Taking Back Control? Big Business and the Welfare State
Kevin Farnsworth
One of the clarion calls of the 2016 referendum campaign against the United Kingdom’s membership of the European Union was ‘take back control’. Given structural economic factors, coupled with powerful business actors, this was however always likely to be no more than a slogan. Post-referendum, as power is being repatriated it is also being redistributed away from citizens and government—and towards big business.
Governments and citizens depend on the ability of nation-states to capture and retain private investment. The aggregate investments of businesses are major determinants of production, consumption, employment, growth and tax revenues within capitalist economies (Gough, 1979; Lindblom, 1977; Offe and Ronge, 1984; Hacker and Pierson, 2002). Foreign direct investment from multinational companies is an important part of the mix but how important depends on the economy in question. Some nations are more heavily dependent on inward investment than others. Regardless, business investment decisions are private decisions, taken by owners and company chief executives after calculating potential returns. Governments and citizens are dependent on private investment but neither can compel businesses to invest. They can only induce them so to do—and they do so in different ways.
Competing for capital, UK-style
From the early 1990s, the UK began to put in place ever more aggressive methods to compete, not only for capital located outside the EU which wanted better and cheaper access to expanding markets, but also for businesses from more heavily regulated and expensive labour markets within the union. In 1994, the UK government placed an advertisement in the German business press imploring firms to relocate there to take advantage of its more favourable business environment. Such early attempts to lay down the UK’s ‘offer’ to capital highlight the importance of ‘business-friendly’ social and labour-market policies, alongside more traditional grants and subsidies, as potential draws. Such strategies and inducements came to define the UK’s approach to investment, establishing the basis of a long-lasting contract with investors.
The inducements offered to businesses investing in the UK included deregulated labour markets, a favourable tax system, low wages, lower trade union concentrations, fewer rights at work and business-friendly social policies (Farnsworth, 2019). Since a relatively small number of policy paths became traversable in this policy context (Pierson, 1995), Brexit potentially offered a theoretical possibility to pursue different routes. This is certainly what the so-called Lexiters (left-wing supporters of Brexit) hoped. The UK might, with a different approach and a different vision, compete on the basis of high skills, harmonious industrial relations and high productivity, like Sweden and Germany (Farnsworth, 2019). But all the indications since the referendum suggest that the UK will march with even greater purpose along its existing path.
This isn’t to argue that rerouting the UK’s competitiveness model would have been straightforward: it would have required nothing short of a paradigm shift, backed by huge amounts of public investment. But business as usual isn’t possible either. Brexit removes one of the major inducements—if not the most important—which the UK has been able to offer businesses. It will thus have to put in place new inducements which will make up for the Brexit losses. And powerful business actors will push hard to ensure that their general and specific interests are served.
Compensating capital through corporate welfare
Businesses are in a ‘buyer’s market’ in the face of Brexit. And they are clearly aware of the changed circumstances in which they find themselves. Having vigorously lobbied for a Remain vote, most business associations—including the Chambers of Commerce, the Confederation of British Industry, the Institute of Directors, the British Bankers’ Association and TheCityUK (representing London financial interests)—subsequently sought to emphasise the importance of public policies which would induce businesses to continue to invest. KPMG warned in 2016: ‘Policy makers should be really concerned about a leaching of British business abroad and should engage with business early to understand what assurances they can offer and closely monitor any shifts overseas’.
John McFarlane, head of Barclays and TheCityUK, told the Financial Times in March 2017 that the UK government would have to compete even more vigorously to retain investment in future: ‘There needs to be a tangible, compelling economic or collateral reason to be here or to do business here, rather than somewhere else, and this needs to be renewed continually’.
Nissan provided a good example of things to come. Aware of its strategic importance as a major employer in the north-east of England, and exemplar of a key industry in the UK, Nissan made repeated threats to shift investment elsewhere if unable to extract concessions from the UK government. It was even able to persuade the Japanese government to write to the UK government (in a letter subsequently leaked), pressing it to protect the interests of Japanese companies—notably Nissan and Toyota. This was enough to earn Nissan a one-to-one appointment with the prime minister, Theresa May, the outcome of which was to encourage Nissan to announce its intention to continue to invest in the UK after assurances given to the company.
