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Investment Zones the answer to the Levelling up agenda?

Political history of Investment Zones

Similar to the Enterprise Zones promoted by Thatcher and Osborne, the Investment Zones announced by Kwarteng in September were sold as a way to promote growth in the UK. The basic idea behind the zonal policy is that of offering tax breaks in certain geographical areas to provide incentives for firms to move to areas where there aren't a lot of opportunities.

However, these plans by Kwarteng were modified by Hunt to focus more on ‘growth clusters’ instead of promising it will aid development. Further, the scale of the project has been vastly cut with Hunt aiming to ‘catalyse a limited number’ of areas whilst the original plan – under Liz Truss – was for 100 or 200 of these zones.

More importantly, by focusing on the zones for innovation and research, Hunt has improved upon previous policies. Place-based policies (like the one under Truss by Kwarteng) are notoriously high-cost ‘solutions’, even discounting the short-term tax breaks. Estimates suggest that bidding for the three Levelling Up funds cost local governments £63 million. Instead of being borne by the Treasury, already struggling local authorities are usually expected to pay for this. Another major issue with place-based policies is that they encourage companies to move locations. By incentivising this, they displace economic activity from one area to another and so its impact is often overestimated. Enterprise Zones in the 80s and 90s created 58,000 new jobs but over 40% of those jobs were from companies who relocated to enjoy tax breaks. Similarly, for the 2011 Enterprise Zones, the Treasury predicted the creation of 54,000 new jobs by 2015, but by 2017 there were only 17,500 new jobs, out of which more than 30% were due to relocation. They also only created a fourth of what the Treasury has estimated, creating questions about the significance of tax cuts in the first place.

Reforming Investment Zones?

Levelling up should be a long-term priority for the government to ensure that areas of the country grow together and to provide being around the country with the same opportunities and improve jobs and living standards. It is also important for the government to expand what is seen as levelling up to include disparities in average life expectance, well-being and education instead of purely targeting corporate endeavours. Further, the problem of uncertainty stemming from Brexit and subsequent failures from governments has created an unpredictable environment for investors, who desire stability. To see a boost in investment, there needs to be more certainty to support long-term industrial strategies.

Hunt’s reformed vision for these Zones is closer to what many papers suggest is the best way of increasing investment. Focussing investment in a few areas is better than a thin, even spread to start off. The Levelling Up White Paper named Glasgow, Greater Manchester and the West Midlands as Innovation Accelerators. It would be more advisable to give adequate funding to these areas rather than too little too many areas and failing to provide any material changes.

Hunt was also right in suggesting making use of local universities as it links with the larger idea of Investment Zones needing to be better connected to the local systems. Some research has suggested that less productive regions of the UK, are more specialised in areas relevant to achieving net-zero, meaning that this could be an opportunity to level up and generate growth as well as address environmental issues and funding technology. Along with universities, Zones need to utilise other major firms in the area and wider research institutes.

There is, however, a larger issue with this form of Investment Zones. The What Works Centre for Local Economic Growth concluded that whilst Investment Zones brought increased activity to the area, due to this largely being due to the displacement of jobs elsewhere, it is unlikely to lead to UK growth. Further, tax cuts and deregulation might not lead to new practices as it makes it cheaper to conduct business and might lead to low-wage jobs expanding instead of lifting areas out of deprivation. Under Kwarteng’s plan, along with tax incentives, there were lower employer National Insurance Contributions, lower business rates for new buildings, deductions in corporation tax, looser planning rules etc. By making deregulation and tax cuts the major incentive, the previous government ignored a lot of evidence suggesting that Research and Development activity is more reliant on skilled labour than lower costs.

More interestingly, however, were the plans for local growth funds where mayoral authorities would receive a ‘local growth settlement’. IfG research has suggested that the funding model for mayoral combined authorities are more effective in long-term planning and coordinated policy and certainty through its competitive bidding process.

Whilst Hunt’s U-turn on Truss’ investment zones is a better policy, the government needs to make plans for these Zones to be as innovative as the technology they are hoping to create. Certainty and agreement about a long-term vision will be more of an incentive to businesses than tax cuts. Perhaps it is time to escape the political rut of recycling tried, tested and failed ideas purely due to its neoliberal stance, especially on a bipartisan issue.

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