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Freeports announced

Written on . Posted in Economics.

The government has just announced the first eight of the so-called freeports. These will be

  1. East Midlands Airport,
  2. Felixstowe and Harwich,
  3. Humber and Immingham,
  4. Liverpool,
  5. Plymouth,
  6. Solent (Southampton and Portsmouth),
  7. Lower Thames including Tilbury,
  8. Teesside.

The announcement states that “Eligible businesses will have access to a suite of tax reliefs including Business Rates, Stamp Duty Land Tax (SDLT), Employer National Insurance Contributions (NICs), Enhanced Structures and Building Allowance and Enhanced Capital Allowances designed to incentivise new investment within the boundaries of Freeport ‘tax sites’.

“The council area in which the Freeport tax sites are located will be able to retain 100% of the business rates growth above an agreed baseline. This will be guaranteed for 25 years, giving councils the certainty they need to borrow and to invest in regeneration and infrastructure that will support further growth.”

We have mixed views on the concept of freeports. It is a tacit admission that existing taxes result in a deadweight loss; economic activity which would have occurred in the absence of the tax is stymied by the tax. However, if the taxes have such a damaging effect, then they ought to be phased out everywhere, not just in a few selected places. The concessions also ignore the fact of tax incidence; the burden of all employee related taxes, including PAYE Income Tax and employees NI is on the employer. If exemptions to these taxes were also included in the concession, then employees would accept lower gross pay, which would be a further saving to the employers, at no loss to the employees. With the right package of tax concessions, the entire country could be a freeport.

The drawback of freeports is that the tax advantages will lead to an increase in land values and rents in the designated zones, especially as it is not clear what exactly is meant by ‘business rates relief’. It looks like a nice windfall for those landowners who have won in this lottery. The official analysis conducted for the government itself after the conclusion of the 1980s Enterprise Zone scheme proved this conclusively; the business rates concession was just money given away unnecessarily.

There must also be concerns about the way in which the actual development will take place, including planning and infrastructure. Many of the selected locations  have geographical disadvantages, and even those that do not suffer from poor local transport links. Felixstowe, for example, is connected to the national railway network by a single line branch which is not electrified. The port has recently experienced severe congestion with container ships being unable to dock and unload. A proper transport and planned development framework is needed to ensure orderly growth without bottlenecks and other deficiencies. There is, unfortunately no mention of setting up development corporations on the lines of that which was responsible for overseeing the development of London Docklands forty years ago. In order to get the most benefit from freeports, an injection of 1940s style planning is needed, a notion which is now regarded with horror.

For more information, see the UK government website https://www.gov.uk/guidance/freeports