Paul Swinney analyses whether the UK government’s plans for 12 new ‘investment zones’, which were announced in the 2023 Spring Budget, are likely to create jobs and generate investment.
The 12 investment zones announced in the budget are the UK’s latest foray into a policy that uses taxes and other incentives to get investment into specific geographic areas. But do these types of policies actually work?
Investment zones themselves have an interesting recent history. They came out of left field as one of Liz Truss’s flagship policies during last summer’s Conservative leadership election. The idea was to have 40 such zones that would tempt in businesses with lower taxes and lighter touch regulation (it was reported that Truss wanted ‘100s’).
Local authorities were asked to get bids in to receive a zone in double quick time. Not quick enough, however, to be submitted before the end of the Truss premiership. Said submissions were subsequently put straight in the bin.
Rather than ditch the policy, Jeremy Hunt has reshaped it. There will be fewer investment zones (8 in large English city regions and 4 in Wales, Scotland and Northern Ireland) – and those that survive have been explicitly refocused around universities or other research institutions and to encourage the growth of sectors seen as national priorities.
Each zone will have £80 million to spend on a mix of tax incentives (e.g. business rates relief, zero-rated National Insurance contributions for new jobs) and investment.
But do they work? The evidence of success is not good. Evaluations of enterprise zones, the grandfather of this type of policy introduced under Margaret Thatcher, suggested the tax incentives caused a lot of displacement of activity rather than the creation of new jobs.
This didn’t stop them being reintroduced by the Cameron government. Analysis by Centre for Cities revealed three key findings.
First, they were very underwhelming in terms of total job creation. The Treasury predicted that after five years they would have created 54,000 jobs. The actual figure was less than one third of this.
Second, the majority of these jobs were in low skilled occupations. This isn’t necessarily a bad thing in itself. But they did not contribute to changing the make-up of a struggling economy – they brought in (a little) more of the same.
Third, and reflecting their predecessors, they encouraged the displacement of jobs. Modest estimates are that 34% of the jobs ‘created’ were actually moved from elsewhere.
This happens because policies of this kind don’t address why high-skilled activities typically aren’t located in struggling areas in the first place. Looking at where they choose to set up business in the UK shows that high-skilled jobs tend to be located in places that can offer access to lots of skilled workers and a network of other high-skilled activities. And the high rents they pay suggest they’ll pay a premium for this access.
Enterprise zones, freeports and investment zones (or at least the Truss version of them) instead focus on making cheap places even cheaper. They double down on what these places offer already. If investment zones are to be any different, they will need to be integrated into a broader package of support that addresses the barriers to attracting high skilled activity.
Jeremy Hunt has, in fact, tweaked the policy in an attempt to do some of this. The main change, as mentioned, is requiring the zones to have a link with a research institution. Local leadership has the opportunity to use some of its £80 million on research and development and skills. The main incentive, though, very much remains the tax deductions. Whether these are sufficient to change the minds of high-skilled businesses is debateable.
Where investment zones are located will influence their ability to attract these businesses too. If they are to be based in city centres, and are used as a tool to bring about wider investment into these centres, then the 2010s investment zones offer some encouragement – the three top performing zones were based in a city centre. Birmingham in particular used its zone as part of a wider remodelling of the city centre – part of its Big City Plan.
Doing this, however, requires serious public investment. Canary Wharf is the most famous example of an enterprise zone in the UK (the current investment zones have even been billed by the government as creating ‘mini Canary Wharves’). But Canary Wharf required substantial investment, in particular to connect it to the DLR and the Jubilee Line, in order to make it take off (through opening up the site to a large pool of potential bankers). The £80 million allocated to the current crop is mini indeed.
The long history of investment zone style policies doesn’t bode well for the UK’s latest bash at them. If they are put in city centres next door to the most research-intensive university in that area, and are part of a broader package of policies to address transport, property and public realm challenges then that might make them more attractive to high-skilled activities than their predecessors were.
If instead they look more like enterprise zones, then we shouldn’t be at all surprised if they too create lower-skilled jobs and displace a chunk of them from elsewhere.
By Paul Swinney, Director of Policy and Research, Centre for Cities.