Innovation policy needs imagination – not constant repackaging of the enterprise zone dream
One government after another has stuck with this economic orthodoxy, even as the labels change. It’s time for a new approach
Any notion of growth in every postcode cannot succeed without a more innovative economy.
While much attention is focused on the diffusion of ideas from universities into business, and the adoption of those ideas by businesses, there is less attention to how government tax subsidies enable a more innovative economy to succeed. This is damaging to the overall innovation ecosystem as current incentives are having mixed success – and there is little political attention to how they could work differently.
One of the few areas of political consensus between Labour and Conservative governments has been an unhappy equilibrium on market intervention. Scarred by accusations of “picking winners” through the 1970s, a series of Labour governments has appeared politically unable to directly intervene in the market to shape a more innovative economy to the extent they might otherwise have wished to. Conservative governments, aside from a few examples of recent history, have not believed in significant market intervention. One party does not believe intervention is appropriate and another believes it cannot do so.
One last push
The result is that every government from 1980 onwards has refused to ditch the idea that just one more tax relief, business incentive, or other form of corporate welfare will attract the innovative firms that will create the highly skilled jobs the country desperately needs. Ever since Margaret Thatcher launched enterprise zones – sites with tax relief aimed at attracting innovative high paying firms – governments have continually repackaged them, resold them, or otherwise rejuvenated them.
The existence of enterprise zones is not because they work (they rarely ever deliver what they promise) but because Conservative governments ideologically believe in them while Labour governments confuse consistency with fiscal rules with acquiescence to a set of economic reforms whose impact is either minimal or impossible to prove.
The irony of enterprise zones is that governments are not just picking sectors, as in the Industrial Strategy, but rather backing specific firms through targeted tax relief. It is the ultimate example of picking winners. It is not place-specific, not sufficiently targeted, nor really about sectoral growth. They are about tax reliefs to a handful of firms.
Enterprise zones, with all of their tax incentives, were never Labour’s plan – but in government the party has again and again retreated behind the idea that the only thing standing between the UK and a more innovative economy is spending billions of pounds on reducing stamp duty and corporation tax. It is not, I would argue, a sincerely held belief, but rather borne out of political expediency as a signal that ministers are serious, or that they understand business, or can otherwise do grown-up politics.
If Andy Burnham’s administration refuses to break with the orthodoxy of place-based investment, then it is doomed to walk into the same trap as his predecessors. Money spent encouraging business followed by business doing less than was promised, all topped off by further handwringing about how hard it is to build a more innovative economy.
Success is too hard to measure
The Labour Party has a significant claim to having built the bedrock of scientific organisation as we know it. It was Labour’s Arthur Henderson who helped establish the Department of Scientific and Industrial Research, it was Harold Wilson's “white heat of technology” speech that launched the Ministry of Technology, and it was a Labour government which oversaw the creation of four of the research councils and Research Councils UK, the forerunner of UKRI.
The Conservatives undoubtedly have a significant list of achievements, particularly in increasing research budgets through the 2010s and in the creation of UKRI. However, their efforts have often focussed on supply-side reforms to get the economy going.
It was a Margaret Thatcher government that introduced enterprise zones, a kind of low-tax investment site design to support the revitalisation of brown-field sites. It was a David Cameron administration that expanded their coverage in 2011, it was Rishi Sunak who championed freeports (a low tax no-tariff investment site), and it was again a Conservative government that in 2022 introduced investment zones, again relying on tax reliefs and infrastructure to drive new innovation-focused clusters.
The logic is the same every time, dressed up in different initiatives. If the government can make it appealing to businesses through making it exceptionally cheap to set up, these businesses will go to places that need investment. Through the magic of the market the government can conjure up investment, jobs, skills, and a better economy. Even better, this is always premised on the idea that it won’t only create jobs, but better jobs. These zones will not only create economic activity but new economic activity.
It doesn’t matter that this activity is sometimes good for some things, like rejuvenating brownfield sites, as it is almost impossible to measure; the sunlit uplands of economic growth blind policymakers from the harsh reality of trying to measure GVA over small geographies and smaller supply chains.
Big claims
The claims that have been made about these schemes have been enormous. The Liverpool City Region alone claimed that the freeport would create 14,000 “highly skilled jobs” and deliver £850m of GVA. There are currently 365,000 people in the Liverpool City Region with what are classed as “highly skilled jobs” with a total economy worth £43bn, while the freeport was created with an initial £25m of government seed funding.
