Bold ideas are needed to transform economic policy agenda, says expert
By: Sunil Gadhia
Britain has a chronic growth problem. Average annual growth rates have more than halved since the 2007-2008 global financial crisis, and the International Monetary Fund (IMF) has forecast that this year we will be the worst performing large, advanced economy in the world.
Underlying this is a productivity crisis, which means that even this anaemic growth has come from working more, not working more efficiently. This, in turn, has made the cost-of-living crisis even more painful.
According to the IMF, if our GDP per person had grown as strongly in the 15 years after 2007 as it did in the 27 years before, every person in the UK would be more than £10k a year better off in real terms. And, at a national level, lower GDP means less money for public services, higher taxes and declining global influence.
But, what to do? Well, a cornerstone of the government’s policy agenda for stimulating growth, as well as levelling up, is freeports. Back in 2016, as a backbencher, Rishi Sunak wrote a policy paper for the Centre for Policy Studies. He espoused the benefits of Brexit in providing economic freedom to create freeports to drive economic growth.
Seven years on, Sunak is the prime minister and freeports have become a reality. They are not a new idea, they have existed for centuries, but the new ones – there will be eight in England (seven based around seaports, and one around East Midlands Airport) – benefit from a number of reliefs that offer meaningful upfront savings (eg SDLT [Stamp Duty Land Tax relief] and capital allowances); in addition to ongoing savings (in NICs [National Insurance Contributions], business rates, and customs/ VAT relief ); enhanced support for trade promotion and innovation; seed capital to help pay for infrastructure; and other enabling activities.
In addition, councils are encouraged to make use of existing powers to relax planning. The policy objectives are to promote regeneration and job creation, establish freeports as national hubs for global trade and investment across the UK; and to create hotbeds for innovation.
So, what do freeports mean for British Asian businesses? Well, for businesses with investment plans, probably some investigation, followed by “wait and see”, before deciding. Investigation that is, into whether the criteria for freeports’ incentives aligns with investment plans, or indeed should lead to modifications of plans, given the incentives only apply to operations located within a freeport location.
While the theory is that a freeport will also create a cluster of businesses in similar industries, leading to cross-fertilisation of people, resources and ideas, this depends on a critical mass of businesses developing in a particular freeport. As a basis for decision- making, that sounds speculative.
As for “wait and see”, this is because in the spring 2023 budget, the government also confirmed plans for 12 low-tax “investment zones”, scaling back proposals announced by Liz Truss while she was the prime minister.
These will aim to create new business clusters, focused on universities and research institutions in “priority” sectors, each receiving £80 million of support, to be spent on investment and tax incentives, which incidentally look suspiciously like those available in freeports. So, businesses will need to “wait and see” where and how these “investment zones” develop and their pros and cons versus freeports.
As for what any of this will do to alleviate our growth crisis, according to a study by the Institute for Fiscal Studies, the tax incentives and other benefits enjoyed by freeports should boost investment and employment, but this will come partly at the expense of other areas (displacement). The Office for Budget Responsibility expects freeports to generate little additional activity, with gains mostly being displaced from other areas.
Time will tell, but for now freeports and investment zones are a clear recognition that leaving markets to themselves is not the answer to the country’s problems.
Yet, when all is said and done, these are timid proposals, dwarfed for example, by the US’ massive Inflation Reduction Act, which will splurge $369 billion (£297bn) on green subsidies, and its Chips Act, with nearly $80bn (£64bn) for US chipmakers.
The Conservatives have long claimed a reputation for economic competence, but while this prime minister has had scarcely little time to demonstrate his, the party has had more than enough. As for Labour, one of its five missions is securing the highest sustained growth in the G7. Amen to that. But it will need to be truly bold in spelling out how this will happen.
Alas, it is not since perhaps [Margaret] Thatcher and, before her, [Clement] Attlee, that the country has enjoyed a truly transformative economic policy agenda. I know from personal experience how difficult it is to truly change something. But I also know it can be done and for the sake of our country, it must be done.
Sunil Gadhia is a partner in the firm Cleary Gottlieb Steen & Hamilton LLP and former chair of the Asian Business Association of the London Chamber of Commerce. This article reflects his personal views.