Blog: ‘Taking back control’ or Brexit and the dash for corporate welfare?

Boris Johnson campaigned that Brexit would 'take back control'.

Many of those who voted to leave the EU would have been encouraged to do so by the rallying cry of the leavers: ‘take back control’. It was never quite made clear who would be the major beneficiaries of this. One thing was certain at the time: it wouldn’t be ordinary people. Instead, power is being consolidated by the same old political and economic elites and the state is becoming more, not less, beholden to big business and its demands. These are the real consequences of Brexit.

Brexit has triggered a ‘Dutch’ auction (a phrase that no longer has just figurative meaning) wherein an increasing number of EU governments are shifting their own public policies in order to persuade British investors to relocate. And it is working. At the same time, having witnessed an important new window of opportunity, corporations are either shifting investment outside the UK or are threatening to do so, unless the British government cuts them a deal.

Corporate power is the key to understanding the current political terrain. The argument is simple: 1) businesses control investment; 2) citizens and governments need corporations to invest; 3) businesses cannot be forced to invest, they can only be induced.  Without business investment, there would be no jobs and no welfare state. Governments need the tax revenues. Without investment, the economy would contract. For citizens, incomes would fall, poverty would increase. The more options that businesses have and the more hostile the investment environment, the harder that governments and citizens have to work to induce capital to invest.

For over three decades, the UK has been one of the most aggressive competitors for inward investment. Over this time, the UK has sold itself to investors as a relatively cheap place from which to access European consumers. Its sales pitch has been based on a ‘Commitment to deregulation, a transport infrastructure that provides fast and easy access to the rest of Europe’, ‘lower production costs than our neighbours’ thanks to an ‘adaptable’ workforce’ that is ‘willing to work flexible hours’ and ‘access to the single European market without the costs of the Social Chapter’.

Even after the UK signed up to the Social Chapter, the Blair Government went out of its way to reassure business that it was on their side, and this worked. For most of the past twenty years, the UK succeeded in capturing more inward investment, as a percentage of GDP, than any of its major competitors. But in so doing, it grew more dependent on mobile capital and new inward investment raising the question of how, after Brexit, it will compete to retain existing investment and attract new investment going forward.

In pursuing Brexit, the UK is reneging on a major pillar of its offer made to businesses since the 1970s. To avoid capital flight, it will have to offer compensation across the board.

The government has several options: reduce labour costs (either through reductions in the National Insurance system or subsiding associated costs such as training), reduce taxes, reduce regulations, or offer increased grants and subsidies. Outside the single market, the government would have more options—including being free of State Aid rules, although sanctions could be imposed if EU officials believe that any particular company is being given an unfair competitive advantage under WTO rules. It is not hard to see how the policy options might stack up to undermine social welfare and boost corporate welfare.

Businesses know the government is on the back foot. The Cabinet is running scared, petrified of losing big investors prior to the Brexit negotiations. Major corporations don’t actually have to go anywhere in order to get a better deal. They simply have to demonstrate a willingness to do so. For Nissan, a well-timed threat and a stern letter from the Japanese Government earned it a one-to-one with the Prime Minister. Other TNCs have lined up to play their own hands, but perhaps fearing to start a stampede to Number 10, the party of business pointedly tried to keep corporations at arm’s length. Undeterred by the snub, and shaken in their confidence in the government following the June General Election, the CBI, Chambers of Commerce and Institute of Directors went straight to the EU to present their case directly—the City took their own delegation. And the government established a new Business Advisory Group made up of representatives of the BCI, Chambers of Commerce, Institute of Directors, Engineering Employers’ Federation and the Federation of Small Businesses.

All this raises key questions regarding the future direction and sustainability of public policy. The Brexit camp argued that the key problem with the EU is that it imposes high regulatory burdens on business, including in areas such as social policy and the working-time directive. Faced with the prospect of capital-flight, the British government will be likely to race to relax workplace regulations and ‘market-distorting’ social protections on top of the agreed reductions in corporation tax. The government has already agreed to protect business subsidies and the case of Nissan points to special measures that will further boost public assistance to corporations. Meanwhile, the ‘newly liberated’ citizens of the United Kingdom will have to bear a higher tax burden to make up for the corporate tax giveaways already promised; will pay a higher price, perhaps through cuts in health, education and other budgets, to support more generous subsidies and other inducements to companies; and will suffer from reduced labour market and consumer protections. Whether in ten years’ time they are grateful they voted to take back control depends on how the UK competes for capital in the future. But only a radical departure from previous policies will be enough to prevent the UK from racing faster to the bottom as far as social and public policy is concerned.

by Kevin Farnsworth, Director of Corporate Welfare Watch

This blog draws on a refereed academic article recently published in the Journal of Social Policy.