requirement to consult, but I am certain that the devolved Administrations will argue that it is tantamount to requiring that their agreement must be given. I would ask the noble Lord if he has not noticed that on every single relevant question the devolved authorities want to do things slightly differently to show their powers. I think the noble Lord’s proposal is, therefore, most unhelpful.
I agree with the noble and learned Lord, Lord Thomas, as quoted by the noble Lord, Lord Stevenson, that it is very important that we have a single set of rules across the United Kingdom. The noble Lord’s wish to extend devolved powers to include all those powers until now held by the European institutions for the purpose of harmonising rules across the EU does not fit well with his view that, at the UK level, the UK Government should not reserve the powers necessary to ensure harmonised state aid rules across the United Kingdom. I think I can see some inconsistency in the noble Lord’s position, and I would ask my noble friend the Minister if he agrees.
The noble Lord, Lord Mann, and the noble Baroness, Lady McIntosh of Pickering, have withdrawn from this debate, so I call the noble Lord, Lord Liddle.
My Lords, I very much want to support the amendment that my noble friend Lord Stevenson is moving. I think that the proposal before us today is symptomatic of the poor quality, dysfunctional Government that we now have. I do not think that I am going to express myself in quite the polite terms that he did, because I think that what is happening is appalling.
As a member of the Secondary Legislation Scrutiny Committee, we thought it very strange indeed that such a major decision was being taken by statutory instrument. It is a major change of policy. It is a change from the policy that the noble Lord, Lord Callanan, himself advocated in this House during the passage of the EU withdrawal Act, when he explained how the European state aid regime would be adopted by the UK but be run in future not by the European authorities but by the British authorities—the CMA. Yet the Government are casting that aside, abolishing the present regime, without frankly having a clue—a clue of the slightest clue—about what they are going to replace it with.
The WTO regime is not a credible state aid regime. I am a strong supporter of trying to build up the WTO—it is very important that our effort goes into that in future and, with the change of President in the US, it might be possible—but, frankly, its regime on state aid is a bit of a joke. There is no need to secure prior notification of any kind, there is no proper enforcement mechanism and there is a tribunal that President Trump has made largely ineffective. The Brexiteers’ greatest friend, President Trump, is the person who has done more to damage the WTO than any other figure.
There is no clarity on the Government’s part about what kind of state aid regime they want. All they know is that they think it is essential that the London Government should be in control of whatever it is. That is the argument we have had on the internal market Bill, where they insist that state aid is a reserved matter when in fact the devolved Administrations have had considerable discretion over how they allocate public funds in support of economic development. The Government’s behaviour on this undermines the devolution settlement as well as being economically incoherent.
The Minister kept repeating that what we are doing here gives business certainty. It gives business no certainty whatever, because who knows what the regime is going to be? The refusal of the British Government to set out a state aid regime is one reason why it is so difficult to conclude the trade agreement with the EU. The EU does not have a clue how the Government intend to sustain any kind of level playing field, which is a perfectly reasonable request in a trade deal.
This is a very bad policy and a very bad move. I believe in state aid; I believe it is necessary to support restructuring. I am not in favour of subsidising lame ducks, but I am in favour of trying to give companies in difficulties a viable future. State aid is important in promoting innovation, particularly in the high-tech industries that are our future. Frankly, though, this does not get us anywhere near having a credible state aid policy. It is a typical Brexit act, taking a leap into the unknown without a clue about what you are actually trying to achieve.
My Lords, state aid has the potential to distort market competition. As a member of the EU, we were governed by its state aid rules. This SI does away with that, but there is a degree of flexibility to those rules. In 2015, for instance, the Government wanted to subsidise the Drax power station to enable it to convert one of its units from coal to biomass fuel. The European Commission investigated and gave its approval. Clearly there were advantages for all in making that contribution to its own carbon emissions, and the EU state aid rules did not get in the way.
I am grateful to the noble Viscount, Lord Trenchard, for explaining to us how the EU state aid rules have been used so fairly, largely to keep France and Germany in line and to allow the UK to do most of what it wanted. They are not overly unfair. We should not characterise EU state aid rules as necessarily preventing the UK doing what is right. As Theresa May said in Florence in 2017, the UK and EU understand and agree about the purpose of state aid rules and
“trying to beat other countries’ industries by unfairly subsidising one’s own is a serious mistake”.
Some of us fear that the Government are about to make that serious mistake.
