Are there smart ways for governments to cushion industry?

In the final analysis a subsidy is a subsidy. We are in that phase at the moment when governments are trying to dress it up. Let’s look at two such schemes – the German employment scheme and the putative UK R and D scheme.

I have been told that in Germany there is a current government scheme to keep skilled workforces together. Apparently an employer can announce that a large number of workers are no longer needed and send them home. The state will then pay between 60 and 67% of their wages, depending on their marital status, for as long as they are doing nothing. The theory is that the downturn will be temporary, and the worker will go back to their company when normal demand resumes.

Such a scheme is not necessarily a good idea for the company concerned. After all, they still have to pay a substantial amount to employ someone who no longer does any work for them. There can be no guarantee that “normal” demand will resume any time soon so they need them again. Nor can there be any certainty that the employee will come back to work for that employer. They may change their mind and resign many months into the enforced period of no work.

It can be an even worse deal for the German taxpayer. Big multinationals could decide to lay off more German workers rather than taking action elsewhere, if someone else paying two thirds of the wages is enough to sort out the cost problem. The scheme could become very expensive, as it is very expensive to cut the size of a German workforce so this could be attractive compared to the full costs of redundancy. It does nothing to resolve the underlying business problem that some German companies are facing. They have too few sales, and need to cut all their costs.

We read that the UK is thinking of an R and D subsidy scheme for certain car makers. The thinking here is that we wish to keep R and D in the UK auto sector here in the UK, and therefore taxpayers should pay to do so. This well intentioned proposal would also be fraught with difficulties when it comes to sorting out the detail.

Spending is spending. Accountants can have long arguments about which part of an auto company’s spending is R and D. How much of the Board’s costs is R and D, as they spend time talking about future products? How much of the CEO and the rest of the executive overhead, as they too are heavily involved? Is investigation of a complaint or a technical problem with the product R and D? Is market surveying and customer contact R and D? How much of the engineering overhead is truly future oriented?

There is no easy way of indentifying and ring fencing all R and D spend. Nor is it magic spending, clearly better than other spending. The government will discover, if it presses on with this, that a subsidy is a subsidy, by whatever name.You keep R and D here if we continue to produce good people who want to innovate and engineer new solutions, and they are affordable.

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  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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