Tag: Budget 2021

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Freeports: boosting trade and investment or diverting it?

In his March 2021 Budget, Rishi Sunak announced the setting up of eight freeports in England. These will be East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames. The locations were chosen after a bidding process. Some 30 areas applied and they were judged on various criteria, including economic benefits to poorer regions. Other freeports are due to be announced in Scotland, Wales and Northern Ireland. The Scottish government is stressing their contribution to the green agenda and will call them ‘green ports’.

Unlike many countries, the UK in recent years chose not to have freeports. There are currently around 3500 freeports worldwide, There are around 80 in the EU, including the whole or part of Barcelona, Port of Bordeaux, Bremerhaven, Cadiz, Copenhagen, Gdansk, Luxembourg, Madeira, Malta, Plovdiv, Piraeus, Riga, Split, Trieste, Venice and Zagreb. The UK had freeports at Liverpool, Southampton, the Port of Tilbury, the Port of Sheerness and Prestwick Airport from 1984, but the government allowed their status to lapse in 2012.

Freeports are treated as ‘offshore’ areas, with goods being allowed into the areas tariff free. This enables raw materials and parts to be imported and made into finished or semi-finished products within the freeport area. At that stage they can either be imported to the rest of the country, at which point tariffs are applied, or they can be exported with no tariff being applied by the exporting country, only the receiving country as appropriate. This benefits companies within the freeport area as it simplifies the tariff system.

The new English freeports will provide additional benefits to companies, including reduced employers’ national insurance payments, reduced property taxes for newly acquired and existing land and buildings, 100% capital allowances whereby the full cost of investment in plant and machinery can be offset against taxable profits, and full business-rates relief for five years (see paragraph 2.115 in Budget 2021).

Benefits and costs

Freeport status will benefit the chosen areas, as it is likely to attract inward investment and provide employment. Many areas were thus keen to bid for freeport status. To the extent that there is a net increase in investment for the country, this will contribute to GDP growth.

But there is the question of how much net additional investment there will be. Critics argue that freeports can divert investment from areas without such status. Also, to the extent that investment is diverted rather than being new investment, this will reduce tax revenue to the government.

Then there is the question of whether such areas are in breach of international agreements. WTO rules forbid countries from directly subsidising exports. And the Brexit trade deal requires subsidies to be justified for reasons other than giving a trade advantage. If the UK failed to do so, the EU could impose tariffs on such goods to prevent unfair competition.

Also, there is the danger of tax evasion, money laundering and corruption encouraged by an absence of regulations and checks. Tight controls and thorough auditing by the government and local authorities will be necessary to counter this and prevent criminal activity and profits going abroad. Worried about these downsides of freeports, in January 2020 the EU tightened regulations governing freeports and took extra measures to clamp down on the growing level of corruption, tax evasion and criminal activity.

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The 2021 UK Budget: giving now and taking later

Rishi Sunak delivered his 2021 UK Budget on 3 March. It illustrates the delicate balancing act that governments in many countries face as the effects of the coronavirus pandemic persist and public-sector debt soars. He announced that he would continue supporting the economy through various forms of government expenditure and tax relief, but also announced tax rises over the medium term to begin addressing the massively increased public-sector debt.

Key measures of support for people and businesses include:

  • An extension of the furlough scheme until the end of September, with employees continuing to be paid 80% of their wages for hours they cannot work, but with employers having to contribute 10% in July and 20% in August and September.
  • Support for the self-employed also extended until September, with the scheme being widened to make 600 000 more self-employed people eligible.
  • The temporary £20 increase to Universal Credit, introduced in April last year and due to end on 31 March this year, to be extended to the end of September.
  • Stamp duty holiday on house purchases in England and Northern Ireland, under which there is no tax liability on sales of less than £500 000, extended from the end of March to the end of June.
  • An additional £1.65bn to support the UK’s vaccination rollout.
  • VAT rate for hospitality firms to be maintained at the reduced 5% rate until the end of September and then raised to 12.5% (rather than 20%) for a further six months.
  • A range of grants for the arts, sport, shops , other businesses and apprenticeships.
  • Business rates holiday for hospitality firms in England extended from the end of March to the end of June and then with a discount of 66% until April 2022.
  • 130% of investment costs can be offset against tax – a new tax ‘super-deduction’.
  • No tax rises on alcohol, tobacco or fuel.
  • New UK Infrastructure Bank to be set up in Leeds with £12bn in capital to support £40bn worth of public and private projects.
  • Increased grants for devolved nations and grants for 45 English towns.

