Aug 2011 18

The Department for Communities and Local Government yesterday announced eleven new Enterprise Zones in England designed to boost economic growth after disappointing recent jobs, inflation and growth data.

The current Enterprise Zones scheme was launched in March this year with the first zones covering sections of Liverpool, Manchester, Nottingham and London. The zones provide a 5-year break from Business Rates for new and incoming firms, departmental help to develop simpler planning regimes, taxpayers’ money to subsidize superfast broadband and, for 25 years, local authorities will be able to retain additional Business Rate revenues which arise from growth in the zone.

Some zones will also offer more generous capital allowances (effectively, lower corporation tax bills) for plant and machinery, but only for zones which are limited to identified sectors for a limited number of companies with a ‘manufacturing focus’.

The current scheme attempts to recreate the success of the London Docklands Development Corporation, one of the zones set up in a similar scheme in the 1980s by Michael Heseltine, which helped turn the run down, derelict London docks into the gleaming towers of financial commerce they are today. But while they share the same name as their Thatcherite predecessors, the new Enterprise Zones are notably different in some respects. Both boast relief from Business Rates, advantageous capital allowances for Corporation Tax and a streamlined planning regime. However, the new scheme has chosen areas more likely to respond to the policies and generate jobs and prosperity – it’s important to remember that while the Docklands was a success, the other zones were much less successful. Alexandra Jones, of the Centre for Cities, said:

They are locating the new zones in areas where there is a realistic chance of producing growth, rather than focusing on reviving rundown areas which weren’t realistically going to produce new jobs.

Councils will also be able to keep additional revenues from Business Rates in the zones instead of the money going straight to the Treasury. This will mean councils as organisations will directly benefit from development and enterprise. Currently, development often only appears to mean complaints and disruption in the eyes of short-sighted officials. It’s not all good news, however.

While the original zones often benefitted from planning deregulation that took planning decisions outside the remit of the local authority, the new scheme merely points out an existing power already available to councils -Local Development Orders – and encourages them to be used. And while the Business Rates exemption will be set at 100 per cent, it will only last for 5 years instead of 10. Finally, the generous capital allowances in the original scheme have been significantly weakened in order to comply with EU law. The new allowances are limited to just £55,000 per year and apply only in schemes where the local authority has chosen to limit the zone to specific economic sectors, such as the “Newquay Aerohub Zone”, which only applies to companies deemed to be in the aerospace sector.

As well as Newquay, there is also the Alconbury Airfield Zone, the Discovery Park in Sandwich, the Science Vale Enterprise Zone, the MIRA Technology Park and, with the most entertaining name of them all, the Humber Estuary Renewable Energy Super Cluster. All of these new zones will focus on economic activity in particular categories which thoughtful officials have decided is of greater economic importance than the prosperity businesses in other sectors might have provided.

They will no doubt help some economic activity relocate and will even result in actual marginal growth. The problem is that some of what’s good about them is just an exhortation to councils to do what they should be doing anyway. The rest of what’s good isn’t nearly good enough and should be applied nationally and across the whole economy. As JP Floru pointed out in this deliciously absurdist parody for the Adam Smith Institute, if the zones will generate the jobs and prosperity Britain’s faltering economy desperately needs, why limit them to a few select districts? Why not apply the medicine nationwide?

The very existence of Enterprise Zones is emblematic of two worrying problems. They are an acknowledgement that Britain’s tax and regulatory environment is not ‘fit for purpose’. It is because the rest of the country can accurately be described as a ’bureaucracy zone’ that ministers are trying to create zones of enterprise in the first place. Acceptance of a problem is the first step to resolving it, so perhaps there is some room for optimism here. The second problem the zones highlight offers less hope for optimists: the ‘Whitehall knows best’ dirigisme.

Bureaucrats have chosen particular small strips of the country where they believe enterprise should occur. What makes them think they know best where businesses should locate? In many of those areas they have also selected particular industries which they have judged to be of a suitable ‘strategic fit’ for the area. Why has the Government not learned from the mistakes of the 1970s, still thinking it can, let alone should, ‘pick winners’? These distortions provide incentives for companies to relocate into the zones and reclassify themselves to match bureaucratic definitions in order to qualify for the financial advantages. The Government have introduced rules to prevent this happening but business will attempt to find flaws they can exploit. More complexity in the form of schemes, zones and regulations is the opposite of what Britain’s already gargantuan tax code needs.

Ministers have also decided that ‘superfast broadband’ is of strategic economic importance, much in the same way as they thought ownership of such commanding heights of the economy as British Telecom was in the 1970s. Inevitably, taxpayers’ pockets have been put on notice as ministers have decided that, “if necessary”, our money will be spent on providing the economic Miracle Gro if the businesses benefitting don’t think it’s worth their own money. Dominique Lazanski explained how the Government should promote broadband yesterday on The Commentator.

If the Coalition really wants to stimulate growth there is plenty they can do. On taxes they could cut Corporate Tax, abolish National Insurance and scrap the 50p rate. On regulation they could end Sunday trading restrictions, simplify the planning system nationwide and scale back quangos like the Health & Safety Executive. What isn’t going to do very much good are little centrally-chosen zones for officially-approved sectors, who get welcome  but inadequate relief from the tax and bureaucracy the rest of the country will still have to endure and yet more wasteful government spending  on ‘superfast broadband’.

Rory is the Research Director of the TaxPayers’ Alliance. Rory’s work is focused on tax policy and economics, with a particular emphasis on tax simplification.

  • Trotsky

    Depressed city regions, preferably ports, plus a hinterland of 50kms: 10% flat tax including workers and across the board, take off all planning controls and watch the growth and industry take off.

  • Anonymous

    Renewable energy? Considering almost all of those industries are utterly state susbisdy dependent it is offensive that such should be promoted.

    The whole green nonsense must be ended. We need next generatio research such as hydrogen and thorium, smaller, local reactors. We do not need windmills.