What are investment zones?
As of the Spring Budget 2023 the government has set out a programme which will grant a small number of dedicated geographic areas tax and regulatory rules intended to drive economic growth – dubbed investment zones.
Investment zones were first announced by then-chancellor Kwasi Kwarteng in his growth plan on 23 September 2022. However, the blueprints for these zones have changed since then. New chancellor Jeremy Hunt told the House of Commons on 17 October that “I totally support the benefits that investment zones can bring, but we will implement that policy in a way that learns the lessons of when similar models have been tried in the past and we will make sure they are successful.” 64 https://hansard.parliament.uk/commons/2022-10-17/debates/68F2BACA-D0F2-4F1C-8A65-8D29D304B6BA/EconomicUpdate A key characteristic of the new plan is that investment zones are intended to form ‘knowledge-intensive growth clusters’ as zones will require the cooperation of local research institutions like universities.
Which areas will be designated as investment zones?
The government plans for 12 zones at most to be established across the UK, eight in England and four elsewhere. Through devolved administration engagement the government is looking to establish at least one investment zone in each of Scotland, Wales and Northern Ireland.
So far the government has shortlisted eight areas in England holding investment zone potential, all of which coincide within Mayoral Combined Authorities (MCAs):
- Greater Manchester
- Liverpool City Region
- South Yorkshire
- Tees Valley
- West Midlands
- West Yorkshire
- East Midlands (proposed MCA)
- North East (proposed MCA)
These MCAs and their constituent local authorities have been invited to submit investment zone proposals for a specific area within their boundaries. Zones are expected to be set across a sensible economic geography to facilitate effective collaboration between industry and research institutions. If zone proposals choose to take up the government’s tax incentive offer, they must be located in dedicated tax sites. Tax sites must be located within investment zones on underdeveloped land which can be split across three areas totalling no more than 600 hectares. Timelines are to be confirmed but the government hopes to have all proposals agreed by March 2024 with funding to commence in 2024/25 financial year. 65 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1142995/Investment_Zone_Policy_Prospectus.pdf
What benefits will investment zones offer?
In England each zone will be provided £80m worth of support over a five year period which can be used flexibility between spending and tax incentives. The stipulation over spending is that it should be split 40:60 between resource (day-to-day costs, such as staff wages) and capital spending (investment, such as research infrastructure). The tax incentives offered to the zones include:
- Stamp Duty Land Tax relief
- 100% Business Rates relief (some places hosting investment zones could also receive 100% of the business rates growth over an agreed baseline for 25 years)
- Enhanced Capital Allowances – 100% first year allowance
- Enhanced Structures and Buildings Allowance
- Lower employer National Insurance Contributions
These incentives are very similar to what was announced in September, the main difference being that these incentives have been limited to a five year period instead of the original 10.
Unlike the previous proposal investment zones will not offer regulatory planning freedoms. This element of the previous proposal received backlash from wildlife organisations over concerns that loosening regulations would put the natural environment at risk. 66 https://www.bbc.co.uk/news/uk-england-shropshire-63046923 Instead the government have stated that ‘investment zones will operate within current regulatory frameworks and be expected to maintain high environmental standards’. 67 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1142995/Investment_Zone_Policy_Prospectus.pdf
Investment zone proposal criteria
The new focus of investment zones is developing and improving existing technology clusters, based around universities and an existing industrial strength. Zones will be required to focus on at least one of the government’s five priority sectors: digital and tech, green industries, life sciences, advanced manufacturing, and creative industries. Local industry, planning authorities and other wider stakeholder are also expected to be engaged in proposal development.
How does this differ from the original Truss proposal?
The original plans announced in September 2022 did not specify a minimum number of sites and opened applications up to all MCAs and upper tier local authorities in England, 68 https://www.gov.uk/government/publications/investment-zones-in-england/investment-zones-in-england with 626 applications submitted by 90 councils. 69 https://www.theguardian.com/politics/2023/jan/25/councils-spent-125m-on-bids-for-liz-trusss-investment-zones-data-shows The current plan is more specific, limiting zones to areas with high growth potential in government identified ‘growing sectors’. The benefits offered in zones are also different; the tax incentives only cover five years rather than 10, there will be no looser planning regulations, and there will now be additional spending to support enterprise in investment zones on top of tax breaks.
What other area-based policies have been implemented in the UK?
The concept of creating areas with special exemptions to encourage growth is not new and similar initiatives have previously been rolled out in the UK, many of which are still in operation.