That is why I take issue with the noble Baroness, Lady Noakes. The Government can now define their own state aid rules but those have implications far beyond the UK. After all, we are a great trading nation, and everything being said about our future outside the EU is about how we are going to trade brilliantly all around the world. State aid rules that are not approved by those we wish to trade with will make that increasingly difficult. That is why we shall not be able to escape completely from state aid rules. The WTO operates its own and, as the noble Lord, Lord Liddle, pointed out, they are far from adequate, but in every trade deal, as we have heard, state aid will be an issue that has to be agreed on.
So what state aid are the Government so keen to be able to dispense that it stood, in part, in the way of a Brexit deal being negotiated? Perhaps the Minister could tell us what the Government want to do. It seems very strange to see a Conservative Government so apparently keen on being able to dispense state aid. In the past, we have seen plenty of instances where government interventions in industry have been disastrous. It gave us the Austin Allegro, for instance, a car that was not only unattractive but prone to breaking down. That failed to rescue the British car industry; being open to overseas investment was what did that.
Backing winners is not something that we have shown particular acumen in doing, but perhaps that is what the Government have in mind to try again. The partial purchase of the bankrupt satellite company, OneWeb, in the summer seemed to be a move in that direction, but hopes for that business have already begun to fade. At the time of the partial purchase, which civil servants definitely were not comfortable with and had to be mandated to do, OneWeb appeared to be caught in the UK’s efforts to find a replacement for the crucial Galileo project and the GPS system that it fuels. Five months on from that purchase, I am no clearer about how we plan to replace Galileo. I would be grateful if the Minister could tell the House whether he envisages pumping more public money into OneWeb and indeed if he could provide reassurance about how Galileo is to be reproduced in just a matter of weeks.
As the noble Lord, Lord Stevenson, pointed out, we still do not know what state aid policies the Government have in mind. It seems wrong to do away with one policy without explaining what will take its place. I can understand why the EU would be concerned about that, and why it could be standing in the way of a deal. Whatever importance the Government put on being able to dispense state aid as they wish, that cannot be as important as securing a deal with our largest trading partner.
In debate after debate, we hear more stories of the chaos that looms with a no-deal Brexit, particularly on top of Covid, so surely the Government could make clear what state aid regime they favour and whether they no longer believe that British companies are capable of competing fairly on the world stage. Four years after the decision to leave the EU, could the Minister tell us how close the Government are to developing their state aid regime?
The noble Lord, Lord Berkeley, has withdrawn from the debate, so I call the noble Lord, Lord Moylan.
My Lords, we have had so much contentious legislation in this Chamber recently, some of it causing noble Lords—including myself—genuine anguish, that my sole purpose originally in putting my name down to speak in this debate was simply to thank my noble friend for bringing forward an instrument around which I thought we would all be able to unite quite joyfully. After all, we as a country voted to leave the ambit of EU law, and noble Lords from all sides of the House have bought into that. Indeed, I recall that the noble Baroness, Lady Jones of Moulsecoomb, whom it is always a pleasure to follow, was a keen advocate of Brexit alongside us at the time. We achieved our objective.
Brexit was an inherently constitutional vote. It did not decide policy, nor what our future laws would be. It decided dramatically to change the locus of where those laws would be made, restoring that to our own democratic institutions and to the electorate on which they depend. Yet, here we are, four years later, still subject to the full panoply of EU law. So we should really be rejoicing at this statutory instrument which, for the first time, is wholly devoted to abolishing a whole range of EU laws—clause after clause. It does almost nothing else. It simply sends regulations bowling like ninepins off the statute book and out of existence.
The noble Lord, Lord Stevenson of Balmacara, seeks to persuade your Lordships to introduce a note of regret into this inherently joyful event. He is not happy for a number of reasons, principally—as far as I can make out—because he is not content to see elements of the existing regime abolished without knowing what will take their place. We might all want to know that; what will replace the Government’s state aid regime is a matter of keen interest. The Chancellor of the Duchy of Lancaster has promised us that it will be robust, and that is all we know. However, as my noble friend Lady Noakes has explained, this is almost entirely ungermane to the current instrument before us. She gave a number of reasons why it was not relevant —but there is another. It would be naive of the Government to put forward their state aid subsidy regime in the context of protracted negotiations with the European Union about our future relationship. The European Union intends to take that regime and, if it approves of it, seek to codify it in an international treaty or make it a precondition of such an international treaty. It wishes to recover its influence over our industrial subsidy strategy before it has even relinquished it—to de-democratise it and take it out of the hands of the electorate.
