It’s been suggested that the government is on the point of announcing 12 ‘low tax investment zones’, where businesses and perhaps employees will benefit from deregulation and reduced taxes. Much of the response to this, predictably enough, will be about fairness, and the suspicion that the government is offering special favours to its mates.
Let me offer a different perspective. I’m going to assume, although there are grounds for scepticism, that the government’s basic claim is justifiable: that these programmes will have an effect in stimulating economic growth. The question is: what sort of effect?
There are three things that governments should always be aware of in judging value for money in special programmes and initiatives. They are deadweight, spillovers and externalities. Deadweight happens when those who are benefitting do not actually change their behaviour. If a firm that is already trading successfully moves from one area into another, simply to get the benefit of the programme, it’s a dead loss.
Spillovers occur when people do benefit and change their behaviour, but carry on reaping the benefits of the programme after the case for stimulation has ceased to apply.
The term ‘spillovers’ is now increasingly being used in development economics to refer to externalities, but externalities are something different. Externalities, or external effects, can be positive or negative. The stimulation of the economy would be a positive externality. An increase in crime, for example, is a negative externality, and crime in freeports, such as smuggling, drug dealing and money laundering, has been a major concern.
There is no certainty that the deregulation and low tax will have any benefit to the economy. They may be detrimental. Let’s have fewer assumptions, please, and more evidence.