Yes, corporate welfare is worth at least £93bn. No, it isn’t possible to cut it all. What we need is a full audit and a proper debate.

Corporate welfare: even £93bn doesn’t capture it!

In the Guardian’s Comment is Free strand, Kevin Farnsworth writes that the £93bn price tag on corporate welfare has been much misunderstood. We need a full audit of exactly how much taxpayers help British businesses do business. A longer, fully referenced version of the article is featured below.

I am the person behind the second most debated figure of the Labour leadership race – the £93bn corporate welfare bill.[1] I write ‘debated’ but this is too generous to some of those who have passed judgement on the work. Once Jeremy Corbyn had begun campaigning on the basis that some of the £93bn could be saved if we scrapped corporate welfare, most of the largest media outlets concluded that the figure must be wrong and the analysis must be flawed. Most of the assessments of the report were also eerily similar and thus similarly wrong in the summary of my arguments. Most surprisingly, not a single journalist, with the exception of Aditya Chakrabortty who wrote the front page scoop on the report for the Guardian,[2]bothered to contact me about any aspect of the work before commenting on it.

Some of criticisms of the report are as eerily similar – relying, it seems, on the initial musings of a few commentators such as Jo Maugham, a response to which can be found here. Some of the points he raises are deliberately mischievous – his initial response to the Guardian piece relied more heavily on a paper I had written some years previously. Some of the points are a matter of opinion and for further debate. But most of his criticism is based on a fabrication of what I argue rather than what is actually put forward in the report.

The report was published in July by SPERI at the University of Sheffield. It builds upon years of researching and writing about public and social policies. And each category of corporate welfare I identify – made up of the various forms of state provision that service the needs of businesses – builds on the work of British and international academics, journalists, governmental organisations, politicians, policy makers and think tanks.

Corporate welfare is made up of the various benefits and services that are provided by governments in order to service the needs and/or interests of private businesses. This is a broad definition, designed to capture the range of provision that makes the business of doing business possible. The work challenges those who would have us believe that private businesses ever really go it alone and those who would paint the state, including the social welfare state, as being primarily about citizen-claimants. Public provision is as much about large corporations, and small businesses for that matter, as it is about (poor) people. My report seeks to capture the complexities of this by mapping out different forms of provision along a welfare continuum. What I argue is that most forms of state provision potentially bring benefits to citizens and to corporations, but some versions of the corporate-social welfare state are more compatible with the promotion of competitiveness and social justice than others.

This report does not come out of a vacuum. The term has been around for a long time in North America. And there are also parallels between the kinds of items of state expenditure that are said to make up corporate welfare in the US and Canada and those identified in my report. The US spends more on corporate welfare than any other country and far more than it spends on social welfare.

What my work argues is support to private businesses goes far beyond subsidies, grants and tax breaks. Most of what the government does is as much about servicing the needs of private businesses as it is about the needs of citizens.

Who, in the aftermath of the banking crisis, the bank bailouts and the internationally-coordinated help for major industries, could seriously suggest that businesses really go it alone? And state support for private businesses goes far beyond such periodic bailouts.

The idea that the state provides essential goods and services for private businesses has a long pedigree. Economists from Adam Smith to JM Keynes to Ralph Nader and Mariano Mazzucato, have identified the essential role of government in ensuring that markets work.[3]

Businesses need legal protections, a system of money, legal frameworks to hire and fire and property rights. They need access to new technologies, the finances to exploit new innovations and invest in appropriate premises and machinery. They need financial support to invest when private sources of income dry up. They need to be able to socialise the risks that private markets would fail to cover. Businesses need workers that have decent and extensive state education and who are healthy and productive. The high-tech companies and the pharmaceutical industry wouldn’t be anything like as advanced and profitable if the government did not subsidise their research and purchase their products. Consider for a moment where employers would be without the system of unemployment benefits and pensions that helps businesses to manage their workforces and hire, fire and retire employees at will. But don’t take my word for it. Dip into the pages of any one of the recent World Competitiveness Reports produced by the World Economic Forum, hardly a mouthpiece of the left, which identifies spending in all of these areas as being essential to growth, productivity, profitability and national competitiveness.

The ‘criticisms’ of my report boil down to four: 1) the £93bn estimate is incorrect; 2) it is not possible to cut corporate welfare by £93bn; 3) that cutting corporate welfare will undermine new investment; 4) that many of the forms of corporate welfare identified in the report do not constitute real or direct ‘payments’ to corporations. Anyone who bothered to actually read the report would realise that I acknowledge each of these pitfalls in the report.