This seems a very strange path for a Labour Front-Bencher to pursue. The noble Lord, Lord Stevenson of Balmacara, will be well aware that, in recent years, even among the leaders of the Labour Party there has been a wide range of views as to the role of industrial subsidies. There is nothing wrong with that; in a democracy, there is bound to be a wide range of views. His Motion effectively begs a Conservative Government to take their as yet unknown policy and see it embedded in an international treaty. This would remove the opportunity for other political parties which may put themselves forward for election in future to make any meaningful change to it, which is a strange and difficult path to go down.
In the interests of our democracy and of maintaining democratic control over our policy, this amendment to the Motion should be rejected.
My Lords, it gives me great pleasure to follow the noble Lord, Lord Moylan. I can only emulate his wit and clarity. In this instance, I agree with him. I will make some additional points.
I am opposed to the amendment from the noble Lord, Lord Stevenson of Balmacara, just as for many years I was totally opposed to the EU’s state aid rules. It was one reason why I voted to leave in 2016. I was glad to escape them then and I do not want any further delays. I note with some irony that this means I will be supporting the order put forward by the noble Lord, Lord Callanan. During the years before the referendum, even the most ardent Eurosceptics in the Conservative Party were rather lukewarm in highlighting the egregious nature of the EU state aid rules. Indeed, Margaret Thatcher was happy to use those rules to roll back the state at home. The Eurosceptic left might well be a dying breed, although there are a few of us left—but, in contrast, for many years they objected to the EU’s state aid rules. The much-missed RMT leader, Bob Crow, the former Labour leader, the right honourable Jeremy Corbyn, and others on the left, such as me, recognised that those rules were anti-democratic. Whatever the UK electorate might have voted for, if those policies involved certain state subsidies to create new jobs or to help certain industries survive, they could be blocked.
EU rules stipulate that Governments need to notify the European Commission in advance for permission. This is an affront to popular sovereignty and why I support this order. This outrageous mechanism, which allows the Commission to overrule elected finance Ministers and claw back payments, is uniquely prescriptive in the world. It goes far further than other economic blocs, such as the World Trade Organization. The WTO allows subsidies by default. Prior notification and approval are not required. Despite what the noble Lord, Lord Liddle, might say, this makes it more democratic than the EU.
Apart from noting the irony that today’s Labour Party seems keen to retain the EU’s anti-worker, anti-state rules, and that the Conservative Party seems committed to escaping them, it is worth considering why there is so much focus on state aid in the withdrawal agreement negotiations, and in this House. Surely, it cannot be because the EU thinks that the UK will be chomping at the bit to increase state aid, once it is free from Brussels, or that the present Government are likely to launch a campaign for the mass nationalisation of industry. Even when it was in the EU, Britain conducted less approved state aid than most other EU members. In 2018, Britain’s official state aid spending amounted to 0.34% of GDP—about half the EU’s average of 0.76% and far below Germany’s 1.45%. Why do the EU and its avid remainer cheerleaders in the UK constantly take such a robust stance over rules that cover a relatively small part of the UK’s GDP and overall state spending? This seems more politically than economically driven. After all, state aid rules are often used by the European Commission as a mechanism for asserting its overall authority and supremacy over its member states, on pain of punishment and at the expense of their sovereign rights. The rules are used as a punitive and enforcing mechanism.
While the UK has formally left the EU, it seems that it wants to use state aid to curtail the UK as a genuinely autonomous nation. That is why I think it is right that the Government seek to protect against a maximalist interpretation of Article 10 in the Northern Irish protocol, because it could give the European Commission extensive jurisdiction over subsidies granted throughout the UK. It is why it was so important to retain Clause 45 of the Internal Markets Bill, but more of that another time. More broadly, regardless of the economic impact of adhering to any version of the EU state aid rules, the main issue is one of national sovereignty. If the British people want more nationalised industries or state support, it is they—and not the European Commission—who should have the final say.
We have heard much hectoring from some noble Lords about the importance of sticking to international law. Interestingly, despite the rigidity of the EU state aid rules, those same rules were effectively waived during the recent European lockdown-induced recession —just as they were during the financial crisis a decade ago—to allow for emergency bailouts and job protection schemes. This rather calls into question the supposed inviolability of international legal rules in all instances. Is this not a case of one rule for them and another rule for the rest of us? I want to get rid of state aid rules as quickly as possible.
