Friday, 29 July 2011

More Enterprise Zones

The government has announced the location of four new enterprise zones in Birmingham, Bristol, Leeds and Sheffield. So this seems a useful moment to revisit some of the concerns I raised when the decision to create EZ's was announced in the March 2011 budget.

Enterprise Zones will offer firms five year rebates on business rates, planning regulations will be simplified, Local Authorities will be able to keep business rate growth and government will ensure superfast broadband is available. To understand the impact it’s useful to distinguish between the effect on “UK plc” (i.e. national employment and growth) and what happens in the Enterprise Zone.

In areas with strong economies, planning certainly acts as a break on business expansion and development and Local Authorities often have few incentives to allow more development. EZ type reforms would help encourage growth in these areas. Some of this growth would come at the expense of other areas in the UK, but much of it could be additional. Overall, we might reasonably expect both local and national employment and growth to increase.

But EZ’s make these changes in areas with weak economies (or in the parts of OK performing areas that businesses don't want to locate in). Misguided local planning policies may not be helping in these areas but the fundamental problem is that these are unproductive places for business investment. Five year rebates on business rates and relaxed planning regimes attempt to offset these disadvantages for businesses. But they don’t address the fundamental problems such as the educational level of the local labour force or the fact that a centre city site is inappropriate for business needs. If EZs allow new development on an appropriate site that has hitherto been undeveloped in an area which is doing OK, these concerns would be mitigated. [This new development / redevelopment trade-off lies at the heart of my main concerns over the new national planning framework]

The evidence on whether this has any effect on local employment is, at best, mixed. Even if it does it is highly likely that much of this growth would come at the expense of other areas in the UK (p.24 of this SERC policy paper provides more detailed discussion). Overall we might hope for some small impact on local employment but should expect little, if any, impact on national employment and growth.

There are many reasons to think that the current planning system acts as a break on growth. Unfortunately, reform in local zones does little to treat this problem and it is hard to see this having much, if any, impact on total growth. In the current climate, spending money (or equivalently forgoing taxes) to shuffle employment around the country may not be the wisest use of funds.

[This is an update version of my post from 23 March 2011]

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