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Enterprise Zones

    The Chancellor George Osborne recently announced that he would look to create at least 10 ‘Enterprise Zones’ in the forthcoming budget. These were no doubt at least partly inspired by the Enterprise Zone policy of Margaret Thatcher, which used localised supply-side policies to eliminate dereliction and entice businesses to areas of impoverishment.

    Today the aim of all government economic policy should be geared to economic growth. Increasing employment and expanding firms are what the UK needs to ease the rebalancing process away from the public sector.

    The problem with regional policies, i.e. the creation of zones, is that they lead to lots of displacement and deadweight. Businesses that might have set up anyway now do so in the ‘Zone’ area, whilst new businesses might simply drive out older ones in other regions. The net effect on national employment is thus not clear-cut, whilst the number of jobs created might be relatively expensive in terms of lost tax revenue.

    On top of this, using resources (even if it is only £100m) to encourage businesses to set up in low productivity areas will clearly have less of a positive effect on growth than diverting them resources to a high productivity area. Therefore, whilst areas of high unemployment are rightly considered first when deciding where to set-up the EZs, the overall decision must be based on growth potential with an aim of maximising national employment.

    With this in mind, recommendations from the Centre for Cities should be taken seriously. They rightly suggest that resources be diverted to areas with high growth potential (rather than bleak prospects) and incentives used to encourage net jobs, rather than shifting jobs to a particular region. Most importantly, they highlight that the policy package for any Enterprise Zone must be tailored to local circumstance.

    Another good recommendation comes from Charlie Elphicke's paper published today. He advocates the importance of ‘Transition Enterprise Zones’, which could be set up in areas such as Sandwich in Kent to enhance the possibility of maintaining a particular industry given the availability of high-tech, expensive laboratories and local capital. He emphasises that the importance of these clusters means the effect on the economy of losing the industries forever could be significant.

    Deregulation and more competitive tax structures are desirable, and Enterprise Zones could have a role to play in making some UK regions more attractive for investment. But the Chancellor must take today’s conditions into account – the zones cannot afford to be expensive to the exchequer, and the benefits must come in the form of greater employment rather than income to property and land owners. Shifting the employment deck chairs is not desirable - Enterprise Zones should be effectively targeted as part of a much broader, national long-term growth strategy.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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