Twelve things the government shouldn't do: Subsidies

By: Callum McGoldrick, researcher at the TaxPayers' Alliance


In the second of series of blogs looking at 12 things the government shouldn’t be doing, we take a look at just a few of the subsidies handed out by Whitehall, unnecessarily, expensively and often counterproductively. 


Indiscriminate subsidies

State subsidies are necessary for some essential tasks of government, as they allow the state to pursue goals without taking responsibility for funding or running a whole institution. To this end, the state provides many worthwhile subsidies, such as those that preserve historic buildings, support the families of the armed forces and those that preserve endangered species. 


Despite this strong case for subsidies in some areas, over decades many subsidies have accumulated that are indiscriminate, funding those who do not need them and can afford to pay for services themselves. Moreover, some subsidies have emerged which seek to prop-up unprofitable enterprises. 


Heat pump subsidies 

From 23 October 2023, the boiler upgrade scheme heat pump grant increased to £7,500 for air source heat pumps and ground source heat pumps, up from £5,000 and £6,000 respectively in England and Wales. In Scotland the loan can be up to £9,000 for those in remote areas. Scotland also offers an interest free loan of up to £7,500. The government has set a target of 600,000 heat pump installations per year by 2028, if every installation received the maximum grant in England, this would cost £4.5 billion.


Many pro-heat pump organisations claim that heat pumps are not expensive as buyers will see more in efficiency savings, this should mean that the government does not need to subsidise them as consumers should see more benefit from their heat pumps. Alternatively, if they are not cost-effective then the government should not be subsidising them under claims of battling the cost-of-living crisis, these funds would be better spent on cutting the tax burden. A report by the Parliamentary Office of Science and Technology (POST) said that there is a lack of consumer demand in heat pumps and that, “heat pump installation costs are higher than gas boilers. Large cost reductions are unlikely”.


Heat pumps are slower at heating homes than boilers and electric heaters while only providing £115 per household in savings for those swapping a newer A-rated boiler. Additionally, heat pumps are less efficient when there is a greater difference between the internal and external temperatures of a building, meaning that they cost more to run when the weather is colder and the pumps are needed most. Consumers are not interested in heat pumps on a large scale due to the technology being in its infancy. As advancements may come in upcoming years, there is an incentive to wait for these technologies to arrive, rather than investing in equipment that will soon be outdated. 


Winter fuel payment and bus passes

The winter fuel payment ranges between £250 and £600 and is paid to anyone born before the 25 September 1957, it is not means tested. This means that millionaires and billionaires receive winter fuel subsidies alongside those who need it most. The scheme currently costs approximately £2 billion each year. While it is logical to help those relying purely on the state pension when costs are higher, any government aid should be means tested, rather than provided to all no matter their financial circumstances. 


Like the winter fuel payment, bus passes are available for anyone over a certain age without taking account of financial circumstances. In this case once you reach the state pension age, which is currently 66. Those that live in London can get free transport within London from the state pension age, including on tubes and other transport. Given that 44 per cent of men and 35 per cent of women are still in work at the age of 65, it does not make sense to have a blanket free public transport pass, rather, it should be means tested. 


Digital growth grant

The digital growth grant is given to start-up and scale-up technology businesses in the UK, via Barclays, and is aimed especially at those with female or ethnic minority founders. The Barclays programme is funded by a £12 million government grant, and raises questions about the role of the government. 


If the businesses in question are strong prospects and will become profitable then they should be able to attract private investors, if they are not and cannot attract private investment then the government should not be funding them either. It is not the responsibility of the government to pick and choose winners and losers in the private sector by using public funds. The grant has been given to companies in a plethora of sectors from sustainable fashion to HR firms who aid in environmental, social and corporate governance (ESG) compliance


Another arm of the digital growth grant is the Sustainability Bridge. This is, “a new seven-module programme designed to bring together some of the UK’s leading established businesses and most promising startups. The programme will enable the sharing of innovative ideas to help solve today’s challenges”. Members of the scheme include British Gas and EDF. In addition to the Sustainability Bridge scheme there is the Care and Health Tech Bridge, of which Specsavers is a part of. While cooperation between businesses is often a good thing, it is not the role of the government to fund this, especially for large international corporations who are capable of using their own resources. 


Electric vehicle subsidies

Under a current scheme, the plug-in car grant (PICG), customers can claim up to 35 per cent off the cost of certain electric vehicles, costing taxpayers over £1 billion. This subsidy is available regardless of income or wealth. As those who purchase electric cars tend to be wealthier than those who purchase petrol and diesel cars, this subsidy is likely to disproportionately benefit high earners.


There are also subsidies available for additional electric car infrastructure, namely charging points, to local authorities called the on-street residential chargepoint scheme (ORCS), up to a maximum of £7,500 per chargepoint. The scheme cost £37 million over the last financial year. 


The government has already announced that electric vehicles will need to pay road tax from 2025, something which they had been previously exempt from. The government should continue with this trend and remove all subsidies for electric vehicles.

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