Investment Zones are a new label but old concept, will they work? - Steve Fothergill

The government says Investment Zones will ‘drive growth and unlock housing’. They will benefit from ‘tax incentives, planning liberalisation, and wider support for the local economy’.

In England, the tax incentives, time-limited to ten years, will encompass business rates relief, investment in plant and machinery, investment in buildings, stamp duty relief on commercial land and buildings, and employers’ NI contributions relief.

It’s clear that the Zones will be sites, or possibly groups of sites, rather than broader local areas. The government’s Growth Plan includes an illustrative list of 24 sites of the type that might be considered as well as another 38 authorities, spread widely across England, that have already expressed an interest in hosting a site.

There are no details, however, of just how many Investment Zones the UK government might consider designating, and there has been concern from officials that the policy could be an ‘open-ended cheque book’.

Like the new Investment Zones, the first-generation Enterprise Zones, designated by the Thatcher and Major governments, included 100 per cent relief from business rates for 10 years, 100 per cent capital allowances for investment in buildings, and relaxed planning controls.

The new Investment Zones come with a distinctly more powerful package – all the incentives on offer in the first-generation Enterprise Zones plus relief from employers’ NI contributions and stamp duty.

Given that the financial incentives in the new Investment Zones are at least as powerful as those in the first-generation Enterprise Zones, these offer the best guide to the likely impacts.

The evidence is that the first-generation Enterprise Zones were successful in generating large numbers of jobs on-site and that a substantial proportion of the jobs, especially in manufacturing but less so in retailing, were additional to the wider local economy.

There is little evidence that large numbers of firms move on to the sites to take advantage of the tax breaks and then move away as soon as they come to an end.

The key incentive is arguably the 100 per cent capital allowance for investment in buildings – something missing from the later Enterprise Zones but restored in Investment Zones. This attracts speculative property developers, who invest heavily in industrial and warehouse units and in office space. Businesses are then attracted in by the ready availability of premises, and by the bonus of a rate-free holiday.

Some Enterprise Zones were much more successful than others. The success stories include the Dearne Valley in the former heart of the South Yorkshire coalfield, where thousands of new jobs are now located.

Nevertheless, it must be accepted that a proportion of the new jobs in Investment Zones will be either deadweight, jobs that would have been created on-site anyway, or displaced, where the jobs would instead have been located elsewhere in the local area, so there is no net addition to local employment.

What is clear is that Investment Zones are unlikely to have a rapid impact on the volume and location of economic activity.

Professor Steve Fothergill, from the Centre for Regional Economic and Social Research, Sheffield Hallam University.