Report: A clear exit strategy is needed to abolish the more flexible state aid rules

A decision on the overall level of business subsidy expenditure could serve as a tool for maintaining policy discipline. A clear exit strategy is needed to abolish the more flexible state aid rules. According to the annual report of the Research Division on Business Subsidies published on 17 May 2023, R&D activities should be expanded to more sectors and aid policy should be targeted more efficiently in order to achieve the R&D objectives.

There is no clear exit strategy for abolishing the more flexible state aid rules, which increases the risk of competition for business subsidies. The European Commission temporarily relaxed the state aid rules due to the coronavirus pandemic. Initially, the rules were scheduled to last until the end of 2020, but they will remain in force to a limited extent until the end of 2023. The state aid rules have been expanded in seven parts during 2020–2022. Due to Russia’s war of aggression, the exceptional measures have continued. In March 2023, the Commission adopted a temporary crisis and transition framework, which will remain in force until the end of 2025. 

Direct business subsidies have grown especially in energy 

Direct business subsidies grew by around EUR 160 million from 2021 to 2022. The largest increase was in energy subsidies, which have already been growing for the past ten years. In recent years, the growth has been driven in particular by funding from the EU’s Recovery and Resilience Facility (RRF). 

Energy aid has become an important business subsidy related to the green transition, which increases the need for an impact assessment of the aid. The objectives of the subsidies should be defined and presented more clearly so that their success can be genuinely evaluated. This is especially the case now that the US Inflation Reduction Act programme is forcing the EU to increase its business subsidies in the green transition sectors. A systematic review of the green transition subsidies is necessary because a low-carbon economy can also be advanced through carbon dioxide pricing (taxation, emissions trading) and other regulation that does not put as much pressure on general government finances.

Private sector investments important in the growth of R&D 

The Act on Research and Development Funding, which entered into force at the beginning of 2023, will increase aid for companies’ R&D activities in 2024–2030. The aim is to raise investments in R&D to four per cent of the GDP. Currently, the Government spends EUR 2.4 billion on R&D, and the amount is estimated to rise to EUR 4.3 billion in 2030. 

In order to achieve the targets set for the private sector, R&D activities should be actively expanded to more sectors. An effective RDI aid policy aims not only to boost investment volumes but also to allocate the aid appropriately and to apply the efficient forms of aid. 

Coronavirus subsidies have ended but their evaluation is important

During 2020–2022, the amount of corona-related support was approximately EUR 3.1 billion. Approximately EUR 234 million was allocated to coronavirus support in 2022. In order to prepare for future crises, it is important to evaluate subsidies. Many studies in Finland have retrospectively assessed the coronavirus subsidies. The pandemic may have affected the dynamics of the economy and it should therefore be analysed in more detail. 

Government Programme should limit subsidy amounts and improve allocation

Future Government programmes should highlight more clearly the objectives and means related to business subsidies. In addition, a decision on the overall level of business subsidy expenditure could serve as a tool for maintaining policy discipline.

The Research Division on Business Subsidies is an independent body that operates under the auspices of the Ministry of Economic Affairs and Employment. It produces information on the development of the business subsidy system. The report will also be published later in the Ministry of Economic Affairs and Employment publication series.

Inquiries:
Seija Ilmakunnas, Chair of the Research Division on Business Subsidies (01/04/2019– 31/03/2023), tel. +358 50 362 9270 
Rune Stenbacka, Professor, Hanken School of Economics, tel. +358 40 352 1433