My Lords, this has been an interesting short debate. If the Minister did not already know it from the UK internal market Bill, how state aid—if such a thing is to exist as a definition in future—is to work is a sensitive and significant matter of public policy that merits primary legislation. The changes go beyond what would be permitted under the withdrawal Act. I will concentrate on the mainstream state aid point, although I am sure that the Minister will appreciate that I have seen the amendments to recognise third-country state aid instruments as core tier 1 equity for bank capital. If only there had been such clarity all round.
The problem is that, given the double whammy of, “delete all and maybe start something else—or maybe not”, as we are told in connection with this statutory instrument, and the attempted power grab without consultation in the UK internal market Bill, it all looks like a high level of disregard for stakeholders and devolution, or a high level of disorganisation, or both. The truth of the matter seems to be that policy is at the mercy of trade agreements on the one hand and the avowed distancing from all things EU on the other. It is not even an attempt to cherry pick. There are some cherries to pick, not least the ones that we put into the legislation.
By now, one would have hoped for the emergence of some ideas on alternative shape; if this is how the negotiation is proceeding with the EU, I am not surprised that it got stuck. So instead of an independent policy we have a hole that might or might not get filled. That hole is carved out by secondary legislation, which is a major policy change. Does this mean that, from January, public authorities can start to make subsidies, secure in the knowledge that if they fit within the WTO rules—which means among other things a free-for-all on services—there will be no retrospective prohibition, interruption or comeback? How will that sit in making trade deals if it has already started?
Paragraph 10 of the Explanatory Memorandum says that there have been technical discussions with the devolved Administrations. I find that interesting, given the onslaught against the UKIM Bill. Can the Minister explain more about those technical discussions? Paragraph 11 says that there will be guidance given about the new subsidy control arrangements, but paragraph 12 indicates that, indeed, all that public authorities need to worry about are the WTO rules. Will that guidance include any forward-looking advice beyond compliance?
I do understand that contraction of geographical scope of the state aid rules is sensible, but maybe there could have been a general continuation of the principles until completion of the consultations or some other commitment to co-ordination, not least because of Northern Ireland. Now there will be notional freedoms but concern that it may be temporary or governed solely by Treasury stinginess. The Business Secretary has said—reported, for example, in the Financial Times on 9 September—that the,
“guiding philosophy remains that we do not want a return to the 1970s approach of picking winners and bailing out unsustainable companies”,
and some of that is indeed now in the Japan trade agreement. Is there an intention to enforce that on public authorities and devolved Administrations, or are they being given free rein to see how it works out?
The noble Lord, Lord Stevenson, has proposed in his amendment that the policy be delayed until after the consultation, when devolved Administrations are on board and the legislative context in which state aid rules sit is more certain. These Benches can broadly agree with those sentiments. We think that the Government’s approach to state aid policy, and the wider context of the UKIM Bill, has been deeply unsatisfactory, with important details left undetermined and the devolution settlements neglected. We will, therefore, be supporting the amendment.
I thank all noble Lords for their interesting contributions to this debate. There have been many contributions on a range of subjects, very few of which had anything to do with this instrument. Fascinating though discussions were on the fate of the Austin Allegro, and Galileo, I say to my noble friend Lady Wheatcroft that they were totally irrelevant to today’s debate and nothing to do with the instrument being discussed.
The EU state aid rules were created to meet the needs of the European Union. With the UK’s departure from the European Union, we will no longer be bound by EU state aid rules after the transition period. We have been clear that we will not align with EU rules as part of any free trade agreement. My noble friends Lady Noakes and Lord Moylan were absolutely right to say that what subsidy control regime we have in future is an extremely valid debate. We will, no doubt, have that discussion in this House at great length, but it is nothing to do with the merits, or otherwise, of this statutory instrument. Many noble Lords who contributed seem to be confused about that. The point of this instrument is that businesses must have clarity on the UK statute book to plan for investments and to receive the support that they need to innovate and grow.
