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Investment Zones: bid now, reflect later

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Places have just three days left to draft initial bids for Investment Zones (IZs). Details are still to come, but we know that IZs will likely combine tax relief for businesses with reductions in regulations and planning restrictions in an attempt to drive growth. With only twelve days in total to submit a bid, and with many policy details outstanding, some local areas may still be asking whether they should be bidding to host zones. Given the details available at this stage the answer is almost certainly ‘yes’.

At a national level the overall impacts of the scheme are uncertain. As demonstrated in a recent review paper, the evidence on a strong link between corporation tax and growth is quite weak – at least at the levels of tax we have in the UK. The evidence on the effect of cutting business rates is much slimmer – in a paper published a little over a decade ago myself and co-authors did show a positive effect on manufacturing employment but not firm entry (we couldn’t look at services) but there hasn’t been much consideration of the employment effects since. Finally, while we don’t know much about the impact of the recent tax super-deduction, in work on Regional Selective Assistance, myself and co-authors show that reducing the cost of capital tends to increase employment, although not productivity, at least for smaller firms.

At the national level, these positive effects will be offset by cuts in tax revenue, with implications for public spending and investment – hence my assertion that at the national level the impacts of the scheme are highly uncertain. For any local area, however, these effects don’t matter as any changes in national tax income will depend on the overall national effect and will not be tied to tax revenue changes at the local level. All of this means that from a local perspective, in terms of the fiscal incentives, IZs are pretty much a free lunch (there are some issues around the overall effects on the local area that we will consider more carefully in blogs coming later this week).

The tricky aspect of the deal for local areas will come on the planning side. What will areas be asked to give up in terms of local control on land use in exchange for these fiscal incentives? For now, the simple answer is that we don’t know. The guidance on planning in IZs is vague, if not contradictory. We are told that IZs will “remove burdensome EU requirements which create paperwork and stall development but do not necessarily protect the environment; […] and relax key national and local policy requirements” and that “in Zones, the planning system will not stand in the way of investment and development”. However, “Key planning policies to ensure developments are well designed, maintain national policy on the Green Belt, protect our heritage, and address flood risk, highway and other public safety matters – along with building regulations – will continue to apply”. Not particularly clear.

At this point, given the size of the tax incentives on offer, and the uncertainty over what will be asked in terms of planning, bidding feels like a ‘no-brainer’. Bidding isn’t a commitment, it’s the start of a negotiation, so from a local perspective, some of the difficult decisions are down the road. Watch this space for further thoughts on addressing those challenges as the bidding process continues.