The Treasury is close to agreeing a £300m aid package for the UK’s second-biggest steel producer in a move aimed at reducing its carbon footprint and averting the loss of thousands of industrial jobs across northern England.
Sky News has learnt that Jeremy Hunt, the chancellor, has been advised by officials to approve a request from British Steel for public money following an intervention by Grant Shapps, the business secretary, and Michael Gove, the levelling-up secretary.
Whitehall sources said the government was expected to communicate a decision to the company in the coming days, which would see around £300m handed to it in instalments during the next few years.
The funding would be “directly linked” to a project to replace British Steel’s blast furnaces at its Scunthorpe site with a greener electric arc furnace, according to one person close to the situation.
Jingye Group, British Steel’s Chinese owner, would also be obliged to invest at least £1bn in the business by 2030 and make commitments relating to job retention, the person added.
If those conditions are not met, the Treasury could still decide not to proceed with the funding.
Sky News revealed last month that Mr Shapps and Mr Gove had written to the chancellor to seek approval for the package of financial support.
A decision to grant it will not be without controversy, given British Steel’s Chinese ownership and doubts about its adherence to financial commitments made when it bought the business out of insolvency proceedings in 2020.
In their December letter to the chancellor, his cabinet colleagues warned that British Steel’s demise could cost the government up to £1bn in decommissioning and other liabilities.
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Image: The chancellor has been advised by officials to approve a request for public money
They cautioned Mr Hunt that British Steel “does not have a viable business without government support”.
“Closing one blast furnace would be a stepping-stone to closure of the second blast furnace, resulting in a highly unstable business model dependent on Chinese steel imports,” Mr Shapps and Mr Gove wrote.
“Given the magnitude of the liabilities due to fall on HMG in the event of blast furnace closure, and following the PM’s steer, we would like officials to test whether net Government support in the region of £300m for British Steel could prevent closure, protect jobs and create a cleaner viable long-term future for steel production in the United Kingdom.”
They also argued that retaining sovereignty over steel production was critical to the UK economy.
“Every other G20 nation has maintained domestic steel production and, while we do not think that this should come at any cost, we do believe it is in HMG’s interest to offer well-designed and targeted funding which unlocks private investment, achieves a good outcome for taxpayers, and enables transformed, decarbonised and viable domestic steel production to continue in the UK in the long-term,” Mr Shapps and Mr Gove wrote.
“We do not want to become reliant on steel sources elsewhere in the same way that energy security has become self-evidently important.
The fate of British Steel, which was bought by Jingye out of an insolvency process just under three years ago, has become increasingly unclear in recent months as the current owners have indicated that they would not maintain its operations without taxpayer funding.
British Steel employs about 4,000 people, with thousands more jobs in its supply chain dependent upon the company.
Jobs threat
According to last month’s letter, British Steel had already informed the government that it could close one of the Scunthorpe blast furnaces as soon as next month, with the loss of 1,700 jobs.
This would be “followed by the second blast furnace closing later in 2023, creating cumulative direct job losses of around 3,000”, Mr Shapps and Mr Gove wrote.
Mr Shapps’ predecessor, Jacob Rees-Mogg – who lasted just weeks as business secretary under Liz Truss – opened formal talks with Jingye in October about the provision of government funding to help British Steel decarbonise.
Image: The company employs about 4,000 people
One of the pre-conditions set by Whitehall for the discussions was that Jingye would not cut jobs at British Steel while the discussions were ongoing, although the recent letter to Mr Hunt said that ministers “cannot guarantee the company will choose to support jobs in the short term”.
Tata Steel, which is the biggest player in the UK steel sector, has also requested financial help from the government in the past year.
The request for financial support from Jingye poses a political headache for ministers, given the scale of the potential job losses which might result from a refusal to provide taxpayer aid.
Subsidies contentious
An agreement to provide substantial taxpayer funding to a Chinese-owned business, however, would inevitably provoke outrage among Tory critics of Beijing.
Image: Tata Steel, which is the biggest player in the UK steel sector, has also asked for support
As part of the deal that secured ownership of British Steel for Jingye, the Chinese group said it would invest £1.2bn in modernising the business during the following decade.
Jingye’s purchase of the company, which completed in the spring of 2020, was hailed by Boris Johnson, the then prime minister, as assuring the future of steel production in Britain’s industrial heartlands.
British Steel ‘can play a significant role in the UK’s economic recovery’
Responding to an enquiry from Sky News, a British Steel spokesman said: “To support the journey to net zero, our owners, Jingye, have invested £330m in capital projects during their first 3 years of ownership and they continue to invest unprecedented sums of money in British Steel.
“Jingye are committed to our long-term future but we also require the UK government to provide the necessary support, policies and frameworks to back our drive to become a clean, green and sustainable company.
“We are continuing formal talks with the government about decarbonisation, along with the global challenges we currently face.
“The government understands the significant impact the economic slowdown, rising inflation and exceptionally high energy and carbon prices are having on businesses like ours, particularly during such a key period in our transformation.
