Belfast Telegraph

Tuesday 16 September 2014

Back to the future

Michael Heseltine
Supporters of the zones see the potential for a cut in corporation tax

Michael Heseltine failed to make enterprise zones work in the 1980s and critics believe they wouldn’t be effective today, so, asks Paul Gosling, why are they back?

Chancellor George Osborne announced in the Budget that 21 new enterprise zones would be created in England, offering up to 100% discounts on council rates, access to new superfast broadband and enhanced capital allowances to promote the manufacturing sector. The devolved governments of Northern Ireland, Scotland and Wales are encouraged to adopt similar policies to promote local economic growth.

But there is a complication in applying the policy in Northern Ireland. The day after the Budget, the Treasury published its paper on rebalancing its economy, floating the idea that the whole of Northern Ireland would be a single enterprise zone. This is at odds with the approach in England, where most of the so far announced enterprise zones cover single cities or towns — such as Leeds, Sheffield, Greater Manchester and Liverpool — that suffer from high rates of unemployment.

Anyway, BT and the Northern Ireland Executive are already committed to the accelerated roll-out of superfast broadband across the province. Rates are a far more important source of revenue here than in England, so widespread rates discounts may not be practicable.

This leaves the enhanced capital allowances as the only lever that may be relevant in both England and Northern Ireland — except that the Treasury paper makes clear that the focus here would be a potential reduction in corporation tax. With a cut in overall corporation tax rates, it may not be appropriate to also offer enhanced capital allowances.

Northern Ireland’s representative business groups made clear in their Jobs Plan earlier this year, that they see a corporation tax cut as the main potential measure in an enterprise zone. Nigel Smyth, regional director of the CBI in Northern Ireland, says: “It does come down to corporation tax. That is the biggest thing.”

But, he adds, other measures should also be included. Those are an export strategy — “we don’t really have one”, says Smyth — a reduction in employment regulation, a better skills strategy, streamlined planning processes and, in Smyth’s words, “making the public sector more agile”.

But zones have traditionally been about cutting business costs, rather than creating a change in public sector culture. Moreover, such zones are not new and the academic evidence is stacked against them. Margaret Thatcher’s government gave several deprived areas enterprise-zone designation in the 1980s — including Belfast and Londonderry. Michael Heseltine was the leading force. Even the Government’s own analysis of the experience indicates this was no policy success.

A report published earlier this year by Belfast City Council explained the official findings. “The evaluation of the Northern Ireland Enterprise Zone experiment suggests that, of the 7,300 jobs created on the enterprise zones, 1,200 are net additional jobs on the zones themselves, with 440 net additional jobs in the local areas around the zones,” it said. “Given the public investment of £10.7m (of which 90% was spent on the Belfast enterprise zone), this equates to a cost per job of £9,200 in the zones themselves and £24,000 in the local areas.”

The council concluded that there was no net growth of employment in the region, and that any positive impact could have been achieved at lower cost by improving the capital allowance and rate relief regimes. Despite this, the city council supports the principle of a new enterprise zone in Northern Ireland to deliver a lower corporation tax rate and an improved skills development strategy.

John Tomaney, professor of regional development studies at Newcastle University, is a strong critic of enterprise zones. “This is one area where I think social science is very clear, with very strong evaluations,” he says. “These suggest to me that as a policy instrument, enterprise zones have not been very effective at creating jobs. They were more successful at moving jobs around — often at short distances and at high cost. If the policy objective is to effect the rebalancing of the UK economy towards manufacturing, then enterprise zones seem a very weak mechanism for doing this because most of the jobs created in enterprise zones were actually service jobs.”

Andrew Sissons is the author of a just published study on enterprise zones from the Work Foundation. He believes that the high cost per job created by the zones indicates that other policies would be more effective. “There should be more money to invest in things that make a long-term difference in the economy,” he says.

“There are a few things that are particularly important — skills, some infrastructure and an institutional framework so that you get universities engaged with other organisations and industry, and working together. This involves initiatives like technology and innovation centres, based on a German model of a public research base. This makes sure that universities are involved and producing valuable benefits for businesses. Things like that have a much more lasting impact than short-term tax breaks.”

Greg Lloyd, professor of the built environment at the University of Ulster, gave evidence to the House of Commons Northern Ireland Select Committee in its hearings on the proposal for an enterprise zone here. He believes there are several questions that must be answered about the practicalities of a zone.

“What are the implications of the Westminster Government designating an enterprise zone in Northern Ireland in terms of a devolved Northern Ireland Assembly?” he asks. “Will it represent an externally imposed measure to avoid addressing the corporation tax question?

“What will an enterprise zone designation mean for the ongoing reforms to Northern Ireland’s statutory land-use planning system, regional development strategy and its emerging economic agenda? Devolution affords the opportunity to innovate according to local regional conditions. An enterprise zone would inhibit that process.

“Finally, Northern Ireland requires a strategic and integrated economic and institutional framework to guide business, community and public sector thinking. This has to be addressed in Northern Ireland by Northern Ireland and there is a long way to go in this respect — particularly with the fragmented governance structures and processes that prevail. An enterprise zone — or smaller enterprise zones — would divert attention from that much more fundamental economic governance imperative.”

Professor Lloyd also worries that a single zone for the province ignores the very different local conditions that apply in our sub-regions. “Three points are important here,” he says. “First, there is the absence of concrete evidence that enterprise zones worked before and questions remain as to their sustainability in nurturing their local economies.

“Second, there are very different economic conditions now prevailing — depressed demand, over-supply of property and deflated public spending — compared to the 1980s, when there was a under-supply of land and property development. As a consequence, the real political priorities should be longer term in character — promoting innovation, trade, skills, infrastructure and entrepreneurship.

“Third, a Northern Ireland-wide enterprise zone would homogenise the regional economy and weaken a strategic approach to promoting infrastructure investment, securing employment and investment in the appropriate places across Northern Ireland.”

Despite the criticisms, Linda Brown, divisional director of the Institute of Directors in Northern Ireland, is convinced that a single enterprise zone for Northern Ireland would work and should be adopted. “Northern Ireland is a small place,” she points out. “It makes it an easier proposition for investors to have the whole place [and] have the advantages for inward investors.

“If we can get corporation tax devolved and include some attractions, [the enterprise zone] will be successful. I |don’t think we should pass up any options that could give us an advantage.”

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