The stamp of neoliberalism on the UK tonnage tax and the implications for British seafaring

Abstract

In 2000 the UK adopted a tonnage tax strategy on ships and related businesses as the main strategy for revitalising its declining shipping industry. In line with EU policy on shipping, UK registered shipping companies were offered fiscal incentives based on reduced corporation taxes while labour was offered support for training. Almost a decade since the introduction of the tax it is clear that the strategy has delivered for business but not for labour. This paper considers the nature and limits of state intervention per se in declining economic sectors in the context of globalisation and a neoliberal approach to governance. It concludes that the problem is often not state intervention but rather the form of intervention, namely one that panders to, and is constrained by, neoliberalism.

Introduction

The paper provides a critical analysis of the UK's tonnage tax against the politico-economic environment within which it was designed and implemented, as the main state strategy for the revitalisation of British shipping. The aim is to suggest an explanation for its effectiveness with regard to the delivery of its objectives. These were to effect a recovery and growth in the declining British national merchant fleet, revitalise the shrunken national seafarer labour force and boost growth in the shore-side maritime clusters. The paper begins with a brief historical background to the tonnage tax.

In the early decades of the 20th century; until the early 1970s, the British shipping industry benefited from highly favourable fiscal and financial incentives [1]. These measures were, however, not unique as many countries have, for many decades, aggressively supported the shipping industry in the same way. The context for this support has been the international nature of shipping, the extent of free market competition characterising the industry and the importance attached to the maritime sector by many states around the world as a central catalyst to trade and national economic growth. In addition, many states, particularly in Europe, historically attached great value to shipping for defence and strategic purposes. With regard to maritime strength in the pre-1970s period, Britain, alongside other EU maritime countries, maintained a dominant position, both in terms of labour and fleet, and in relation to both ownership and registration [2], [3]. The government dedicated resources to fleet building and skills development to maintain a large fleet for trade and strategic purposes. Support came in three forms as the provision of cheap loans, payable over an extended period and at low interest rates; free plant and machinery depreciation for ship owners for tax purposes; and cash subsidies in the form of investment grants [1]. These positive measures continued into the early post-war years thus propelling the UK's shipping capacity, in terms of gross registered tonnage, to its peak in the mid-1970s (see Table 1).

Although government support for many other sectors significantly reduced in the immediate post-war period, shipping was considered a special interest case and thus continued to receive favourable treatment [4]. However, between early 1970s and late 1990s, support for shipping was also reduced [1], [5]. This period of reduced support coincided with the beginning of the recent extensive globalisation of the industry and the emergence of highly subsidised low-cost developing-country flags, commonly known as flags of convenience (FoC), often with lax flagging regulations [2], [3].

In these countries, mostly small developing economies, shipping was often highly protected and supported by generous fiscal and financial incentives [6]. Thus, in a situation of deregulation, reduced support and rigid flagging conditions in western industrialised maritime countries, traditional flags such as the Red Ensign struggled to compete and began to decline. By the late 1990s, this decline reached a level where, once again, shipping became a special interest case in need of rescue [7]. Furthermore, in the case of Britain, the decline was attributed to lack of a comprehensive policy for shipping and failure by successive governments to proactively shield the industry against unfair international competition [8]. The argument is that, while the UK and other EU countries operated costly, closed and often restrictive maritime regimes, the new FoC competitors sought to aggressively attract ship owners, many of them from Europe and other industrialised maritime countries, with lax and less costly regimes [5], [2], [6]. The consequence was that, by mid-1990s, EU member-state fleets had gone from 39% of the world fleet, in the late 1970s, to 30% [9]. The UK registered the greatest decline, as illustrated in Table 2.

An important part of this decline, directly relevant to this discussion, was in relation to the number of qualified seafarers in the industry. The UK's pool of seafaring labour fell from about 99,000 to around 17,000 between the mid-1970s and late 1980s and, within the same period, cadet intake also fell from around 4500 to <1000 [10].

The response from the UK government was to introduce a tax-based strategy, which would cut taxes for shipping companies and reduce their overall cost burden to ensure greater profitability and international competitiveness. The strategy was developed as part of a wider EU support framework, through the EU tonnage tax, which was developed to promote coordinated community state aid to shipping and was aimed at revitalising shipping while harmonising support strategies within the community. The basic framework offered an alternative corporation tax for shipping business, which was calculated strictly on the basis of the actual tonnage operated per year rather than making companies’ total profits taxable under the normal corporation tax system. It also covered other activities which were directly related to shipping with tight ring-fencing, to prevent abuse. This alternative tax regime was designed to be more business-friendly and was intended to attract owners to the EU by making it a competitive location for shipping operations [7].

