My report on corporate welfare

It’s time to have a grown-up debate in the UK about the other sort of welfare

Kevin FarnsworthThe purpose of my report into British corporate welfare, which featured in the Guardian on budget day, was to bring corporate welfare into the debate about the future shape of the state.  The report raises questions about the role of the government in meeting, balancing and managing the needs and interests of businesses alongside those of citizens.  In this respect it succeeded: but only up to a point.  The noise surrounding the discussion of the size of corporate welfare got in the way of debating its substance.  Meanwhile, George Osborne’s budget made the strongest argument yet for having a proper debate on corporate welfare and its role and purpose within the shrinking state.

Let me begin by laying out a few principles and statements of fact.  First, the free market is a myth, as is the idea that corporations are most successful when governments ‘get out of the way’.  Businesses do not succeed despite government: they succeed because of government, not to mention the contributions of ‘regular’ citizens as workers and taxpayers.  There is nothing new about governments assisting private businesses.  Corporations have always depended heavily on the state and, historically, corporate welfare precedes social welfare.  Taken as a whole, such support operates to socialise business risks.  By so doing, the government not only enables businesses, but seeks to shape business decisions in order to maximise the benefits to society more broadly.  In other words, how governments service the needs of private businesses, how they provide assistance, how much they provide, and how they fund it, has huge and lasting implications for citizens and the evolution of capitalism itself.

Second, and more important, it is not ‘anti-business’ to debate corporate welfare, although my argument does suggest that certain ways of doing business are a problem.  This is perhaps the more important point.  What we desperately need is a new way of thinking about the functions of the state and, in particular, the ways in which social and corporate welfare should co-exist.  Provided in one way, corporate welfare can contribute towards a more sustainable, and more just, model of capitalism.  Delivered in another way, it undermines social justice, reinforces inequality and protects companies that behave irresponsibly, not only to citizens, but also other corporations.

So what is wrong with corporate welfare?  My answer is that it depends on the nature of the provision, its delivery and its economic, social and political impact.  There is certainly something fundamentally wrong about the propagation of a myth that private businesses get a bad deal from government: that they pay too much in taxation, are too heavily regulated and get little in return for the taxes they pay.  It’s even worse when the very companies that extract most from the state proceed to undermine the tax base or rail against the state services upon which they depend.  Social welfare claimants are constantly told their benefits are conditional and there are no rights without responsibilities.  Yet corporate welfare claimants are celebrated regardless.  Business risks continue to be socialised, whilst profits remain private.  Indeed, as the latest Osborne budget demonstrated, social welfare is being attacked whilst corporate welfare is preserved, protected and boosted.  Putting a figure on how much corporate welfare costs should surely be easy, especially in an era of austerity and ‘budgetary responsibility’.  But, whilst the government tells us everything we need to know about the costs of social welfare and its effects on claimants, it reveals hardly anything about how public policies benefit private businesses and how businesses, as recipients, behave.  The government doesn’t even outline clearly how much is provided to individual businesses through the most direct type of transfers: namely, grants and subsidies.  This data is difficult to obtain and collate.  Anyone who wants to test this should think of a big company – Amazon, Rolls-Royce, Nissan, Tesco, Sony, to name a few – and then trawl government websites to try to find out how much has been given to these companies over the past few years.  Or, instead, they could go straight to the database I am presently compiling.

In mapping out these various forms of corporate welfare, my report is careful to stress that compiling this data is complex and, in certain categories, a matter of judgement.  That is why the categories I identify are separated out.  As the project continues, further refinements will be made.  What turns out to have been one of the most controversial arguments made in the report is that we should count tax breaks to companies as part of corporate welfare.  Decisions about which kinds of activity can be written off against corporation tax reflect a mixture of political and economic judgements, because tax breaks – or tax expenditures, as they are commonly known – of any kind obviously represent foregone tax revenues.  In this respect, they operate as potential subsidies that, as the OECD puts it, ‘allow certain groups  . . .  to pay less in taxes’.

Read what the EU, the WTO, the Global Subsidies Initiative, international tax experts (also here) or the UK Parliament have said on the question of capital allowances and other tax expenditures as subsidies in the past.  Does this mean they are unjustified?  Not necessarily.  But such decisions help to socialise risks and shape business decisions in various ways.  In setting the rules that define tax allowances, governments determine how much is taken in revenues and how much is given away.  And, even in the area of capital allowances – one of the more ‘universal’ tax benefits for businesses – there is huge variation between countries in the way they operate and how much they are worth each year.

Similar discussion might be had about another aspect of corporate welfare highlighted in my report (although it doesn’t form part of the core £93bn direct benefits): namely, in-work tax credits.  By budget day, a number of people on both sides of the political spectrum were referring to tax credits as ‘business subsidies’ and even as ‘corporate welfare’.  Prior to that, they were simply viewed by most as part of the benefits system.  The report outlines how tax credits operate as effective wage subsidies.

In short, the UK has an extensive corporate welfare system that sits alongside the social welfare system.  The question is: what do we do about it?  To be clear, my report does not conclude that we should simply cut corporate welfare.  I argue that corporate and social welfare operates on a continuum, so that there are few forms of public provision that exclusively benefit only citizens or only private businesses.  But satisfying the needs (or demands) of businesses by cutting taxes or regulations, driving down wages or assisting companies that assiduously avoid taxation and gain through the claims they make on direct assistance: none of this makes any sense at all.

The key challenge, my report argues, is to balance the often-competing needs of businesses and citizens.   However, the recent Conservative budget does not suggest that corporate and social welfare are at present evenly balanced in any way.   It’s clear that corporate welfare has the upper hand.  Social welfare is being cut in order to save the exchequer £12bn.  At the same time, Corporation Tax is also being cut for businesses.  This will cost £2.9bn by 2020, according to the Office for Budget Responsibility or, if we take into account growth and inflation over the next few years, £27.8bn, according to calculations made by Richard Murphy.  In addition, as the latest PESA data shows, corporate subsidies and grants will be expanded over the next few years.

The question thus becomes: does cutting corporate taxation and increasing corporate welfare make sense in an age of austerity?  Perhaps it does; perhaps it doesn’t.  But surely it’s worth some grown-up debate.