The noble Lord, Lord Stevenson, has moved an amendment expressing regret, as he is perfectly entitled to do. However, I hope that noble Lords can see that revoking retained EU state aid law is appropriate and necessary. Furthermore, consequential amendments to other retained EU law, and UK domestic legislation which refers to state aid rules, will ensure that these regulations continue to operate appropriately. I repeat: state aid is support in any form, from any level of government which gives a business or other entity an advantage that could not be obtained in the normal course of business. In the way it is defined in the EU, if this advantage has the potential to distort competition within the internal market and affect trade between EU member states, then state aid is present and the rules for state aid are triggered.
The state aid rules were devised by the European Union to ensure that EU member states operate in a way which is compatible with the internal market. The rules are very much a European Union concept. We will no longer be part of the European Union or the single market and the EU will no longer have any jurisdiction in the United Kingdom, and nor will the European Commission. At present, the UK Government or devolved Administrations proposing any form of state aid need to get the permission of the European Commission. In future, the Commission will have no jurisdiction in the United Kingdom. It makes no sense to leave these rules on our statute book, which is what noble Lords are proposing today.
From 1 January, the Government will follow the World Trade Organization rules on subsidies and other international commitments. Before the end of this year, the Government will publish guidance for UK public authorities to explain these commitments. As I have said before, during debates on the internal market Bill, we will also consult in the coming months on whether to go further, including on whether to legislate.
A number of noble Lords posed questions, very few of which had anything to do with this particular instrument. I will, nevertheless, endeavour to answer them. The noble Lord, Lord Stevenson, asked about legislating for the UK-Japan free trade agreement. In general, where implementation is required, the Government will use the European Union (Withdrawal) Act 2018. The Act ensures that existing laws which implement the EU-Japan free trade agreement continue to have effect.
The noble Baroness, Lady Wheatcroft, in another contribution that had nothing to do with this debate, asked what any new regime would mean for new subsidies. We are clear that we do not intend to return to the 1970s approach of government bailing out unsustainable companies. I shall say a little more about the negotiations later.
I was asked by the noble Lord, Lord Dodds, about the Northern Ireland protocol. It is important to note that after the end of the transition period the EU state aid rules will not apply to Northern Ireland as they do today. State aid provisions apply only to trade that is subject to the protocol, which is limited in scope to goods and wholesale electricity markets. Northern Ireland will enjoy new flexibilities with respect to support for its service industries, but let me be clear that the instrument that we are debating does not affect the application of the state aid principles in the Northern Ireland protocol.
My noble friend Lady Altmann, who I think was referring to our previous debates on the internal market Bill rather than to this statutory instrument, mentioned consultation with the devolved Administrations. Officials have been having technical discussions on this instrument with the devolved Administrations and other Governments’ departments at the official level and no concerns have been expressed about it by their officials. I recognise that on the general issue of a future state aid policy they wish to make a contribution, and we have said that we will consult them, but they have expressed no concerns about this statutory instrument.
The noble Baroness also referred to the shared prosperity fund. Again, that has nothing to do with the instrument that we are debating, but it will be consistent with the UK’s approach to subsidy control following the end of the transition period to ensure that it invests fairly in local economies. The noble Lord, Lord Stevenson, asked about common frameworks. Obviously, we debated these issues at length when considering the internal market Bill, but let me reiterate the points I made then. The devolved Administrations have never previously been able to set their own subsidy control rules, as covered by the then EU state aid framework. They will continue to have responsibility for spending decisions on subsidies within any future subsidy control system.
The noble Lord, Lord Stevenson, and my noble friend Lady Noakes asked why the Government are using secondary legislation to remove the state aid regime and whether this is a policy change. The answer is no. This is not a policy change and it is no more than is appropriate to revoke redundant retained EU law and make amendments to address deficiencies in other retained EU law and UK domestic legislation that refer to EU state aid rules.
The noble Lord, Lord Stevenson, also raised the UK-Japan agreement, on which I have already answered. My noble friend Lord Trenchard and a number of other noble Lords asked about the status of the negotiations. Obviously, they are ongoing literally as we speak and the future of state aid is, of course, an important subject within them. Noble Lords will understand that there are limits on what I can say about it, but perhaps I may refer to comments made by my noble friend Lord Frost when he spoke to your Lordships’ committee about our approach that might be helpful. He said:
“If subsidies are granted, for example, there must be clear statements that they must contribute to and be justified on public policy or market failure grounds. They must be proportionate. There must be openness and transparency about what they are. They must be aimed at bringing about a degree of change in behaviour. They must be the right instrument for the purpose, and you should not in general subsidise if there are negative effects on trade and investment. Those are all commitments that we are willing to make and that we think are important parts of a good subsidy system.”
