Canary Wharves in the Coal Mines: How Investment Zones can improve productivity outside of London
By Gideon Salutin
Researcher, Social Market Foundation
The government’s plans for investment zones have a lot of potential, promising to catalyse business innovation, improve the translation of research and establishing a framework for combined authorities to gain more control over their local economy. [i] However, Jeremy Hunt’s claims that this will stimulate private sector growth to create “mini Canary Wharves” are unrealistic.[ii] While the principle of using up-front government spending to encourage private investment in post-industrial areas is a good one, the impact of the initiative will be limited in absence of additional funding and bold action on fiscal devolution.
The Spring Budget reintroduced the concept of investment zones, a policy that looked to have been axed when Liz Truss left office. Hunt’s plans involve funding to develop an initial eight zones across England, and another four in Scotland, Wales, and Northern Ireland. The central government will allocate up to £80 million over five years to each combined authority granted a zone, with amounts varying based on the individual plans offered by local leaders. The money will fund new capital and resource spending and/or compensate for income lost from tax relief.[iii] Although not explicitly referenced, the funds work towards levelling up post-industrial towns which over recent decades have lost businesses to London.
On their face, investment zones look like a substantial step towards devolution. Offering combined authorities the chance to bid for funding, allocated in line with their proposals to attract private investment, would seem to empower them. Yet the extent to which such schemes are likely to support private sector growth is limited by the meagre funds on offer. To compensate, new powers to raise revenue should be granted to local authorities through fiscal devolution.
£35 million will be available for authorities to spend on resources and capital that help develop each cluster - for instance, by providing grants, recruit technical teams and city planners, or spending on local infrastructure. The other £45 million is being offered by the central government to compensate for money lost from tax reliefs, such as exemption from stamp duty, up to 100% relief from business rates on newly occupied premises, up to 100% first-year capital allowance, increased structures and buildings allowances, and relief on employer tax contributions for national insurance. [iv] Alternatively combined authorities can request to use this remaining pot on additional spending. To incentivise effective use of the funds, each authority could receive 100% of the business rates growth in their investment zone above an agreed baseline for 25 years.
If the Government wants to create more Canary Wharves, it needs to put more money up. On average, the £16 million combined authorities will receive each year –if they get maximum benefit from the scheme– will increase their budgets 7.4%.[v] Canary Wharf, in contrast, required huge upfront investments, among them a £3.5 billion extension of the Jubilee line.[vi] This was worth over ten times the surrounding Tower Hamlets’ budget, which totalled just £307 million when the work was first proposed in 1988.[vii] The cost of the extension was therefore overwhelmingly covered by the central government.[viii]
Figure 1: Mayoral combined authorities’ total expenditure in 2021/22 fiscal year compared to amount offered by investment zones plan
Source: Treasury and respective council budgets 2021/22 fiscal year. Note, the proposed East Midlands MCA has been excluded from analysis as it currently lacks a unified budget
Figure 2: Maximum investment zone funding as a percentage of total expenditure in 2021/22
Source: Treasury and respective council budgets 2021/22 fiscal year. Note, the proposed East Midlands MCA has been excluded from analysis as it currently lacks a unified budget
Investment zones in the UK’s major cities have the potential to reduce regional inequalities and improve productivity. A stronger and richer metropole could provide secondary benefits for its surrounding rural and suburban areas. The proposed policy rightfully recognizes how transport investment and skills building are essential facets of any credible plan to improve productivity in investment zones, and so establishes a useful framework to provide those goods. By transferring funds to local councils, and incentivizing partnerships between authorities, the market, and researchers, the central government has provided a realistic way to develop new business cores.
However, the funding on offer is negligible compared to what is necessary according to historical experience. The £80 million cap is too little, and limiting incentives to five years is inadequate for most private businesses looking for long-term benefits. The programme therefore appears less likely to revolutionise local economies and more likely to act as an additional, if minor, funding stream to complement existing projects. The money is dwarfed by pre-existing financial resources made available to the same authorities last year.[ix] At worst, tax breaks will benefit businesses but fail to spark long term investments in the area, leaving the Exchequer to appear penny-wise and pound-foolish.
To properly invest in investment zones, government at some level must provide more funding over a longer term. Right now 95% of money raised in the UK goes to the central government, leaving little for local authorities.[x] By allowing a portion of locally raised VAT, income tax, and corporation tax to be kept by local authorities, government can provide them with a reliable funding stream to fund ambitious projects.[xi] Alternatively, a new fund could be established and distributed by the central government for these projects, but the money available will need to be far greater than £16 million per annum.
The investment zone plan has sound logic. More funding and more authority needs to be provided to combined authorities for them to offer a viable alternative to invest outside of London. But experience shows that economic zones designed by governments are only successful when local investment is sufficient and when local authorities have the power to coordinate them.
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[i] HM Treasury and Department for Levelling Up, Housing and Communities, “Investment Zones Policy Offer,” March 15, 2023, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1142995/Investment_Zone_Policy_Prospectus.pdf.
[ii] Hannah Finch, “Key Points from Jeremy Hunt’s Speech from ‘mini Canary Wharfs’ to Inflation,” Business Live, January 27, 2023, https://www.business-live.co.uk/enterprise/key-points-jeremy-hunts-speech-26086622.
[iii] HM Treasury and Department for Levelling Up, Housing and Communities, “Investment Zones Policy Offer,” March 15, 2023, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1142995/Investment_Zone_Policy_Prospectus.pdf
[iv] HM Treasury and Department for Levelling Up, Housing and Communities, “Investment Zones Policy Offer,” March 15, 2023, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1142995/Investment_Zone_Policy_Prospectus.pdf
[v] Based on the 2021/22 budgets of seven of the eight combined authorities invited to submit proposals for investment zones. The proposed East Midlands MCA was not included as it is not yet a combined authority and has therefore not submitted a combined budget.
[vi] For details on the full cost of the Jubilee Line, see James Meek, review of Crocodile’s Breath, by Christian Wolmar, London Review of Books, May 5, 2005, https://www.lrb.co.uk/the-paper/v27/n09/james-meek/crocodile-s-breath
[vii] London Borough of Tower Hamlets, “Annual Report 1987/88”, 1988.
[viii] For details on payment and responsibility, see “Jubilee Line Extension” (House of Commons, May 18, 1992), https://hansard.millbanksystems.com/commons/1992/may/18/jubilee-line-extension#S6CV0208P0_19920518_HOC_364.
[ix] Department for Levelling Up, Housing and Communities, “Secretary of State’s Annual Report on Devolution 2021 to 2022,” March 30, 2023, https://www.gov.uk/government/publications/annual-report-on-devolution-2021-to-2022/secretary-of-states-annual-report-on-devolution-2021-to-2022.
[x] “Fiscal Devolution: Why We Need It and How to Make It Work,” New Local (blog), April 26, 2023, https://www.newlocal.org.uk/publications/fiscal-devo/.
[xi] Ibid.