Rishi Sunak’s freeports ‘no magic bullet’ for UK economy, report warns

Special zones ‘likely to relocate economic activity and jobs, rather than create them’

The new wave of freeports at the heart of Rishi Sunak’s Budget are unlikely to offer a “magic bullet” for boosting the UK’s economy, as their main impact will be to relocate  activity and jobs rather than creating them, a report has warned.

The main beneficiaries from the initiative will be the businesses and super-rich individuals who take advantage of the tax breaks they offer, while the public will bear the cost of the infrastructure required to make them function, said the report by thinktank UK in a Changing Europe.

And it was “simply untrue” to claim that they will transform the UK’s prosperity rather than give a boost to areas where they are located to the cost of other parts of the country without them.

Boris Johnson’s government is aiming to create up to 10 freeports across the UK as hubs of enterprise where reduced customs and tax burdens will allow innovative businesses to flourish.

Up to 40 ports and airports are believed to have applied for the status, including Dover, Southampton, Felixstowe/Harwich, Tilbury, Hull, Port of Tyne, Teesport, Bristol, Milford Haven and Grangemouth.

They are expected to form a centrepiece of the Budget to be delivered on Wednesday by Mr Sunak, who has long been an enthusiast for freeports, writing in 2016 that they had the power to “unleash the potential in our proud historic ports, boosting and regenerating communities across the UK”.

But today’s report notes that the UK had freeports until 2012, when the government allowed legislation permitting them to lapse, apparently because they were of limited use, made no difference to government revenues and introduced unnecessary customs complexities.

The report found that the model - under which goods imported into a fenced business area near a port or airport can be stored or processed with no taxes payable until they enter the domestic market - was most suited to developing countries with dysfunctional or excessive regulation and chaotic customs administration.

In an advanced economy like the UK, the advantage of processing raw materials into finished products within a freeport is likely to be “negligible” and the capacity of freeports to create jobs is “unclear”, it said.

The report highlighted concerns identified in recent studies for the European Parliament and Financial Action Task Force that the secrecy and extraterritorial nature of freeports can attract money laundering and tax evasion.

And it said that the ongoing costs of the establishment and maintenance of physical infrastructure like roads and security fences - as well as the additional workload on schools and hospitals resulting from any workers attracted to the location - would offset the benefit of job creation for local areas, without any compensating increase in tax revenues. One evaluation of the similar enterprise zones created by the Thatcher government found that they cost the public £17,000, at 1994 prices, for each additional job.

The report found that freeports “could be used to solve specific problems, such as attracting jobs to a lagging region, focusing them on a specific sector which is particularly struggling due to tariffs, or opening up new financing models for local authorities”.

But thinktank deputy director and report co-author Catherine Barnard, professor of law at the University of Cambridge, said: “If the Government thinks freeports are a magic bullet that will create hundreds of thousands of new jobs, bring billions of additional pounds to the Exchequer and radically transform an area, it is mistaken.

“That is not to say they should not be created. But the thought they’re going to transform the wealth and prosperity of this country is simply untrue. It will help the regions that get a freeport – but possibly to the detriment of those that don’t.”