In June 2009 and the UK Government launched the £300m car scrappage scheme, designed to boost demand for

new cars. In March 2010 the UK Government announced a £270m loan to the European part of GM(General Motors) to help the carmaker’s two Vauxhall plants in the UK and those of Opel in Europe.

Discuss the arguments for and against Government intervention to support UK businesses.
Government intervention involves the government making changes in the business environment mainly to correct a market failure, to achieve a fairer distribution of wealth & income or to improve the performance of the economy. Some people argue that government intervention is vital and without it the economy may collapse. I will now discuss some arguments for government intervention. One of the biggest reasons for the government to intervene would be to stop companies that have a monopoly becoming too powerful and suppressing competition therefore restricting customer choice. A monopoly in the UK is a business with a market share larger than 25%, these firms have great amounts of market power which is often abused in one way. This abuse is mainly aimed at competitors to make it harder for them to compete in the particular market. This therefore gives the consumers less choice so the large firm will be able to charge higher prices and provide a less than adequate service. But by the government intervening & allowing more competition into the market this stops exploitation of customers by firms that once had a monopoly as it will stop them charging too much due to other firms willing to charge less. A number of competitive legislation acts were passed in order to balance competition; the Monopolies & Restrictive Practises Act 1948 and the Monopolies & Mergers Act 1965 were both designed to block business deals & mergers against the public interest. Also the Fair Trading Act 1973 set up various official bodies such as OFGAS & OFGEM(for the gas & electricity markets) to monitor what businesses did if they have over 25% market share. And the Competition Act 1998 was introduced to match EU law and control anti competitive actions by various firms.

A business that was affected by the government deciding it was too powerful was British Gas. As British Gas had a monopoly in the gas market during 1996, in preparation for the opening of the gas supply markets to more competition, the government through OFGEM decided to make the company divide into 5 divisions so other companies could enter the market such as npower, E.ON UK, and EDF energy. Then in 1997 British Gas was demerged into two companies: Centrica- owing the rights of the British Gas name inside the UK, and BG group- having the rights of the British Gas name outside the UK. However government intervention at times may fail, this can be seen in the situation when Centrica(owner of British Gas in the UK) decided to raise it’s prices by 35%, this was mainly due to it’s power in the market & lack of serious competition, also OFGEM was partly at fault as they failed to effectively increase competition in the gas & electricity market. Another reason for government intervention could be to attract large multi national firms to operate in the country in order to create more jobs for the local community and to promote the production of a specific ‘good’ product that may be more environmentally friendly, for example recently the UK government backed Nissan to start production of it’s ‘Leaf’ electric car in Nissan’s Sunderland plant with a £20.7 million grant, this not only will create an extra 350 jobs at the Sunderland plant but will also be producing 50,000 environmentally friendly battery powered cars a year promoting the ‘green image’ in the UK. A similar situation occurred around the same time of the Nissan agreement, the government decided to back Ford with £13.4 million in producing low carbon engines at their Bridgend plant, the main purpose behind this was to ‘safeguard’ some 2,800 skilled jobs at the Bridgend plant and various other Ford research centres & factories around the UK. Government intervention can also be very useful to badly affected industries during recessions in an attempt to boost sales of businesses in that particular industry to improve the performance of the economy. An example of this can be seen from the recent recession, in June 2009 the UK government introduced a £300 million car scrappage scheme which was designed to boost demand for new cars, which was a great success, as figures have shown UK car production increased sharply this February, rising 62.7% on the same month last year. However this had a massively negative effect on used car sales in the UK as most potential buyers were induced through the scrappage scheme offered by the government so used car sales fell dramatically from June last

year to March this year as more people preferred to scrap their old car & get a new one, also with fewer older cars on the road this makes it incredibly more expensive for people to buy a cheap ‘runabout’ car, and another point on this is it is still increasingly difficult to obtain finance on a new car(impacting the consumer greatly), no matter how much the discount is, so if the banks won’t lend then there is no money to spend. Another point for government intervention is that the government may want to protect a national firm to secure it’s continual operation, this happened recently to General Motors- the owners of Opel & Vauxhall in the UK as the UK government provided them with a £270 million loan guarantee, this was mainly to help secure the future operation of Vauxhall plants in the UK. Another point against government intervention could be that it takes away control from a particular business, not allowing some proposed actions to be carried though that could in turn lead to a decline in sales & revenue. This could be linked to Microsoft’s continuous battles for patents, in 2008 they applied for a page up or page down single keystroke patent which was refused. And the main reason against government intervention is the possibility of it crippling the economy, if the government intervenes too much, giving away more & more loans, this could inevitably increase tax, affecting everyone as this puts the government further into debt, this can be closely compared with banks just before the recession of 2008 when they were giving out more loans than they could handle in which a lot of them could not be repaid. Also it can be argued that government intervention is not very effective in the short term as it may take the government a great amount of time to actually make proposed changes due to the government’s lack of knowledge of that particular industry or business. To conclude I believe that government intervention is important mainly because of company size limitations & competitiveness. As discussed previously it is important to have a range of competitors in a market to give consumers more choice and stop one business from having a monopoly and charging whatever prices they want. By Semon Blanchard