Industrial Subsidies

The use of industrial subsidies was little known in the eighteenth and nineteenth centuries, so that the rise and subsequent waning of this policy instrument has been an extraordinary phenomenon of the twentieth-century economy. Direct subsidy payments to private firms amounted to more than five per cent of national output at their peak in the late 1960s, and at different times have been an important means by which the government has sought to fine-tune and stabilize the economy; to correct for balance of payments difficulties; to redistribute activity between areas; to encourage enterprise, innovation and technology transfer; and to deal with the most serious of modern economic problems, that of unemployment. More recently, following sustained efforts by national and supranational bodies to eliminate these payments, industrial subsidies have found a more modest role as policymakers have come to understand the limits of these measures, and the pattern of spending has returned to that of an earlier period.

The lessons from the First World War had been learnt, and with the outbreak of war in 1939 controls were introduced immediately on imports, foreign exchange and materials, and quickly extended to give a level of comprehensiveness far greater than that which existed in the earlier period. Controls were exercised over investment, the allocation of raw materials, industrial action and over the movement of individuals between industries, so that by the end of the war it is estimated that as many as 80 per cent of manufacturing employees were working either directly or indirectly for the state (Skuse, 1972). Consumer demand was rationed, prices were fixed and the government pursued a policy of industrial concentration whereby production was restricted to a limited number of firms, which paid compensation to those firms put out of business. Taxes, which had been used almost continuously from 1915 to discourage the consumption of luxuries, were extended, with Purchase Tax placed on a wide range of goods.

Economic growth resumed in 1959, but after heady growth and a trade imbalance in 1960, a credit squeeze followed from July 1961, and UK unemployment rose sharply, from around 300 000 in June 1961 to just over 515 000 in June 1963. The rise in unemployment was felt across all sectors of the economy, but was most severe in the engineering and metal industries, and in coal-mining, where supply had caught up with demand and pits were closed, particularly in North East England and Scotland (Table 4.1). Pockets of high unemployment once again appeared, and the hope expressed by the Treasury that spending on local employment measures would soon cease was dashed.¹ The measures taken in April 1963, both through the Budget and through legislation to extend the provisions of the 1960 Local Employment Act, were significant in two respects. First, they represented the beginnings of large-scale industrial assistance, separate from the depreciation allowances and the support afforded to agriculture. Second, spatially-based employment policy was to become as much concerned with inducements as with controls, so that the balance of policy shifted away from the ‘stick’ and towards the ‘carrot’. Prior to 1963, local employment policy had operated largely through the mechanisms of Industrial Development Certificates to restrict development outside scheduled areas, and through various physical planning measures to ease the location of firms into these areas, and while financial assistance was available, this was relatively small in scale.

By June 1969 it had become apparent that the government had at last achieved a substantial balance of payments surplus, but this was as much due to devaluation as to any consequence of industrial policy. The Conservatives inherited this position a year later, but also inherited sluggish economic growth, wage inflation which reached 12–13 per cent during 1970 and unemployment at more than half a million (see Figure 5.1). The pre-election pledge was to transform the economy through increased efficiency in public services and by placing the onus on employers to resist excessive wage demands. The government also sought to reduce non-discretionary assistance and profitability supports, and this was made abundantly clear by the then Secretary of State for Trade and Industry, who in Parliamentary debate in 1970 stated that ‘the vast majority lives and thrives in a bracing climate and not in a soft, sodden morass of subsidised incompetence … We believe that the essential need of the country is to gear its policies to the great majority of people, who are not lame ducks, or do not need a helping hand’.¹

Unemployment peaked around March 1972, at about the time that the government had embarked on its programme of industrial expansion, and strong growth followed, so that by the end of 1973 unemployment had nearly halved to stand at just under half a million. Fiscal and monetary measures were taken during 1973 to curb demand, but such was the strength of growth that a deterioration in the balance of payments developed, despite currency depreciation following the floating of sterling in June 1972. These problems were compounded in October 1973 by steep increases in oil prices and by industrial action, which led to the abandonment of the statutory incomes policy. The Labour Party came to power in March 1974, and after a further election was returned to office in October of that year with a small majority. While the industrial action was settled quickly, the new government faced both a balance of payments deficit and inflationary pressures. It sought control of wage increases through voluntary restraint by trade unions and in return took a series of measures as its part of a ‘social contract’. In the first of three Budgets in 1974, food and rent subsidies were increased by £570m, and further consumer subsidies were introduced in a July Budget to help curb inflation, which was running at 17 per cent.¹ REP, which had been reprieved when Labour came to power, was doubled at this time to help restore its real value.

The economic events of the mid-1970s forced the government into counterinflation measures, including an incomes policy which traded tax cuts for reductions in wage inflation, and the introduction of a monetary target. Price inflation bottomed out at around 8 per cent in 1978, from 24 per cent three years earlier, but the incomes policy reduced the relative pay of publicsector employees and the attempt to catch up led to the ‘winter of discontent’, which was a precursor to the return of a Conservative government in May 1979 (Tomlinson, 1990; Allsopp, 1991). In this new climate the control of inflation through monetarism became the central tenet of policy, with the Medium Term Financial Strategy the mechanism for targeting the money supply and Public Sector Borrowing Requirement. Demand management was in effect discarded and the objective of full employment was effectively abandoned. Instead, the government sought to tackle the root cause of Britain’s relative economic decline, and this required attention to the supply side of the economy. The aim was to improve efficiency, return nationalized industries to the private sector and liberalize markets so as to encourage entrepreneurship and the formation of new firms.

By the middle of 1983 the economy was starting to grow strongly, inflation was low and falling, and the expansion of the service sector continued to mitigate the job losses in manufacturing. But unemployment was high — and was to remain at around three million for the next four years — and this rise in joblessness had influenced the pattern of industrial assistance in two main ways. First, the effect of recession on government finances and the failure to bring public expenditure under control had meant that new resources were focused on ameliorative labour market measures, so that where new measures were introduced these were generally on a small scale.¹ Second, the severity of the recession meant that the Conservative government was unable to abolish the large-scale blanket subsidies going to the manufacturing sector in the form of the automatic regional capital grants and the accelerated depreciation allowances. With the resumption of strong economic growth and a fresh mandate, attention now turned to the elimination of these subsidies.

In this book we have traced government interventions in industry since the turn of the century, focusing on the use of industrial subsidies for purposes which may be described according to the allocative, stability and distributional functions of government. As we have seen, these interventions initially involved very little real subsidy and were small in scale, so that the pre-war measures in the Special Areas consisted of some makework schemes, physical measures and loans at commercial rates, but by the outbreak of war less than £2m had been disbursed in assistance from Treasury-backed funds. It is therefore only in the past fifty years that industry has been subsidized to any great extent, confirming that the use of industrial subsidies is truly a modern phenomenon.