This article was originally published on the CapX website.
British Steel is on its last legs. Given the huge amount of human suffering which will result if it does collapse, and the impact that this will have on the town of Scunthorpe, people are rightly concerned.
The company has requested a £30m government bailout, in addition to the £100 million it borrowed back in April. The Labour Party have gone further, urging the government to bring British Steel into public ownership. Though they might be superficially appealing, both options are mistaken.
Let’s look at who would really benefit from the government getting involved. The main beneficiary would be the private equity firm Greybull Capital, who bought British Steel for £1 back in 2016 and attempted to turn it around. It’s a stretch to ask taxpayers, many of whom are themselves struggling, to help out a private equity firm that has made mistakes in one of its investments.
Neither a bailout nor nationalisation represent a sustainable long-term solution to British Steel’s woes. The £30 million might keep the wolf from the door for a few months, but what about the next time it finds itself in financial difficulty? It’s the same with nationalisation, why should taxpayers be forced to pay to keep a company running indefinitely?
Some have argued that the government found cash to bail out our banks all too readily, so why not do the same for British Steel?
The truth is the two situations are not remotely comparable. Given the importance of financial services to the UK’s economy, the systemic nature of the crisis, and the fact that the banks were likely to return to profitability, it made sense to bail them out. The same cannot be said about British Steel. This is just one company. What is more, the steel industry represents only a tiny fraction of the UK economy.
The sad truth is that the steel industry in the UK is, for the most part, not profitable. Steel is readily available on the global market, with many countries around the world producing it in a more efficient way.
It has also been argued that the government should intervene in the steel industry for national security reasons. This is unconvincing. The recent building of two Royal Navy aircraft carriers requires only 82,000 tonnes of steel, several thousand of which were imported into the UK. What is more, steel is not as important for national security as it once was – we are thankfully no longer in a position where we need to build more dreadnoughts than Germany – it is the IT and electronics industries which are now far more important in this regard.
There will be those who will exploit this crisis and see it as an opportunity to blame the EU. They will say that if Brexit does happen, then we should place tariffs on steel produced in other countries. This would be a huge mistake. Tariffs are always and everywhere a bad idea. They are essentially a tax on consumers. Cheap steel is good for the UK economy. It means that businesses can cut costs and pass on the savings to workers and consumers in the form of higher wages and lower prices.
Rather than intervening in the economy, the government should start doing far less. One of the reasons many businesses are struggling is because of the taxes and regulations imposed by the government. Having to comply with them places a huge burden on businesses, both in terms of time and money. Worse still, the tax burden is passed on to workers in the form of lower wages and to consumers who have to pay more for goods and services. In extreme cases, businesses can go bankrupt.
If the government really cared about businesses then it would lower or even abolish taxes which harm investment such as corporation tax, stamp duty, and taxes on dividends. This would remove the bias towards debt financing and ensure that businesses could raise money in a sustainable way which would not risk them becoming over-leveraged. Lowering taxes and cutting red tape would allow companies to invest more money in new equipment and in training their staff, thereby improving productivity leading to higher profits.
Steel production is an energy-intensive industry and its plight highlights the negative impact of the plethora of different taxes and regulations aimed at reducing carbon emissions. These should all be scrapped and replaced by a border-adjusted carbon tax. This would be much simpler to comply with and so would cut costs for businesses while also helping the environment by offsetting any negative externalities.
The collapse of British Steel is ultimately a human tragedy and will have a devastating impact on Scunthorpe, from which it will take a long time to recover. To speed up that recovery, we urgently need greater fiscal devolution. If local authorities such as the one in Scunthorpe were given greater revenue-raising power, then they would be able to make themselves more competitive. For example, if they were to set their rate of corporation tax and other taxes and rates lower than the national average, then they could attract businesses to the town which would bring more job opportunities.
It also highlights why I have a lot of sympathy for introducing a universal basic income. The British Steel workers who cannot find another job will find themselves entering the benefits system. The process is often convoluted and degrading, with many claimants waiting several weeks before they receive a payment. A universal basic income could help to avoid this.
This crisis also demonstrates the importance of life-long learning and training. Rather than bailing out businesses and industries, the government should spend money on training the former steel workers with new skills.
British Steel has collapsed. This is dreadful news for the workers and for Scunthorpe. However, the government should resist calls for a bail-out or nationalisation. These are not sustainable solutions and would only increase the pressure on taxpayers. The government should instead slash taxes, cut red tape, and invest in training to ensure that people have the skills they need to be able to succeed in a modern economy.