My £93bn estimate is based on a careful conceptual construction of what constitutes corporate welfare and, based on this, a careful consideration of the available evidence. It is part of a longer-term project that has spun out a number of anonymously referred academic papers and eminent scholars have embraced the work. Each category of corporate welfare I identify builds upon the arguments made by other academics, international organisations, the UK government’s own data, and other authoritative sources, including evidence presented to parliamentary committees.

Readers may well ask why, particularly during these times of austerity, the debate in the UK is so stifled. They may wonder why they hear so little about the amounts that go to private companies as they listen to or read yet another report that discusses the ‘vast’ amounts lavished on the so-called skivers or ‘undeserving’ poor. They might ponder the lack of debate about subsidies to the private train companies that cost a similar amount to Jobseekers Allowance. They may wonder why they are bombarded daily by stories of welfare scroungers but not stories about corporations that make huge claims on the state whilst they assiduously avoid taxes.  Unemployed citizens on benefits are told they have ‘no rights without responsibilities’ and face financial and other penalties if they deviate from their contract with the state whereas corporations, in contrast, are provided with financial support without strings. And whilst the government carefully lays out for us how much citizens extract from the state in cash benefits and in-kind services and benefits, no equivalent examination is carried out into corporate claimants. Readers might want to debate whether the millions paid out to Rolls-Royce, Tesco, Sainsbury’s, Amazon, BT, Ford and many others bring sufficient wider public benefits.[4] They might question whether providing £638,000 to companies such as Nestle and PepsiCo in order to allow them to ‘innovate’ by developing unhealthy snacks represents good value for taxpayers.[5] But before such a debate is possible it is important to develop a level of transparency and openness in the provision of corporate welfare that is absent at the moment.

The first category of corporate welfare identified in my report includes official estimates on the cost of subsidies and grants to companies, worth around £15bn each year (£14.5bn in 2012-13, my snapshot year). Subsidies include provision to agriculture and the privatised train companies and capital grants help to fund investment in a broad range of sectors and industries. Regarding agriculture, previous research suggests that large corporations extract some of the greatest benefits from farm subsidies.[6] There is also growing criticism of the £4bn+ annual subsidies to the train companies and my report adds to this a further hidden subsidy that is based on work carried out by CRESC (2013) at the University of Manchester which suggests that the train operators enjoy an additional £1.6bn hidden subsidy that stems from systematic undercharging by the state-owned Network Rail over a number of years.

Beyond subsidies and grants, the report identifies tax breaks and tax benefits as a major element of corporate welfare. My estimate of this is £44bn. Capital allowances make up £20bn of this. I argue that capital allowances “socialise the risks associated with private business investment”. Business risks stem from most business activities, including investment, employment, production and sales. And the purpose of many of the tax breaks offered by government, including capital allowances, is to redistribute this risk, and the costs of the investment, beyond the individual company to taxpayers more widely.

Critics have argued that such tax breaks are simply a recognition by government that businesses incur costs whenever they invest in order to make profits. Indeed, to read their musings on this part of my report would suggest that I have been the first to suggest that tax breaks are subsidies. But this idea is well-established in the academic literature and in the wider policy arena.

The data on the various tax benefits included in my report comes from the HMRC’s annual publication Tax Expenditures. The clue is in the name! For further clarification, the National Audit Office defines tax expenditures as “being reliefs with similar aims to spending programmes”. They are similarly defined in the US and internationally by the OECD, ILO, UN and WTO. The Global Subsidies Initiative is a well-respected organisation that is dedicated to analysing subsidies. It has this to say about tax expenditures:

Besides adding complexity to tax systems, tax concessions are often criticized by economists as being less transparent than grants, and more resistant to change. Several national governments, and even a few sub-national governments, produce annual tax expenditure budgets. But the information contained in these “budgets” is often reported at a highly aggregate level. Information on the value of tax breaks received by particular industries or companies is usually much more difficult to find.

There are clues here as to why apologists for corporate welfare may want to debate tax expenditures and why they get in the way of the analysis.

The NAO explains that the principal tax expenditures – which include capital allowances – offer a low-cost way of providing financial support to businesses. A report by the Office for Fair Trading into subsidies in 2004 listed tax expenditures, including capital allowances, as one of the key forms of subsidy it was interested in.

Internationally, the WTO, OECD and EU are concerned that tax expenditures provide competitive advantages to companies. International treaties clearly state that capital allowances and other tax breaks are potential subsidies. Deliberations of the EU’s Competition Directorate on which tax benefits constitute a form of subsidy to corporations also makes for interesting reading. And readers can look up some of the tax breaks offered by the UK government that it has referred to the European Commission on State Aid for approval. Yes, the British Government acknowledges that some corporate tax breaks are so generous that they may leave them open to challenge under the EUs State Aid rules!

