Corporate welfare debate

Reponse to Giles Wilkes, Financial Times. 

Response to £93bn of corporate welfare? What nonsense

The whole purpose of my paper on corporate welfare was to trigger a debate and, insofar as Giles Wilkes has offered his contribution to this debate, I am grateful. But my gratitude tends there! Like the weakest undergraduate student, Giles condemns a piece of work without appearing to have read and understood the work in question, let alone seriously engage with the arguments. He has not even tried to engage with the arguments of the paper. What he, in fact, does is to ask “is this an acceptable list of corporate welfare benefits according to Wilkes” and “on this basis, could Labour cut a large chunk of it?”.

What Wilkes might have done is to engage in the debate. He could have reviewed what he things are the main components of corporate welfare. He might have argued that Labour have misunderstood the arguments. He might even have debated whether it is useful to view the state in these terms. Any one of these would have contributed something of substance to the debate.

Of course, the main objective of this piece is to argue that Labour’s economic policy is flawed. Since the current Labour leadership talk about “corporate welfare” and use the £93bn figure, we have to try to undermine Farnsworth’s report. And rather than engaging in with the key issue – concerning the ways does the state provide support to private businesses – Wilkes and others set about trying to test whether the individual component parts of my estimate stand up their assessment of how well my approach expands, not on MY conceptualisation, but their own.

So lets begin with the conceptualisation. My paper outlines, in the first 11 pages, a reconceptualization of corporate welfare. It seeks to move away from the simplistic definition – which is akin to ‘capitalist fat cats’ – and seeks to inject more nuance into the argument by examining how the state fulfils the needs of private businesses. This is important because we so rarely think of state functions in this way. We tend instead to focus on what governments do for people.

Giles suggests that welfare is easy to define – but here he fails miserably. Leaving to one side his argument that “the recipient is not expected to provide a service in return”, which itself is incredibly naïve (benefit conditionality to one side – most benefit recipients contribute more throughout their lifetime than they receive, including those claiming pensions). What he understands by ‘welfare’ is clearly restricted to social protection – unemployment benefits, the dole etc. He excludes a whole range of social welfare services – the health service, education, social housing, social services. This is not how welfare is defined. At least not outside the US. That is why, on page one of the report, I state that:
When William Beveridge put together the blueprint for the modern welfare state, he argued that it would protect citizens from cradle to grave: insuring them against ill health and old age, preparing them for work, and providing for them when they were out of work. One of the key purposes of the welfare state was to improve the plight of the poorest and most vulnerable in society – but what has often been forgotten in subsequent debates is that the welfare state was never exclusively about the poor; nor was it even exclusively about citizens.

So, yes, welfare for citizens is about satisfying needs – in the broadest sense. And corporate welfare is about satisfying corporate needs, in their broadest sense. And I extend the analysis further by arguing that:
Publicly-funded benefits and services that are aimed at meeting the needs and/or wants of private businesses is a key part of what governments do and have always done. Corporate welfare underpins capitalist economies and many of the most successful private companies owe their success to it, although not all companies need corporate welfare in the exact same quantity and form, nor do they depend on it to the same extent throughout their ‘life course’. 
Once we use my definition of social welfare and corporate welfare rather then his, Giles’ arguments fall down like a pack of cards.

But of course, the myth-making suits Giles’ key subtext here, which is that Corbynomics is based on bad economics. I make no defence of Labour’s economic policy. I did not write it, nor did I contribute directly to it. I have complained elsewhere that journalists such as Giles did not contact me prior to writing on corporate welfare. The same can be said of the Labour leadership. Giles’ states that:

For some who argue against the current form of public sector austerity, the idea that there are £93bn of Treasury outgoings that can be easily trimmed is essential for making the numbers add up.