It has surprised many commentators that there was no announcement of greater investment in the NHS or more money for social care beyond the £3bn for the NHS and £1bn for social care announced in the November Spending Review. The NHS England budget will fall from £148bn in 2020/21 to £139bn in 2021/22.

Effects on borrowing and GDP


The net effect of these measures for the two financial years 2020 to 2022 is forecast by the Treasury to be an additional £37.5bn of government expenditure and a £27.3bn reduction in tax revenue (see Table 2.1 in Budget 2021). This takes the total support since the start of the pandemic to £352bn across the two years.

According to the OBR, this will result in public-sector borrowing being 16.9% of GDP in 2020/21 (the highest since the Second World War) and 10.3% of GDP in 2021/22. Public-sector debt will be 107.4% of GDP in 2021/22, rising to 109.7% in 2023/24 and then falling to 103.8% in 2025/26.

Faced with this big increase in borrowing, the Chancellor also announced some measures to raise tax revenue beginning in two years’ time when, hopefully, the economy will have grown. Indeed, the OBR forecasts that GDP will grow by 4.0% in 2021 and 7.3% in 2022, with the growth rate then settling at around 1.7% from 2023 onwards. He announced that:

  • Corporation tax on company profits over £250 000 will rise from 19% to 25% in April 2023. Rates for profits under £50 000 will remain at the current rate of 19%, with the rate rising in stages as profits rise above £50 000.
  • Personal income tax thresholds will be frozen from 2022/23 to 2025/26 at £12 570 for the basic 20% marginal rate and at £50 270 for the 40% marginal rate. This will increase the average tax rate as people’s nominal incomes rise.

The policy of a fiscal boost now and a fiscal tightening later might pose political difficulties for the government as this does not fit with the electoral cycle. Normally, politicians like to pursue tighter policies in the early years of the government only to loosen policy with various giveaways as the next election approaches. With Rishi Sunak’s policies, the opposite is the case, with fiscal policy being tightened as the 2024 election approaches.

Another issue is the high degree of uncertainty in the forecasts on which he is basing his policies. If there is another wave of the coronavirus with a new strain resistant to the vaccines or if the scarring effects of the lockdowns are greater, then growth could stall. Or if inflation begins to rise and the Bank of England feels it must raise interest rates, then this would suppress growth. With lower growth, the public-sector deficit would be higher and the government would be faced with the dilemma of whether it should raise taxes, cut government expenditure or accept higher borrowing.

What is more, there are likely to be huge pressures on the government to increase public spending, not cut it by £4bn per year in the medium term as he plans. As Paul Johnson of the IFS states:

In reality, there will be pressures from all sorts of directions. The NHS is perhaps the most obvious. Further top-ups seem near-inevitable. Catching up on lost learning in schools, dealing with the backlog in our courts system, supporting public transport providers, and fixing our system for social care funding would all require additional spending. The Chancellor’s medium-term spending plans simply look implausibly low.

Articles and Briefings

Official documents and data

Questions

  1. Assess the wisdom of the timing of the changes in tax and government expenditure announced in the Budget.
  2. Universal credit was increased by £20 per week in April 2020 and is now due to fall back to its previous level in October 2021. Have the needs of people on Universal Credit increased during the pandemic and, if so, are they likely to return to their previous level in October?
  3. In the past, the government argued that reductions in the rate of corporation tax would increase tax revenue. The Chancellor now argues that increasing it from 19% to 25% will increase tax revenue. Examine the justification for this increase and the significance of relative profit tax rates between countries.
  4. Investigate the effects on the public finances of the pandemic and government fiscal policy in two other countries. How do the effects compare with those in the UK?
  5. The Joseph Rowntree Foundation looks at poverty in the UK and policies to tackle it. It set five tests for the Budget. Examine its Budget Analysis and consider whether these tests have been met.