Enterprise zones were first introduced to the UK in the 1980 budget by then-chancellor Geoffrey Howe. To stimulate economic activity enterprise zones offered several concessions to businesses, mainly tax benefits such as an exemption from Development Land Tax as well as simplified planning procedures and a reduction in bureaucratic processes. Between 1981 and 1996, 38 enterprise zones were designated. 70 https://commonslibrary.parliament.uk/research-briefings/sn05942/ This enterprise zone programme ended in 2006, with Tyne Riverside the final zone to close. 71 https://www.centreforcities.org/blog/enterprise-zones-the-forgotten-legacy-of-lady-thatcher/
Enterprise zones were then reintroduced in the 2011 budget by former chancellor George Osborne again to stimulate economic activity but with different incentives, providing either business rates discounts or enhanced capital allowances and simplifying planning procedures.
These zones still exist; there are currently 48 in England. Similar policies have also been implemented in Scotland, Wales and Northern Ireland. 73 https://commonslibrary.parliament.uk/research-briefings/sn05942/
Mayoral Development Corporations
Under the Localism Act of 2011 Mayoral Development Corporations (MDCs) were established as statutory bodies to accelerate the regeneration of a defined area. This enables mayors of these defined areas to assume full planning control, develop a Local Plan, levy a Community Infrastructure charge, and act as the planning authority for that defined area (planning authorities are usually the borough, district or unitary council authority for an area). 74 https://www.sciencedirect.com/science/article/pii/S0305900620300349 By drawing on these powers the aim is mayors can spur on economic development within their areas. There are currently two MDCs in London both presided over by the mayor of London and two proposed MDCs, in Hartlepool and Middlesbrough, to be presided over by the Mayor of Tees Valley Combined Authority. 75 https://www.gov.uk/government/publications/the-growth-plan-2022-documents/the-growth-plan-2022-html
Freeports are similar to enterprise zones as they are also designated areas offering a range of tax and regulatory incentives. The main difference is that freeports tend to centre around places like airports and shipping ports to encourage businesses that import, process and then re-export goods, exempting them from some of the usual customs checks on imported intermediate goods.
In 1984 the Thatcher government first introduced freeports to the UK in Liverpool, Birmingham, Southampton, Cardiff, Glasgow and Belfast, with the expectation they would attract jobs and businesses to these cities and their greater regions. These freeports ended in 2012 when former prime minister David Cameron decided not to renew their leases. 76 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3881968 Nine years later eight freeports were reinstated in the UK following the 2021 budget. The current government have indicated intentions for freeports to be established in Scotland, Wales and Northern Ireland. 77 https://researchbriefings.files.parliament.uk/documents/CBP-8823/CBP-8823.pdf
Enterprise zones, freeports and similar area-based policies have been used globally as a strategy to attract private investments. According to the 2019 World Investment Report by the United Nations Conference in Trade and Development, there are nearly 5,400 similar zones around the world with notably high numbers in China, India, the US and the Philippines. 78 https://unctad.org/system/files/official-document/WIR2019_CH4.pdf In the US, for example, zones similar to freeports, known as foreign-trade zones, are designed to provide a relief from tariffs and customs administration.
Will investment zones increase growth?
Similar initiatives in the past to create zones with preferential tax and regulatory treatment have struggled to meet the targets set for them. For example, in 2011 the Treasury predicted the re-established enterprise zones of George Osborne would create 54,000 new jobs by 2015. However, by 2017 there were only 17,500 more jobs than in 2012, at least one third of which were jobs that had been relocated from elsewhere in the UK.
Analysis of the earlier enterprise zones in the 1980s draws similar conclusions.
Investment zones are very similar to enterprise zones and freeports in the tax incentives they offer. While such incentives can attract investment and increase employment in their designated areas, both the Institute for Fiscal studies and the What Works Centre for Local Economic Growth highlight, this is usually at the cost of activity that would have happened elsewhere in the UK.
82 https://whatworksgrowth.org/policy-reviews/area-based-initiatives/evidence-review/ This calls into question how effective investment zones will be in leading to big increases in UK-wide growth. However, some of the newer updates to investment zones mean they may hold higher rates of success than previous area-based policies.
The linking of investment zones to research institutions has been positively received. Dr Annette Bramley, director of the N8 Research Partnership welcomed the policy in its “recognition of the importance of universities across the North of England in unlocking the potential of key future sectors for our economy and achieving net zero”.
Research similarly suggests the useful role university innovation can have to promote local growth via knowledge spills over. 84 https://direct.mit.edu/rest/article-abstract/104/4/718/98194/University-Innovation-and-Local-Economic-Growth?redirectedFrom=fulltext
Some commentators criticised the initial plans because there was nothing to ensure the economic activity incentivised would last beyond the duration of time-limited tax breaks. The new plan better addresses these criticisms by pairing tax incentives with additional spending to build knowledge clusters. These clusters, linking research with industry, hold a strong potential to support long-term industrial strategies in their areas. This is a feature not shared by freeports or enterprise zones.
However, while the policy has been re-designed in a positive way, even if it is successful it will not be transformative. Scaled-back investment zones in England will cost at most £960m over 5 years, less than 0.1% of GDP in each year even within combined authority areas, let alone the country as a whole.