However, as I said, the negotiations on this matter are very much ongoing.
The noble Lord, Lord Liddle, asked whether we are swapping an effective regime for a dysfunctional one. I have said why we cannot retain the current EU regime: there is no point in giving the European Union jurisdiction over state aid in the UK when we are no longer members of the EU. The ASCM is the appropriate standard for global subsidy control and is a more appropriate basis for regulating subsidies than the EU state aid regime, which of course is designed for the European single market which we will no longer be a part of. Some 164 countries follow WTO rules on subsidy control, showing that they are a well-recognised common standard.
I am running out of time to speak, but I hope that I have explained why the statutory instrument before us is worthy of noble Lords’ support and why it is essential to the clarity and well-being of the UK statute book. Noble Lords raised many concerns about other issues, to which I am sure we will return in the future, but in the meantime, I commend this statutory instrument to the House.
My Lords, I have one request to ask the Minister a short question for elucidation. It is from the noble Baroness, Lady Jones of Moulsecoomb.
The Minister did not answer any of my questions, which I presume is because he felt they were out of order. At the same time, I did ask how we were going to make sure that public authorities understand the impacts of this statutory instrument. He did not answer that.
I answered many questions. It is not a matter of being in order; it is whether questions were relevant to this particular debate. I think I said in my reply that of course we intend to publish guidance for local authorities, the devolved Administrations and others active in this field before the end of the year, but the noble Baroness will understand that this is still very much a live subject in the EU negotiations. When we have a complete picture of how the regime will operate in the UK, any commitments that we may wish to enter into as part of those negotiations will be legislated for in the future relationship Bill, but we will ensure that guidance is issued before the end of the year.
My Lords, I have no further requests to speak after the Minister, so I call the noble Lord, Lord Stevenson of Balmacara.
My Lords, for context, I was originally going to introduce this debate on a different day—in other words, not on the same day as the Third Reading of the internal market Bill, but because of other pressures it was moved. I suppose that it was inevitable that the debate would be full of resonances from our recent discussions on the internal market Bill. If we wanted to take the optimistic view, this discussion on the amendment to the Motion could be treated as a sort of digestif after the main course of the Bill, but I shall come back to that point.
I thank the Minister for his full response to the debate. He might have worried about the wide-ranging issues that were raised, but at their heart, they were all about much the same thing. I thank the noble Baronesses, Lady Altmann, Lady Jones, Lady Wheatcroft and Lady Bowles, and my noble friend Lord Liddle for supporting the points I was trying to make. In addition, others have made good points that are relevant to the debate, in particular the noble Lord, Lord Dodds, who asked how companies in Northern Ireland can be expected to cope with both the internal market approach and the requirement under the state aid rules for limited use of the EU state aids that carry forward.
The underlying point that everyone touched on but was not really answered is how we are going to be aligned to the WTO rules for state aid while at the same time our growing number of international trade agreements are going to recognise state aid restrictions that will need to be taken into account as we go forward. The Minister is obviously not able to speak for another department on this, but there is an issue here that we need to resolve. We already have the idea that the Canada rollover agreement will be one set of state aid rules, but we know that the Japan FTA has a different set, which are much more like the current rules for the EU.
We do not yet have a satisfactory explanation from the Minister about why the choice was made to go for the reduction in the state aid rule continuation through secondary legislation. We need a debate on that, but on the basis of a proper consultation. If nothing else, I hope that will still happen. However, as I have just mentioned, we will gradually bring in elements of a state aid policy. It occurs to me that, although the Minister made a good job of trying to argue why this SI at this time is important, he did not really answer the question of why we could not retain the form and substance of the EU state aid rules, which have worked for 47 years, while stripping out any egregious issues that the Government do not like in relation to control by the EU or surrendering powers to the European Court of Justice, which of course is completely inappropriate post Brexit—we agree with that. But there are arguments on both sides that will not be resolved today.
A regret amendment is limited in its effect. It draws attention to points and provokes a good debate, which we have had today, but it has absolutely no effect on the Government unless they decide that it should. The Government should think seriously about the points made about the need for a delay, because there is a good case for that, but if they decide to go ahead, that is obviously their decision. However, as a prompt to their conscience, I would like to test the opinion of the House.
Motion, as amended, agreed.