The specific help Nissan requested embraced reductions in taxation, including import duties, and a specific Brexit deal for the automotive industry, with additional support to protect and ‘compensate’ Nissan for any additional costs it would have to absorb. Colin Lawther, then its senior vice president for manufacturing, explained to the Commons International Trade Committee that the company had extracted from May a promise of a grant to support its planned investment (the amount was not disclosed because of ‘commercial sensitivity’). He said the company needed ‘a whole bundle of solutions’, which might include ‘free import duty’ and around £100 million to support new investment in the UK by companies forming part of Nissan’s supply chain, and he warned that ‘Nissan [UK] will not succeed in future unless the government does something to help our supply chain’ (House of Commons, 2017). Nissan secured most of its demands. Toyota’s response was to argue that it required a similarly advantageous deal to guarantee its future in Britain (Cox, 2017).
The UK government faces pressure to increase more direct forms of state support to individual businesses through other corporate-welfare measures. The most important of these are grants and subsidies to support investment, staff training, research and development and wage costs. Brexit is relevant to this too. The EU has relatively tough rules governing such awards (O’Brien, 1997) : generally speaking, subsidies that distort competition between members states and/or give a competitive advantage to specific firms are banned. Thus, EU state-aid rules tend to push governments towards general assistance to businesses—social-investment measures, such as training and wage subsidies and/or support for new businesses, for industry in deprived areas or specific sectors such as agriculture—or delivery of public goods, such as public transport or public utilities.
One of the key sticking points in the final Brexit trade negotiations in late 2020 concerned the UK’s refusal to agree to tough state-aid restrictions. Perhaps this was because the UK knew it would face huge pressure to increase corporate welfare, while the EU was also aware of the potential risks to its economies. In the absence of EU state-aid rules, businesses will demand that the UK government put together corporate-welfare programmes which substitute for free access to EU markets—and the greater the costs to businesses to gain access to core markets, the more generous the corporate welfare will have to be.
Shifting investment elsewhere
The risk of not putting in place adequate inducements for businesses to invest is that companies will shift investment elsewhere. Many of the companies which have been attracted by the UK’s pitch are, by definition, relatively mobile. Others, within industries on which the UK heavily depends—including finance—are incredibly mobile. The list of companies which have shifted some or all their operations to the EU27 countries or elsewhere, even before Brexit happened, has grown long. It includes Lloyds Banking Group, Lloyds of London, Goldman Sachs, HSBC and UBS. Even BAE Systems, one of the UKs most important engineering and defence companies, signalled that it might shift investment outside the UK if the Brexit negotiations did not achieve free and easy access to the EU. Lloyds of London and BAE Systems also happen to be two of the companies most heavily dependent on government.
The chief executive of HSBC warned that Brexit could trigger a ‘Jenga tower’ of job moves out of the UK, which the head of the London Stock Exchange estimated could top 230,000. Of course, such warnings form part of the political power struggle but the flow of financial capital from London suggests that this is not only a genuine warning but is also likely to prove difficult to stem.
The EU is also playing its hand. Member states are as keen to attract UK investment as the UK is to prevent its exodus. The EU will effectively force some companies to relocate part or all their operations to the EU27 if they want to maintain access to EU markets in the context of a ‘hard’ Brexit—taking the UK out of the single market and the customs union. And many companies will be eyeing the EU as a more favourable, predictable, stable environment in which to invest. To retain their investment will be incredibly hard.
Post-Brexit, the UK will still be bound by international trade rules (set out by the World Trade Organization) and by the requirements of bilateral trade deals with other nations. It is as likely to be a rule-taker as a rule-maker, especially give the speed with which it will have to negotiate new deals. Outside the EU the UK is likely to look elsewhere, especially to north America, for policy lessons—the fact that the UK has looked across the Atlantic rather than to its closest neighbours over the preceding decades explains its long-held ambivalence towards the EU and Brexit itself (Geddes, 2013). Increasing competitive pressures from countries with fewer regulations, more minimalist social welfare and more generous corporate-welfare programmes will likely push the UK further towards acquiescence to big business. It certainly doesn’t point to a progressive, comprehensive and universalistic welfare state shaped by the needs of newly-empowered citizens, recently having ‘taken back control’ over their lives.
Conclusion
The idea that democracy could be restored through Brexit was seductive in principle but based on the lie that power lay with the EU. In reality, public and social policies are shaped more by the needs and interests of big business than any other policy actor. UK regulations, taxation and wages have been framed by a combination of ideology and structural factors to maximise business investment and returns. And all signs since the 2016 referendum point to an acceleration of policies which would concede even more to those perceived needs and interests.
Brexit might have provided an opportunity for the UK to pursue a different path, but with the election victory of the Conservative Party in December 2019 the push is faster and farther in the same direction as before. Without the EU’s social protections, market access and restrictions on subsidies and other forms of corporate welfare, the UK government will face overwhelming pressure to put in place compensatory measures which induce businesses to invest. Rather than taking back control, the government is ceding more power to big business.
References
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