There is also a risk of increased tax abuse relating to corporate tax reliefs. The National Audit Office is especially concerned about Entrepreneur’s relief, which is one of the tax benefits identified in my report. This is what the NAO said in 2014:

The cost of tax reliefs – so far as this is measureable – appears to be growing at a time when public spending is reducing. Each tax relief has an administration cost and carries the risk that revenue will be lost through error, tax avoidance and fraud. For tax expenditures, there is also the opportunity cost of the revenue foregone as a result of the policy decision to offer a relief. Reliefs may also have both intended and unintended consequences, such as the distortion of markets. The efficient and effective administration of the system of tax reliefs therefore presents a large and complex challenge for HMRC.[7]

The fact is that tax expenditures are not simply a matter of accounting. They are politically determined. They have clear objectives which do not include protecting the granting of capital allowances to businesses, or any other tax expenditures, as of right.[8] Capital allowances and rules regarding the levels and application of depreciation rates, vary widely between states, not to mention over time.[9]

And to emphasise the relationship between tax breaks, expenditure and revenues, George Osborne has deliberately reduced capital allowances since 2010 in order to fund the reduction in corporation tax.[10] They are also provided to achieve particular ends – primarily to encourage investment and business expansion through boosting the rewards (or profits) from such investment.[11] The government provides a history of capital allowances on its web site, and makes clear that, from the outset, they were designed to “encourage investment in new plant and machinery, mining works, industrial and agricultural buildings, and buildings and plant used for scientific research.”[12]

Accelerated depreciation (where investment is written off at a far faster rate than an asset actually depreciates) is widely viewed as a subsidy.[13] The UK’s Annual Investment Allowance, for instance, allows 100% of the value of eligible business assets in the first year. Some will be poised to argue that this simply smooths out the regular depreciation of an asset over a number of years. But in the intervening period, the company is effectively provided with a free loan.[14] As Kenneth Thomas has shown, nations compete for new capital through such tax measures.[15]

Does this mean that we should cut all tax breaks? No it does not. Indeed, it may be preferable to use tax breaks selectively, paid for by raising corporation tax, as a strategy to boost particularly types of investment.

Moving on from tax to another controversial issue, the report identifies procurement as a form of corporate welfare. The justification for this 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,[16] 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”.[17]Governments often use procurement to try to assist ‘their own’ companies above foreign competitors (as my report makes clear).  The size of the UK procurement budget is massive – at £238bn – although it is near impossible to obtain a ‘coherent and complete picture’ of where this money goes.[18]

The question is how much of the procurement budget constitutes corporate welfare? Here I have been conservative in my estimate. 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.

Transport subsidies come next. Here my figures are based on previous estimates of hidden subsidies offered by Better Transport (on road freight subsidies), CRESC (on hidden train subsidies as already outlined above) alongside official data on additional tax breaks paid to the private bus operators and a House of Commons estimate of the value of subsidies to aircraft operators (estimated to be worth around £8.5bn by the Transport Committee in 2010.[19] These are followed by insurance, advice and advocacy services in the report. One of the most important of these is the Export Credit Guarantee scheme, relatively small in financial terms, but essential in socialising the risks of exporting companies and in facilitating the ability of companies to trade in more risky overseas territories which is especially important to the defence industry.

These are the various forms of support that make up the £93bn. On top of these is provision that provides indirect, but essential, support to businesses. These include the various services that make up what is usually described as ‘social welfare’, although the Economist is wrong to suggest that I include this provision within the £93bn. What I argue is that tax credits and other in-work benefits can operate as effective wage subsidies. A range of studies support this argument here and in the US where similar schemes have existed for longer. The argument here isn’t so much that tax credits drive wages down, but that they represent a ‘pay-gap’ between what is received in pay and what is needed in order to support families. The work carried our recently by Citizens UK and the recent arguments by some Conservatives that tax credits operate as corporate welfare, demonstrates that this particular argument has found support from across the political spectrum.

The key question that remains is is it possible to cut the £93bn corporate welfare bill? This is what page 10 of the report says: “Some will question the size and veracity of the estimates offered here. If the inclusion of certain categories of expenditure appear to go beyond what the reader feels is appropriate, it is possible to pick-out certain benefits or services and narrow the focus somewhat.”

In some ways it is too soon to address this question. More needs to be known about the potential effects on businesses and communities and the knock-on effects on work and pay, especially at the bottom end.

Certainly there is scope for more careful application of ‘conditionality’ when awards are made to companies. Rail subsidies should be used to subsidise a nationalised rail service. Procurement should be used more selectively.