“British Steel can play a significant role in the UK’s economic recovery and we look forward to working with the government and to making the home-made steel Britain needs for generations to come.”
The Department for Business, Energy and Industrial Strategy and the Treasury have both been contacted for comment.
The bosses of four of Britain’s biggest banks are secretly urging the chancellor to ditch the most significant regulatory change imposed after the 2008 financial crisis, warning her its continued imposition is inhibiting UK economic growth.
Sky News has obtained an explosive letter sent this week by the chief executives of HSBC Holdings, Lloyds Banking Group, NatWest Group and Santander UK in which they argue that bank ring-fencing “is not only a drag on banks’ ability to support business and the economy, but is now redundant”.
The CEOs’ letter represents an unprecedented intervention by most of the UK’s major lenders to abolish a reform which cost them billions of pounds to implement and which was designed to make the banking system safer by separating groups’ high street retail operations from their riskier wholesale and investment banking activities.
Their request to Rachel Reeves, the chancellor, to abandon ring-fencing 15 years after it was conceived will be seen as a direct challenge to the government to take drastic action to support the economy during a period when it is forcing economic regulators to scrap red tape.
It will, however, ignite controversy among those who believe that ditching the UK’s most radical post-crisis reform risks exacerbating the consequences of any future banking industry meltdown.
In their letter to the chancellor, the quartet of bank chiefs told Ms Reeves that: “With global economic headwinds, it is crucial that, in support of its Industrial Strategy, the government’s Financial Services Growth and Competitiveness Strategy removes unnecessary constraints on the ability of UK banks to support businesses across the economy and sends the clearest possible signal to investors in the UK of your commitment to reform.
“While we welcomed the recent technical adjustments to the ring-fencing regime, we believe it is now imperative to go further.
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“Removing the ring-fencing regime is, we believe, among the most significant steps the government could take to ensure the prudential framework maximises the banking sector’s ability to support UK businesses and promote economic growth.”
Work on the letter is said to have been led by HSBC, whose new chief executive, Georges Elhedery, is among the signatories.
His counterparts at Lloyds, Charlie Nunn; NatWest’s Paul Thwaite; and Mike Regnier, who runs Santander UK, also signed it.
While Mr Thwaite in particular has been public in questioning the continued need for ring-fencing, the letter – sent on Tuesday – is the first time that such a collective argument has been put so forcefully.
The only notable absentee from the signatories is CS Venkatakrishnan, the Barclays chief executive, although he has publicly said in the past that ring-fencing is not a major financial headache for his bank.
Other industry executives have expressed scepticism about that stance given that ring-fencing’s origination was largely viewed as being an attempt to solve the conundrum posed by Barclays’ vast investment banking operations.
The introduction of ring-fencing forced UK-based lenders with a deposit base of at least £25bn to segregate their retail and investment banking arms, supposedly making them easier to manage in the event that one part of the business faced insolvency.
Banks spent billions of pounds designing and setting up their ring-fenced entities, with separate boards of directors appointed to each division.
More recently, the Treasury has moved to increase the deposit threshold from £25bn to £35bn, amid pressure from a number of faster-growing banks.
Sam Woods, the current chief executive of the main banking regulator, the Prudential Regulation Authority, was involved in formulating proposals published by the Sir John Vickers-led Independent Commission on Banking in 2011.
Legislation to establish ring-fencing was passed in the Financial Services Reform (Banking) Act 2013, and the regime came into effect in 2019.
In addition to ring-fencing, banks were forced to substantially increase the amount and quality of capital they held as a risk buffer, while they were also instructed to create so-called ‘living wills’ in the event that they ran into financial trouble.
The chancellor has repeatedly spoken of the need to regulate for growth rather than risk – a phrase the four banks hope will now persuade her to abandon ring-fencing.
Britain is the only major economy to have adopted such an approach to regulating its banking industry – a fact which the four bank chiefs say is now undermining UK competitiveness.
“Ring-fencing imposes significant and often overlooked costs on businesses, including SMEs, by exposing them to banking constraints not experienced by their international competitors, making it harder for them to scale and compete,” the letter said.
“Lending decisions and pricing are distorted as the considerable liquidity trapped inside the ring-fence can only be used for limited purposes.
“Corporate customers whose financial needs become more complex as they grow larger, more sophisticated, or engage in international trade, are adversely affected given the limits on services ring-fenced banks can provide.
“Removing ring-fencing would eliminate these cliff-edge effects and allow firms to obtain the full suite of products and services from a single bank, reducing administrative costs”.
In recent months, doubts have resurfaced about the commitment of Spanish banking giant Santander to its UK operations amid complaints about the costs of regulation and supervision.
The UK’s fifth-largest high street lender held tentative conversations about a sale to either Barclays or NatWest, although they did not progress to a formal stage.
HSBC, meanwhile, is particularly restless about the impact of ring-fencing on its business, given its sprawling international footprint.
