We Can't Afford Corporate Welfare

This week, in his budget speech, the UK Chancellor will refer to the usual need to reduce expenditure on social welfare and the deficit on public finances. One thing he won't talk about is the amounts spent on corporate welfare and how that is contributing to austerity, income and wealth inequalities, and deteriorating public finances.
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This week, in his budget speech, the UK Chancellor will refer to the usual need to reduce expenditure on social welfare and the deficit on public finances. One thing he won't talk about is the amounts spent on corporate welfare and how that is contributing to austerity, income and wealth inequalities, and deteriorating public finances. In a society where corporations fund political parties and provide jobs for potential and former ministers, the state has become a major guarantor of corporate profits. There are cuts in investment in healthcare, education and social infrastructure, and hard won social rights. A kind of reverse socialism has been created where the state transfers wealth to the well-off and punishes ordinary people. The following examples provide some evidence for the above thesis.

The price of gas and electricity has been rocketing and Energy companies are accused of making vast profits. But they still get subsidies. EDF and its partners are set to receive £17.6billion subsidy for building a nuclear power plant to generate electricity even though this investment is projected to provide a return of up to 21%. Despite this exceptionally high rate of return, the company will be able to charge a price of £92.50 per Megawatt hour (MWh), roughly double the current wholesale price of electricity. Consultants, including accountancy firms KPMG, picked-up £8million in fees. High profits are not accompanied with social responsibility. SSE declared record profits of £1.5billion, but wants taxpayers to bear the burden of cleaning-up the social and environmental mess.

Successive governments claimed that privatisation would end public subsidies. Well, that has not been the case. In 1996, the railways were privatised and now over 100 companies are running the same, but subsidies have increased. The industry has received over £60bn in subsidies, and more is on the way the Crossrail and HS2 projects. The industry has paid vast amounts in dividends to its shareholders whilst the customer has ended up with the most expensive rail fares in the western world.

Rather than borrowing directly to finance investment in schools, hospitals, roads, bridge and social infrastructure, successive governments have taken the more expensive line. Under the Private Finance Initiative (PFI) companies borrow money to build the project and then lease the assets to the government at exorbitant prices. In 2012, some 717 PFI contracts with a capital value of £54.7billion were running. The government is committed to repaying £301billion, a guaranteed profit of £247billion over the next 25-30 years. The resulting profits do not necessarily get taxed in the UK either. For example, HICL Infrastructure is a fund established by HSBC and registered in Guernsey. Its portfolio of PFI projects includes Portsmouth Hospital and the John Radcliffe Hospital in Oxford. For 2011, it is estimated to have made a profit of £38million from 33 PFI schemes, but paid only £100,000 in UK tax. The government should be clawing back billions from the PFI programme, as it has become evident that the interest rates have been rigged. Even a small adjustment can save taxpayers billions of pounds.

The financial sector preaches free markets and deregulation, but is almost entirely reliant on the state. The deposit-taking licence is provided by the state without any quid pro quo and the state also provided insurance for deposits of up to £85,000 to promote confidence in the industry. The sector has boosted its profits through indulgence in money laundering , insider trading, cartels, tax dodges, and the sale of abusive financial products, with virtually no prosecutions for ant-social practices. In its boom years, between 2002 and 2007, the financial sector paid £203billion in UK corporation tax, national insurance, VAT, payroll taxes, stamp duty and insurance taxes, about half of that paid by the manufacturing sector. In return, the state has poured in billions. The latest data shows that some £976billion of loans, guarantees and other forms of support have been provided to banks. The Bank of England has helped out with another £375billion under its quantitative easing programme. Rather than building their tattered finances, the banks continue to pay exorbitant executive salaries.

The European Union's agriculture policy was devised in the days when farms were family owned rather than corporate controlled. In 2012, the EU provided €83billion (£70billion) in subsidies. Over the years, this veritable bonanza has boosted corporate profits, dividends and executive salaries. Sugar refiner Tate & Lyle has collected €830million even though it does not own any farms. Nestle have collected €93million. The Queen's Sandringham estate has collected £7million. Others include Haribo, the sweet manufacturer; Groupe Doux, a French chicken processor, which does not raise poultry; Coca-Cola, the Duke of Westminster and the Roman Catholic Church.

BT has annual turnover of £18billion and profits of £2.5billion, but received a government subsidy of £1.2billion to install broadband for rural areas. BT will keep the assets and the revenues generated by the subsidy.

With 13million people living below the poverty, many on low wages and lengthening queues at food banks, most Britons can only dream about buying a sporty car. Lotus, the sports car manufacturer, has received £10billion subsidy. And in case someone on minimum wages gets fed-up with Lotus they can always try their hand at a Porsche where the price of a £90,000 model is reduced by £5,000, thanks to a government subsidy.

The above is just a small sample of an escalating and unsustainable corporate welfare programme. By any measure the role of the UK state has has been restructured to guarantee corporate profits. This welfare programme needs to be rolled-back. If the government insists on supporting fledgling companies, then the amounts should be returned once the company is profitable.