A Northern Ireland enterprise zone

Northern Ireland will be termed an ‘enterprise zone’ if corporation tax is cut. Peter Cheney considers what a zone could mean in practice and how it would differ from the existing definition.

The aim of a Northern Ireland enterprise zone (a status expected if corporation tax is lowered) will be two-fold: to rebalance the province’s state-dependent economy and to help rebalance the UK economy away from London.

Such a zone would be very different, in ambition and scale, than what has gone before. In the UK to date, enterprise zones have involved lowering business costs (e.g. through rates relief) and fast-tracking planning in selected small areas (usually less than 0.5km2 in size.) These generally lasted 10 years whereas Owen Paterson’s projected economic revival would stretch out to 25 years.

The existing theory of enterprise zones was introduced to 1970s Britain by economic geographer Peter Hall, following on from examples in the USA. Michael Heseltine (as Environment Secretary) ran with the idea and 38 zones were established across the UK between 1981 and 1996.

After 30 years, the most visible success is the Manhattan-style financial hub at Canary Wharf, which was granted enterprise zone status in 1982 as part of the London Docklands regeneration project. Its working population took off after that status ended, rising from 7,000 in 1993 to around 90,000 today.

This example of success also illustrates the well-known distortions in the UK economy. Financial services growth benefitted London but the benefits didn’t spread north. Over-dependence on banking in the capital city seriously damaged the economy when the recession hit in 2008.

In 2009, London accounted for 21.5 per cent of UK gross value added and its neighbours in South East and Eastern England added another 23 per cent. Almost half of the economy’s value is concentrated in those three areas. Northern Ireland’s proportion, in contrast, was 2.3 per cent; that’s lower than its 2.9 per cent population share.

Last year, the Coalition Agreement pledged to “build a new economy from the rubble of the old” by supporting “sustainable growth and enterprise, balanced across all regions and all industries”.

George Osborne’s first move was the national insurance holiday for businesses outside London, the South East and Eastern England. It started in June 2010, runs to September 2013 and applies to the first 10 employees taken on by new businesses. The Chancellor had expected 400,000 businesses to take up the offer but it had helped just 5,137 companies up to July 2011.

Secondly, Heseltine’s enterprise zones were re-launched in the 2011 March Budget. Twenty-two have been announced to date, mostly located in northern and western England.

Businesses in each zone will receive a five-year exemption from business rates (up to £275,000), central and local government help to get applications through the planning system, and access to high-speed broadband. Nearby local authorities (clustered in ‘local enterprise partnerships’) can retain any increased income from business rates for at least 25 years.

The main problem with the old enterprise zones was that they displaced jobs from surrounding areas. Local companies moved their operations into the zones and closed down sites in nearby towns. An external evaluation found that 2,800 new companies had created 63,300 jobs by 1987. Once jobs displaced from other areas were deducted, the net increase stood at 13,000.

NIO ministers set up two enterprise zones: one in Belfast in 1981 and one in Derry in 1983. The Duncrue Industrial Estate, on reclaimed land in North Belfast, is a lasting example. The legislation still exists and is now in Arlene Foster’s hands.

University of Ulster economist Mike Smyth recalls that Duncrue attracted distributors rather than the manufacturers who add real economic value. “An enterprise zone needs to be smart, it needs to be cute,” Smyth contends, emphasising that it must “attract business that wouldn’t otherwise be here.”

While displacement is damaging at a local level, it is “the whole point” of regional policy within a nation-state and Smyth sees lowering corporation tax as the “honey trap” for investors.

A regional zone

The 2010 Conservative and Unionist manifesto recalled Northern Ireland’s 19th century days of industrial success and pledged to “look at” turning the whole of the province into an enterprise zone. That, in itself, would mark a paradigm shift from both Michael Heseltine’s zones and George Osborne’s updated versions.

Owen Paterson has used the term as “a cover for looking at ways of reviving the private sector in Northern Ireland.” Lower corporation tax would obviously be a key selling point.

The Treasury is discussing what other policies could be tailored to Northern Ireland. That said, it is up to the Executive to improve the province’s performance in broadband coverage, skills and planning.

MPs on the Northern Ireland Affairs Committee analysed the concept as part of their corporation tax inquiry. The committee said that, beyond corporation tax, no further taxes should be devolved to Stormont as the “complexities … would be likely to stall change.”

The CBI’s proposals include:

• 100 or 150 per cent first year capital allowances for all businesses;

• triple allowances (300 per cent) for key identified expenditure within strategic areas e.g. R&D, training expenditure and marketing;

• tax credit support for television drama production (as happens in the Republic.)

Politically, the UUP and Alliance are the strongest supporters of an enterprise zone. Both see lower corporation tax as the common starting point.

Over and above that, Ulster Unionists suggest:

• enhanced tax credits for R&D;
• enhanced capital allowances;
• a speedier planning system;
• 5 per cent VAT on the repair, maintenance and improvement of domestic dwellings (already applied in the Isle of Man.)

In particular, the UUP wants to bring the further education colleges to the negotiating table. Invest NI currently invites recruitment agencies but the colleges can quickly design tailored courses to meet investors’ needs.

Alliance says the Assembly must take the lead by demonstrating the conditions and incentives that Northern Ireland needs. The party’s specific priorities are:

• improved access to finance;

• a jobs fund;

• an enhanced export guarantee scheme to promote export-led manufacturing; and

• a simplified tax credit system for innovation, training and export.

Mike Smyth points out that Irish employment agency Fás and the Industrial Development Authority channelled skilled workers into the Celtic Tiger’s growth industries.

Other parties, though, are more sceptical and want more detail from Westminster. When Paterson described the zone as a brand, Nigel Dodds warned: “It appears that there is little substance to this Tory pre-election pledge.”

Specifics can be expected when the corporation tax decision is announced. While the debate has not had the same profile as the tax cut campaign, the policy work is already under way.

Fast-track US flights

More trans-Atlantic flights could take off from Aldergrove now that the Treasury has agreed to abolish air passenger duty in the province. The proposal was made by the Northern Ireland Affairs Committee, Continental Airlines, the Executive and the Secretary of State. Innovatively, the CBI wants Belfast International to offer pre-clearance checks for US-bound passengers. This allows passengers to go through border security before they enter the USA. Pre-clearance is available at Dublin and Shannon airports, but nowhere else in Europe. Decisions on the locations are taken by the US Department of Homeland Security.