The EU tonnage tax was, however, only a broad framework within which individual states would develop, with a reasonable latitude, their own strategies. Individual member-states were allowed to adopt different versions to suit local circumstances. The ultimate aim of the UK's version of the tonnage tax was to make the UK a more attractive flag-destination for ship owners in order to boost growth in the national ship register as well as the shore-side maritime industry clusters. In addition to the tax incentives offered to companies, the strategy also contained a training initiative aimed at boosting the supply of qualified British junior officers and rejuvenating growth in the local seafarer labour market. The maritime training obligation (MTO) was a commitment by all ship owners participating in, and benefitting from, the tonnage tax to recruit and train UK cadets. This training commitment required every participating company to train one UK cadet for every 15 officer positions entered in the effective officer complement of all participating vessels, irrespective of nationality. The effective officer complement was calculated as the number of relevant officers entered on the safe manning document (SMD) for all vessels entered in the tonnage tax regime, adjusted to include back-up officer provision. This commitment covers the initial period of three years after which the ratio of cadets to officers reduces to one cadet for every five officer positions. Any participating company that was unable to meet the obligation themselves was required to make a payment in lieu of training in proportion to the crewing complement of the ships operated [4], [11]. The MTO was, therefore, a key ingredient in the strategy designed to revitalise the national seafaring skills base.

The effectiveness of this form of government intervention through the tonnage tax, based on its performance since its adoption in 2000, has, however, generated heated debate and attracted mixed reaction from industry and academic commentators. Some commentators have viewed its impact as skewed towards business and argued that the MTO has failed to stimulate effective recovery in the British seafaring labour market [8], [11], [12]. Some, on the other hand, have hailed the success of the intervention and cite the recovery in the UK's registered fleet since 2000 as evidence [13].

Seemingly, whereas shipping companies acknowledge the benefits accruing from the tax cuts coming from the tonnage tax arrangement, maritime unions and other labour oriented agencies and organisations have pointed out its failure to address the problem of declining seafarer labour force and a shrinking general maritime skills base. According to Department of Transport (DfT) data, the number of vessels participating in the tonnage tax steadily increased from 134 in 2000 to 816 in 2005. Meanwhile the UK fleet grew from 5.6 million gross tonnage in 2000 to 12.1 million GT in 2006 [14] (refer to Table 1). Cadet intake improved only minimally and remained far less than initially projected, as represented in Table 3 (the initial intake projection was 1200 cadets per year) [15]. Furthermore, the number of all certificated UK officers has shown little improvement but is projected to further decline to about 7778 by 2022 and, although annual cadet intake rose from 500 in 1999 to 630 in 2006 (see Table 3), the general output for qualified junior officers remained low as a result of high cadet wastage [12].

In this regard a government official explained, in an interview, that ‘the government (was also) aware that the strategy had not worked as well as it was meant to as far as seafaring skills are concerned’ (Government official June 2006).

The design and implementation of the tonnage tax and the resulting impact must, however, be understood within the historical context of neoliberal economic policies in the two decades preceding the tonnage tax which New Labour inherited from the Thatcher era (16–19). In the late 1970s a neoliberal approach to governance began to take root as the dominant economic ideology espoused by UK governments [18], [20]. This ideology champions the role of markets in the organisation of societies and advocates the withdrawal of the state from key areas of economic activity [17], [18], [19], [20], [21]. After the rejection of Keynesian economic policies on full employment by the newly elected Conservative government in 1979, it proceeded to introduce a version of classical economics, emphasising free markets and minimum government intervention [18], [19], [22] as the basis for economic management. The general approach was to boost economic growth by ‘removing market imperfections, including state regulations that impeded the competitive process, especially in the labour market’ [22: 807]. By the time New Labour took office in 1997, the previous Conservative governments had embedded neoliberalism within the UK's policy mechanisms so that, ‘New Labour's policies (essentially) evolved from Thatcherism and that it has largely embraced neoliberalism’ [22: 805].

The parameters for Britain's post-1997 approach to state intervention were, therefore, set by the neoliberal project of the Thatcher era (1979–1990). One consequence is that New Labour's economic policies have tended to promote the interests of corporate business at the expense of labour. In this process, the government has engaged in what has been described a ‘double shuffle’ [18]. It has been argued that:

The key thing […] about New Labour's double-shuffle is that its so-called ‘pragmatism’ is the English face it is obliged to wear in order to ‘govern’ in one set of interests while maintaining electoral support in another [18].

To develop this type of analysis further I adopt the view that the shuffle is, therefore, unequal in the sense that it involves two state agendas, one of which is subordinate to the other. In this case, the major government project being a vigorous promotion of marketisation while promoting employment as a non-urgent side-project, primarily meant to assuage government's primary political support among workers [18]. Two things happen in this arrangement which determine how the state addresses the issues of labour and capital. First, the government emphasises capital accumulation as the primary means by which economic development is to be achieved [20], [23]. In order to achieve this goal, governments actively promote production and market competitiveness, including facilitation for international exploitation of factors, especially labour. Second, in a highly globalised economic environment, this emphasis on development by capital accumulation enhances the ability of business interests to influence state policies, particularly, with the threat of capital flight [24]. In these respects, the choice of a weaker strategy for employment and a stronger one for business should be seen as both strategic and underpinned by the threat of duress.