“There has been a material decline in UK wholesale banking since ring-fencing was introduced, to the detriment of British businesses and the perception of the UK as an internationally orientated economy with a global financial centre,” the letter said.
“The regime causes capital inefficiencies and traps liquidity, preventing it from being deployed efficiently across Group entities.”
The four bosses called on Ms Reeves to use this summer’s Mansion House dinner – the City’s annual set-piece event – to deliver “a clear statement of intent…to abolish ring-fencing during this Parliament”.
Doing so, they argued, would “demonstrate the government’s determination to do what it takes to promote growth and send the strongest possible signal to investors of your commitment to the City and to strengthen the UK’s position as a leading international financial centre”.
The Post Office will next week unveil a £1.75bn deal with dozens of banks which will allow their customers to continue using Britain’s biggest retail network.
Sky News has learnt the next Post Office banking framework will be launched next Wednesday, with an agreement that will deliver an additional £500m to the government-owned company.
Banking industry sources said on Friday the deal would be worth roughly £350m annually to the Post Office – an uplift from the existing £250m-a-year deal, which expires at the end of the year.
The sources added that in return for the additional payments, the Post Office would make a range of commitments to improving the service it provides to banks’ customers who use its branches.
Banks which participate in the arrangements include Barclays, HSBC, Lloyds Banking Group, NatWest Group and Santander UK.
Under the Banking Framework Agreement, the 30 banks and mutuals’ customers can access the Post Office’s 11,500 branches for a range of services, including depositing and withdrawing cash.
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The service is particularly valuable to those who still rely on physical cash after a decade in which well over 6,000 bank branches have been closed across Britain.
In 2023, more than £10bn worth of cash was withdrawn over the counter and £29bn in cash was deposited over the counter, the Post Office said last year.
A new, longer-term deal with the banks comes at a critical time for the Post Office, which is trying to secure government funding to bolster the pay of thousands of sub-postmasters.
Reliant on an annual government subsidy, the reputation of the network’s previous management team was left in tatters by the Horizon IT scandal and the wrongful conviction of hundreds of sub-postmasters.
A Post Office spokesperson declined to comment ahead of next week’s announcement.
As Chancellor Rachel Reeves meets her counterpart, US Treasury secretary Scott Bessent to discuss an “economic agreement” between the two countries, the latest trade figures confirm three realities that ought to shape negotiations.
The first is that the US remains a vital customer for UK businesses, the largest single-nation export market for British goods and the third-largest import partner, critical to the UK automotive industry, already landed with a 25% tariff, and pharmaceuticals, which might yet be.
In 2024 the US was the UK’s largest export market for cars, worth £9bn to companies including Jaguar Land Rover, Bentley and Aston Martin, and accounting for more than 27% of UK automotive exports.
Little wonder the domestic industry fears a heavy and immediate impact on sales and jobs should tariffs remain.
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American car exports to the UK by contrast are worth just £1bn, which may explain why the chancellor may be willing to lower the current tariff of 10% to 2.5%.
For UK medicines and pharmaceutical producers meanwhile, the US was a more than £6bn market in 2024. Currently exempt from tariffs, while Mr Trump and his advisors think about how to treat an industry he has long-criticised for high prices, it remains vulnerable.
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The second point is that the US is even more important for the services industry. British exports of consultancy, PR, financial and other professional services to America were worth £131bn last year.
That’s more than double the total value of the goods traded in the same direction, but mercifully services are much harder to hammer with the blunt tool of tariffs, though not immune from regulation and other “non-tariff barriers”.
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The third point is that, had Donald Trump stuck to his initial rationale for tariffs, UK exporters should not be facing a penny of extra cost for doing business with the US.
The president says he slapped blanket tariffs on every nation bar Russia to “rebalance” the US economy and reverse goods trade ‘deficits’ – in which the US imports more than it exports to a given country.
That heavily contested argument might apply to Mexico, Canada, China and many other manufacturing nations, but it does not meaningfully apply to Britain.
Figures from the Office for National Statistics show the US ran a small goods trade deficit with the UK in 2024 of £2.2bn, importing £59.3bn of goods against exports of £57.1bn.
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Add in services trade, in which the UK exports more than double what it imports from the US, and the UK’s surplus – and thus the US ‘deficit’ – swells to nearly £78bn.
That might be a problem were it not for the US’ own accounts of the goods and services trade with Britain, which it says actually show a $15bn (£11.8bn) surplus with the UK.
You might think that they cannot both be right, but the ONS disagrees. The disparity is caused by the way the US Bureau of Economic Analysis accounts for services, as well as a range of statistical assumptions.
“The presence of trade asymmetries does not indicate that either country is inaccurate in their estimation,” the ONS said.
That might be encouraging had Mr Trump not ignored his own arguments and landed the UK, like everyone else in the world, with a blanket 10% tariff on all goods.
Trade agreements are notoriously complex, protracted affairs, which helps explain why after nine years of trying the UK still has not got one with the US, and the Brexit deal it did with the EU against a self-imposed deadline has been proved highly disadvantageous.