Are the Enterprise Zones flourishing?
Authors: Damian Walne
21 March 2014
The 2014 Budget was packed with announcements: From bingo duty to a penny off beer. My colleague Ian Brinkley gives his take here.
But one line in the Chancellor’s speech piqued my interest:
“Many of the Enterprise Zones we created are now flourishing - so the business rates discounts and enhanced capital allowances will be extended for another three years.”
I don’t follow the logic of why something that is “flourishing” would need discounts and incentives. But my question here is whether it is true: Are Enterprise Zones flourishing?
The Government announced the revival of Enterprise Zones in early 2011. The offer was for a series of commercial development sites across the country. Firms that moved there could receive 100% business rate discounts or capital allowances for up to five years, along with unspecified pledges for public spending on broadband, infrastructure, and business support services. The early ambitions for Enterprise Zones were that they would create up to 54,000 jobs by 2015.
The Work Foundation asked “Do Enterprise Zones Work?”. The answer, from past experience in the UK and elsewhere, was that they probably wouldn’t work. And, in full disclosure, as a Government economist at the time, I advised caution in making bold claims about any economic benefits from the Zones.
The economic evidence that contests the value Enterprise Zones tends to focus on three effects:
- Business may have located on the site anyway. The Government or local authority has simply lost the revenue it would have received. There is a deadweight loss.
- The businesses attracted to the site would have located somewhere else, usually in another part of the same city or county. So the local economy is not really any better off. I tend to think of the Zones as ‘Displacement Zones’.
- Businesses are attracted to the site, for example to avoid paying business rates. This means demand for the site is higher and so the site’s owner charges higher rents. There is substitution with gains to landowners, no benefits for enterprises, and a loss to public revenues.
It has so far been difficult to test if these effects are happening in the current round of Enterprise Zones, simply because the Zones haven’t had much measurable economic impact. Most of the sites are ‘clean’ in the sense that they need new infrastructure and construction before businesses move in. That puts the risk on developers speculating about the future potential of the site – and so developers appear to have held back. Meanwhile, the business rate discounts and capital allowances are modest in terms of many firms’ investment and location choices. So firms haven’t rushed in.
It is little more than a year ago that reports emerged around the concerns senior members of the Government had about the slow progress of Enterprise Zones. Shortly after, the Government announced £100 million of funding to kick-start some investment in the Zones. That is why it is so interesting to hear that the Zones are now flourishing.
But it is difficult to verify if the Enterprise Zones are really flourishing. The Government’s press releases certainly provide examples of firms, from ale brewers to wind farmers, choosing to locate in some of the Zones. Many of these do seem to be existing local employers moving from within the local area. There are broad headline figures that the Zones have attracted over 250 businesses and created over 7,000 jobs.
But there is no published data that shows how these figures were arrived at, or that shows which Enterprise Zones are performing better than others. The reported numbers of jobs and business appears to be a gross estimate of what is within the Zones – that is they do not appear to be adjusted for those issues of ‘deadweight’ and ‘displacement’ that would give us a better understanding of the impact. And the ‘7.000 jobs’ figure for 2014 is some way short of the ambitions set out when they were launched.
Are the Enterprise Zones flourishing? There doesn’t appear to be the evidence available to justify the Chancellor’s remark. Nor is there any explanation about why extending the tax incentives for a further three years would help any flourishing ones to flourish more.
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