‘Set a course for the enterprise sector, Mr Osborne’
Civitas, 14 March 2011
Following the recent financial crisis and ensuing recession all three main British political parties have stressed the importance of ‘rebalancing’ the UK economy. One aspect of this is geographical rebalancing; making the British economy less dependent on industries and businesses concentrated in London and the South East. Reinforcing British political concern, recent analysis by the Economist indicates that the UK is one of the worst countries in the world in terms of regional income disparity.
The Economist’s analysis indicates that in the UK GDP per person in the richest region, as a multiple of GDP person in the poorest region is nearly ten. In contrast this figure is nearly eight for China, around five for America and around three for Germany. Furthermore regional income disparity has also increased in Britain with the ratio of GDP per head in the three richest regions compared to the three poorest regions increasing by almost a tenth between 1990 and 2009, with the recession exacerbating this trend. In contrast Italy and Germany witnessed a decrease in this ratio over the same time period.
Although analysing the difference between GDP per head between the richest and poorest region (or regions) does not give a particularly nuanced picture of regional economic success (some parts of poor regions may be extremely poor, thus skewing the average result for that region), it can give a good impression of which countries witness high regional disparity, and clearly Britain is one of them. The next question, which the Government in this country has obviously tried to answer, is what can be done about this?
On March 5th George Osborne announced the creation of ‘Enterprise Zones’, a flagship policy of the Government for the regional rebalancing of the economy. There has been a great deal of current debate over the success of these zones, as well as a number of studies of the previous experiment with enterprise zones in the 1980s. Interestingly some of these studies, and in particular: ‘UK Enterprise Zones and the Attraction of Inward Investment’, Jonathan Potter and Barry Moore, Urban Studies, 2000, found that EZs did result in increasing inward investment rather than simply redistributing already planned local investment. Importantly though, the success of the zones partly depended on factors which had little to do with the zones themselves, and more to do with local infrastructure, labour availability, location (those with easy access to urban areas were most successful) and land availability. Furthermore the reduction in business rates was by far the most important benefit provided by the zones, and relaxed planning restrictions, and other ‘peripheral benefits’ were far less important.
The Government needs to learn from the successes, and limitations of the previous EZ policy, while the original policy helped create enduring economic growth centres such as Canary Wharf, they also produced many out-of-town retail and shopping centres which added little extra benefit to the local economy, and did not create new industrial activity. One thing the Government should learn is that the zones, in themselves, are not enough to seriously improve the prospects of some areas. The Economist correctly argues that such improvement involves costly public spending on things like education and infrastructure. Unfortunately, the Economist is also correct that the prospects of serious governmental spending in these areas are not good, with the current economic climate and deficit reduction priorities.
If significant public spending is not an option, then the Government needs to consider other ways to address regional economic disparities. One recent suggestion is that regions should be able to set and administer their own business rates tax, this should be welcomed, however the government could go further. Regions should be able to set corporation taxes and formulate local tax breaks to attract businesses to their locality. This healthy tax competition would provide an incentive for regions to formulate their own tax policies which took into account current regional needs. Evidence from Switzerland indicates that intra-country tax competition does not necessarily have to be a damaging ‘race-to-the-bottom’. Undoubtedly such a policy would be controversial and deeply opposed by those that thought the tax take of poor regions would be reduced, yet the current Government has argued that it is committed to localism. Perhaps it’s time the Coalition considered real devolution of local economic decision making, not simply time-constrained, centrally-led economic experiments.