So let me clarify something. I do not, in the report, argue that corporate welfare can be “easily trimmed”. This is what I actually write:

So what is the answer? One solution would be to cut corporate welfare, especially those forms of provision that bring fewest direct benefits to citizens. But this would not be without its risks which are heightened by the lack of transparency/analysis/debate. Cutting back subsidies, grants and tax benefits would certainly impose huge costs on businesses, which may or may not be a cause for concern, but they may also have grave negative effects on citizens. Cuts in wage subsidies would, for instance, impose costs on families but, on the assumption that employers would not simply be able to continue pay wages that are too low to support workers’ living costs, such cuts would also increase the wages bill for employers. There would be similar results if the government charged businesses the full economic costs of building and maintaining sufficiently good transport links, or forced employers to pick up the costs of health insurance. Many businesses would cease to exist if they didn’t trade directly and exclusively with the various arms of the state. 

Thus, again, Giles’ contention that I do not see the public benefits is proven to be wrong. And the spirit of what lies behind his contention has no merit at all. The fact that my estimate of £93bn may have overlapping beneficiaries does not mean that it is incorrect to consider it corporate welfare. When the government used to talk about tax credits, it lumped them all together under the label of ‘social welfare’. It did not explain how they provided benefits to employers. Or it didn’t before it wanted to find a justification for cutting them. From that point, tax credits were regularly referred to as “corporate welfare”.

To be clear, I have written against the governments austerity agenda – and warned against the risks of cutting corporate welfare as well as social welfare. There is certainly scope for analysing how the state spends its money. The ways in which the state supports citizens and private businesses needs to be looked at carefully. To take one recent example, the government may seek to support struggling businesses by subsidising wages at the bottom end. They may, equally, argue that businesses have to pay higher wages. But here the government has removed part of the burden of paying individuals from the state to employers. And in order to compensate them for this, they are reducing corporate tax. The state will both gain (saving on the costs of benefits) and lose (in terms of tax revenues). So we have to investigate whether this is a good policy outcome. But of course, to decide this, we have to analyse the complex relationship between the way in which the state simultaneously meets the needs of citizens and businesses. To do this we need a new debate on the state. And this is what I am attempting to do in my work on corporate welfare.

Of course, given the importance of the state in supporting private businesses, it should be easy to lay our hands on research or data. Government should have this to hand. Researchers must have some idea. And journalists such as Giles Wilkes should have given us some indication. But here’s the problem. The government does not provide the data. Social scientists have not thoroughly researched this question. And whilst some journalists – most notably Aditya Chakraborrty – devote a great deal of time and energy exposing ‘bad’ examples of corporate welfare, most turn a blind eye. And some, and I’m afraid that Giles Wilkes comes under this category, set the arguments back.

Similar attacks have been made in the past, of course. Mariana Mazzacato makes some similar arguments to me, albeit in a much narrower field. And she has spoken about the antagonism she has faced for trying to make the argument that many companies succeed because of, not in spite of, governments.

Of course, once we conceptualise corporate welfare in the way that I do, as opposed to the way that Giles Wilkes does, the substance of his argument about the distribution of benefits and the impact of cuts evaporates. But I would like to deal with the specifics as he does.

One point he makes is that a grant/loan to a company in order to help support business activities in research/training/investment is no different from paying teachers to teach. But this shows a fundamental misunderstanding about what constitutes a subsidy. One difference is that the amount provided to the company would likely have to be declared as a potential subsidy under the State Aid rules. The public benefits may be extensive, of course. And there are lots of other examples of how such intervention can bring wider benefits. But this is completely irrelevant to my research. What I argue is that the key difference is that we know how much it costs to pay teachers. We know how much state education costs. But in pitching the argument that education is something that exclusively benefits citizens, the government (and Giles) is being dishonest. And this is a dangerous game. What we need to recognise is that the government subsidy/grant/loan to a private business represents state assistance to an entity that we are continually told would be stronger if only government. got out of the way. In other words, Giles is here really making my point for me. He doesn’t see this because he hasn’t bothered to read what I actually say in the report as opposed to what he thinks I am saying.

