These days, national policy changes quicker than you can write about it, one reason why investment zones risk being stillborn.
More important than any financial incentive to investment is the stability and certainty that has been sacrificed in the UK these last few chaotic weeks.
Towns and cities need long term policy stability on devolution and levelling up, just as markets need fiscal stability. They desperately need investment, in people as well as development. Without this they can’t plan to build more inclusive local economies. Investment zones may have potential, if more focused and purposeful, but for now look like another short term wheeze. Moreover, if there are now to be public spending and capital programme cuts, these will have far more detrimental impacts on struggling towns and cities than any small boost that they will get from investment zones.
That is why, even post Jeremy Hunt’s evisceration of last month’s Budget, the policy, in the form it was first announced seems an unlikely prospect. At a cost of running to billions of scarce tax pounds the promised 40 investment zones, let alone the 100 or 200 wanted by the Prime Minister seem unaffordable.
But a generation of anaemic UK means we need to look hard and be creative in economic policy. Jeremy Hunt has committed to implement investment zones ‘in a way that learns the lessons of when similar models have been tried in the past’. It is as well then that he has room for manoeuvre: to put it politely, the zones are, as yet, an outline idea only.
The lessons we have are international evidence and our own experience with Enterprise Zones. Both suggest that area targeted tax subsidies is at very best a partially successful policy.
So, what to make of this major and potentially expensive policy being implemented by the new Government? The reason the economic evidence isn’t great is because of old fashioned economic arguments. If investment zones offer too little incentive, they don’t have an impact. Too much and they run head on into the problems associated with encouraging businesses to move activity around the country, benefiting some places at the expense of others (displacement) or rewarding companies for doing things they would have done anyway (deadweight). These aren’t slam dunk arguments for doing nothing. We need to innovate new policy solutions to old problems. But nor can they be ignored. The larger the number of zones and the bigger the incentives, the greater the chunk of business rates is taken out of the system. We are pretty clear the economic benefits are limited. Because HMRC don’t publish relevant evaluations, we don’t know for certain that there aren’t any fiscal benefits. The economics are not encouraging.
Here are a few pointers to the new chancellor.
Firstly, he might apologise for putting local authorities across the country through the process of registering interest in a such a hastily organised and executed manner. Clear processes and certainty are essential to securing real long-term investment. The incentive was on everyone to register their interest which many did, with their efforts likely to have been in vain. An odd move for a deregulatory Government.
Second, the Government should set some principles that will apply to investment zones: precisely what powers will be on offer and how many, and in what sorts of places it is prepared to fund. It would be better to have a few serious investment zones than a large number of less strong ones (that minimises displacement). Similarly, to avoid deadweight, the Government should focus them on places that have a serious combination of need and opportunity – catalysing latent supply, bringing dormant assets back into the productive economy. These hardly revolutionary principles should ensure that the zones secure positive benefits with lower negative side effects, delivering growth at lower cost. Achieving this requires a highly targeted approach, the opposite of what the Government has done. Are we really about to blow billions on business rate holidays for a policy with uncertain benefits when we know that business rates are killing smaller retailers and others across the country and especially in city and town centres?
Third, rethinking investment zones offers possibilities to innovate too. The evidence on tax incentive growth is poor partly because tax relief is on business rates and capital investment. The impact on the people of the areas they apply to is generally indirect. If, as the evidence also suggests, low education, skills and wages are much the bigger drivers of underperformance, why not innovate further than the government has yet said and encourage investment zones working in partnership with local government, colleges and universities to invest in these areas too?
Investment zones will be what the Government wants them to be. Let’s take the chancellor at his word and hope that we learn from past mistakes. If we also innovate and focus on people as well as business, we might even make investment zones work for the nation.
Mike Emmerich is founding director of Metro Dynamics