More research needs to be carried out and the scope of this work needs to be refined and extended. But corporate taxation should also be carefully examined. I have written before of the idiocy of making further cuts in corporate tax at the present time. For the past three decades, UK governments have tried to sell the UK as a cheap place to do business, on the basis of low wages, low taxation and low regulations. What the UK should be doing is abandoning its bargain-basement model of capitalism. Nor should it emulate the practice of the US – which despite being a laggard in terms of its social welfare programmes, has a relatively generous corporate welfare system. Britain should seek to boost investment on the basis of higher skills and new innovations. And trade unions should be viewed as an asset in creating good, strong, employer-employee relationships rather than a hindrance.

But most importantly of all, we need an informed and grown-up debate about corporate welfare. We need greater transparency and greater accountability. The problem with attempting to estimate the costs involved is that, in the UK at least, there is very little of relevance that has gone before it. So to those who would pick the figures apart I would say because it challenges the myths they would prefer to keep alive. There are clearly those who would want to convince the world that businesses do not extract the huge range of services and benefits from the state that I (and many others) claim. But to the rest I would urge you to get in touch and help to refine the work. Add your own insights. Help me to refine the research and complete the work on the database. We desperately need a better informed debate on the state in the UK.

In the mean time, I am grateful to the new Labour Leader and the Shadow Chancellor for pushing corporate welfare further up the political agenda. I would urge them now to engage more fully with the issues rather than see corporate welfare as an easy budget item to cut. They could investigate whether the millions paid out to Rolls-Royce, Tesco, Sainsbury’s, Amazon, BT, Ford, Nissan and many others in recent years bring sufficiently wide public benefits? They could ask the government why it continually emphasises the duties of social welfare claimants while they turn a blind eye to the behaviour of corporate welfare claimants. They might enquire why unemployed citizens on benefits are continually told they have ‘no rights without responsibilities’ whereas corporations are provided with financial support without such strings. They could also ask why the public disclosure of subsidies and grants paid to private businesses doesn’t even come close to fulfilling the government’s own transparency agenda. They should challenge business organisations such as the CBI to say which aspects of corporate welfare should be cut in order to pay for ever-greater tax cuts for businesses. Most importantly of all, they should use their influence to press for a full audit of corporate welfare. And in so doing, they may find that this is an issue that they could build a consensus on.

 

[1]                      http://speri.dept.shef.ac.uk/2015/07/08/speri-paper-british-corporate-welfare-state/

[2]                      http://www.theguardian.com/politics/2015/jul/07/corporate-welfare-a-93bn-handshake

[3]                      http://www.demos.co.uk/files/Entrepreneurial_State_-_web.pdf/

[4]                      See www.corporate-welfare-watch.org.uk/

[5]                      http://www.theguardian.com/society/2015/mar/14/nestle-pepsico-and-others-use-public-funds-to-develop-harmful-snacks

[6]                      http://www.theguardian.com/commentisfree/2013/jul/01/farm-subsidies-blatant-transfer-of-cash-to-rich / http://www.telegraph.co.uk/news/worldnews/europe/eu/5852319/EU-farm-subsidies-paid-to-big-business.html

[7]                      http://www.nao.org.uk/wp-content/uploads/2014/03/Tax-reliefs.pdf

[8]                      https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/198570/ots_review_tax_reliefs_final_report.pdf

[9]                      for a review see: http://eureka.sbs.ox.ac.uk/3514/1/Alternative_Systems_of_Business_Tax_in_Europe_An_applied_analysis_of_ACE_and_CBIT_reforms.pdf; see also for details see http://www.hmrc.gov.uk/manuals/camanual/ca10040.htm

[10]                    http://www.tax.org.uk/Resources/CIOT/budget%20capital%20allownaces.pdf. See also http://www.accanet.com/pk/en/discover/cpd-articles/taxation/capital-allowances.html

[11]                        https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/198570/ots_review_tax_reliefs_final_report.pdf

[12]                    http://www.hmrc.gov.uk/manuals/camanual/ca10040.htm

[13]                    see https://www.americanprogress.org/issues/general/news/2011/03/23/9370/tax-expenditure-of-the-week-accelerated-depreciation/

[14]                    https://www.americanprogress.org/issues/general/news/2011/03/23/9370/tax-expenditure-of-the-week-accelerated-depreciation/.  See also http://www.ctj.org/pdf/hident.pdf

[15]                    Thomson, K.P. 2000 Competing for Capital Georgetown University Press

[16]                    OFT, 2004. Public Subsidies: A Report by the Office for Fair Trading. HMSO: London

[17]                    http://www.iisd.org/gsi/subsidy-types/

[18]                    https://www.iod.com/MainWebSite/Resources/Document/policy_article_towards_tesco.pdf/

[19]                    This is an estimate offered by the House of Commons Transport Committee, 2010, The future of aviation: Government response to the Committee’s First Report of Session 2009-10. London: TSO. P9, Para 15

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