Dealing now with the specifics. The justification for including procurement in my report can be found in the long-established principle in work on state subsidies that such expenditure constitutes a potential subsidy. The DTI acknowledged as much back in 2004, and the WTO’s agreement on Subsidies and Countervailing Measures (SCM) outlines similar concerns given that procurement involves purchases “under circumstances that do not accurately reflect normal market conditions”. Governments often use procurement to try to assist ‘their own’ companies above foreign competitors (as my report makes clear).

First of all Giles argues my figure on the size of procurement is wrong. He uses a NAO report to support his figures, but his report excludes a great deal of expenditure on procurement, including many of the procured services provided by the big 4. In order to question the amounts spent on procurement. This report does not include most procurement. He could have read this report from the NAO that estimates that procurement was worth £220bn per year in 2010. Or this one, written by Colin Cram, who estimates that procurement was worth £225bn in 2014. So my figure, which is based on government data, of £238bn is correct.

Next, he queries my estimate. What I try to do is to provide an estimate that is as close to the spirit of the subsidies argument as possible. There are those who argue that all procurement is effectively a sop to the private sector. I do not believe this and I have accordingly been conservative in my estimate. There is no easy way to get at this. In an attempt to capture the potential ‘above-market’ rate within the procurement budget, I put together an estimate based both on the amount that approximates to the profits made by the big four procurement companies AND previous authoritative estimates of the above-market costs that government incurs in procuring services as opposed to providing them itself. Both calculations result in a figure of around 6.5%. And it is this amount that I argue is the corporate welfare element of procurement expenditure. It isn’t ideal. But then, no one else has offered a better one.

Moving on the tax issue. Here Giles writes that “the motivation” for capital allowances “are to encourage companies to invest more, since investment boosts the productivity of the whole economy. They help to make economic the investment that companies need to make profits. Unless the author believes that all this investment would take place anyway, they are not a subsidy to corporate profit. UK capital allowances are not particularly generous”.

Here Giles actually makes my argument for me, although he doesn’t realize it because he hasn’t read what my argument is. His definition of capital allowances is very helpful. I agree they operate in this way. They assist companies. They socialise the costs of investment. That is why I define them as corporate welfare. I DO NOT believe that all this investment would take place anyway. I believe that some forms of investment are more desirable than others. I do believe that, viewed in this way, UK corporations should pay more towards the cost AND stop lobbying against state support, state regulation and corporate taxation. Most importantly of all, I believe that once corporations receive this assistance, they should not then engage in tax dodging. Giles is right, capital allowances are not especially generous. They don’t need to be because other parts of the corporate tax system ensure that UK businesses face a very favourable tax regime, whichever way we look at it.

Regarding other tax reliefs, here I included a whole range. I am not arguing they simply benefit construction companies. I am not even arguing that they should not be used. But some of it does benefit the construction industry. But let’s not pretend either that the construction industry ‘goes it alone’ without this additional assistance.

On transport subsidies Giles writes that “The author rebadges £5bn of spending on roads as “corporate welfare” because freight companies benefit from having a functioning road system. Certainly – but so do we all, including from having a competitive freight industry.” By now I probably don’t need to explain why this so misses the point. But I would like to add here that whether an industry is made more competitive or not is to completely misunderstand how a subsidy operates. Providing a few extra billion pounds each year to the freight industry would have the same effect! But it wouldn’t be legal. And it would be recorded in these terms.

Ultimately Giles seeks to undermine a report he has clearly not bothered to read thoroughly. His logic is not only loose. It is pretty much entirely absent. What he appears to be arguing is that companies are provided with assistance, but there are wider benefits to that. Beyond this, he seeks to undermine my methods of trying to account for this, and those of others (amongst them respective academics, think tanks and evidence to select committees, official data etc). But I do not conceptualise corporate welfare in the way Gile’s suggests. I do not operationalise it in the way he thinks. I agree that more work is needed. Most importantly, I argue that we need a debate. And I would urge Giles to engage in this debate a little more constructively.

Be the first to comment

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.