Rethinking Subsidy: lessons from social investment on good growth

Policy and Advocacy Manager, Alex Bunker, looks at the lessons from social investment in using subsidy as a tool for delivering good growth

As a social investment wholesaler, our work is fuelled by subsidy, via the Dormant Assets Scheme - and so, in turn, is the wider voluntary, community and social enterprise (VCSE) sector we fund. 

It's easy to read that fact as confirmation of a familiar misconception: that the sector is, perhaps uniquely, propped up by "hand-outs." In truth, subsidy is woven throughout the economy.

At a basic level, subsidy is a mechanism that allows an enterprise to operate below its true cost - this is not always cash grants; it is often through "hidden" means: tax relief, market pricing and sovereign guarantees.

State subsidy itself is not charity. It exists to drive policy objectives, as a very tangible expression of what kind of economy the state wants:

• Correcting market failures: where the market does not provide what is considered "best for society," whether that is funding the experimental research behind a breakthrough antibiotic, or running a loss-making rural bus route.
• Fulfilling strategic priorities: where sectors are deemed critical to national resilience, from the domestic production of steel to quantum computing.

The question worth asking is what public good flows from the public funds behind a subsidy.

Done badly, subsidy is weighted towards shareholder - not social - value: an agricultural payment that inadvertently incentivises over-production; the de-risking of climate infrastructure without a public stake in its future profitability; or support to first-time buyers that artificially drives up house prices.

Done well, subsidy creates public good and a viable business model where markets will underprovide, such as where payoffs are long-dated and uncertain: research and development that could herald widespread public benefit, or infrastructure that helps us withstand geopolitical shocks.

These questions matter because they sit at the heart of a growing debate in government: what role should a more interventionist state, and its public finance institutions, play in shaping the economy?

Social investment is one of the clearest answers to that question – how to achieve good growth:

1. It devolves power to communities. It strengthens local civic life. Whether it’s a community trust saving a threatened leisure centre, residents buying a stake in a local pub via a share offer, or a trading-charity tailoring public services to local needs – social investment keeps ownership local rather than handing it to distant landlords and private equity.
2. It’s not extractive. Growth matters, but so does who it belongs to. Social investment is inherently local. The core beneficiaries are typically asset-locked by design, with their profits reinvested into the mission, constitutionally opposed to extractive practices. Combined with the prevalence of VCSEs employing locally and delivering locally, the value generated stays right where it belongs.
3. It multiplies and recycles. For a strained public purse, social investment is a renewable energy source - as one enterprise repays, the next is funded - a cycle amplified by the power of leverage, as public subsidy de-risks opportunities and leverages in vast amounts of private investment for social change. Take our own track record, each £1 of subsidy (in blended finance deals) has attracted a further £1.42 of wider investment, as we have directed over £200m to good causes during the past decade.
4. And… the unmonetized bit. The most significant return on investment is the one we struggle to cost: raw social value – a fact increasingly acknowledged by those in government advocating for procurement reform. Tackling re-offending, building community cohesion and providing pathways into employment aren’t just worthy add-ons, they are a precondition for growth in a very conventional way. Someone struggling with debt, unstable housing or their mental health cannot be fully productive. A neighbourhood with low trust and weak social infrastructure will struggle to attract investment. Social value is not separate from growth; it makes it possible.

It is worth being precise about what social investment actually is: not a policy objective in itself, but a method, a delivery mechanism that happens to cut across siloed policy and departmental objectives, feeding the ambition of a government seeking integrated solutions to the knotty problems of a place.

And the capacity for the sector to put more subsidy to good use is real, not aspirational. 

However you define “subsidy”, the social investment sector receives only a fraction of a percent of overall UK state subsidy, and yet demand for Access support currently runs at around four times available funding - a gap which isn’t explained by any shortage of investable organisations. The sector’s capacity to absorb further investment is epitomised by the experience of UK Community Development Finance Institutions (CDFIs) who lent £74.1m to VCSEs last year – the vast majority of whom had already been rejected by mainstream banks. And yet, 9 in 10 CDFI customers go on to successfully repay their loans, exposing a real, untapped seam of SME growth. 

Subsidy isn't unique to our sector, and it isn't something we should be defensive about. Over the past decade we have learnt that this is not simply a market failure to be corrected and then withdrawn from. Sustained government backing is a structural feature of how this market functions. That government underpinning does not replace private capital, it is critical to unlocking it, and to achieve the myriad benefits that social investment buys: growth that stays local by design, capital that multiplies rather than depletes the public purse, and social value with a high replacement cost. Perhaps we shouldn’t call it subsidy after all, it is public investment in good growth, and there is a blueprint and a sector ready for more.