Pause for even a second to consider how patently absurd this claim is. This would mean adding nearly four per cent of new skilled jobs and growing the total economy by close to two per cent for an extremely small amount of investment.
The government’s latest estimates suggest that all of the freeports combined will create 60,000 new jobs (somewhat of a downgrade on the 200,000 the Conservative government promised in 2021, many of which were supposed to be in the “high-innovation, low-carbon technologies of the future). At the point Rachel Reeves decided to back the continued operation of freeports they had in fact created only 6,000 jobs.
There is just no credible evidence that any of these schemes are a good use of public money beyond a limited set of goals. Even the centre-right Centre for Policy Studies at the peak of freeport hype could barely muster any cogent defence beyond that they were a good thing because it was a Brexit bonus to have new powers – entirely ignoring the fact that the UK in fact had freeports up until 2012, when David Cameron did not renew their licenses.
The least credible claims made by advocates of these proposals is that they will create high value jobs in the innovation economy. Thatcher’s enterprise zones worked to reform some brownfield sites but job creation was low and public investment enjoyed a poor return. Cameron’s enterprise zones promised to “spark business growth around the country,” but in fact created around one third as many jobs as predicted and displaced some jobs in some parts of the country. The rehashed investment zones of 2022 have very little evaluation.
As a 2023 the Business and Trade Committee found in 2023:
“Compared with the available information on costs, even less information is in the public domain on the benefits of freeports and investment zones. Freeports, academics and trade associations agreed that creating new employment in these regions was the main policy objective. Freeports asserted that such new employment would be “good quality jobs, [with] good training and prospects”. Each individual freeport and investment zone has estimated the potential additional employment they will stimulate in their business case to Government. The methodology and evidence underpinning those estimates have not been published. The previous example of enterprise zones indicated that the Government’s estimates of employment created by area-based or zonal policies can be optimistic.”
Again and again, these schemes have failed to create the innovative high-quality jobs they promise, and the evidence that they are bringing in investment, or spurring new clusters, or revitalising new industry, is mixed at best. Even where there has been evaluation, it rarely considers the cost of deferred tax that may otherwise have been claimed had the reliefs not existed in the first place.
Old wine new bottle
In 2025 the Labour government launched the Industrial Strategy Zone Action Plan, bringing together investment zones and freeports under single governance models design to overcome “siloed delivery and support mechanisms.”
Despite evidence that claims are consistently overmade and with little proof that growth isn’t either displacement, a result of existing business intention (deadweight), an upturn in the wider economy, or otherwise would have happened, this is once again a government promising that coordinating initiatives will somehow now spur new kinds of economic growth to the tune of £50bn. The central premise isn’t that the ideas don’t work but that the ideas would work if only they were more joined up.
It is a myopic, short-term, and thoroughly nihilistic view of what Britain’s innovation system can be and what the state’s role in spurring it is.
The single uniting ideology between Labour and Conservative governments is that in place of well-known evidence about displacement, and the limits of clusters forming naturally, and deadweight, somehow continuing to do the same thing will work. It has not worked and it will not work in its current state.
Money for old rope
The test cannot be whether these zones and freeports have done something. Doing something is the lowest possible bar through which to measure any kind of public investment. The only reasonable measurement is whether the same amount of money could have been spent on doing literally anything else.
The government is nervous about scrapping these initiatives as it will create further policy churn, and because where there has been some investment this could cause capital flight. It seems now it is therefore going to continue to plough taxpayer money into the industrial strategy zone plan. The only reasonable defence is that it is a relatively small amount of public funding – so if it generates something this is better than nothing.
It is not that the government lacks economic ambition in building a more innovative economy (there is after all a record R&D settlement) but that it lacks political courage to say that continually trying to stimulate demand for investment in this way has not worked. The innovation economy is predicated on the success of business, but that success is made possible with the right level of inputs matched by a coterminous level of economic output. For all the fanfare of these reforms, they create too few jobs and stimulate too little new activity.
Back in 2024 the current government committed to freeports in their belief that they would be effective in “promoting new investment in sectors that are vital to the national Industrial Strategy, creating good, highly skilled jobs in areas which have underperformed economically in the past.”
This should form the basis for the urgent and continued evaluation of innovation zones. Do they create new investment, is this investment that would otherwise not have happened, do they encourage investment in sectors that align to government priorities, do they create highly skilled jobs, and do they place a role in the regeneration of underperforming areas? The second step should then be to evaluate whether the costs of deferred taxes, displacement, and reallocation of capital to these zones, is outweighed by any new economic benefits.
If it cannot be illustrated that the industrial strategy zones do not meet at least some of these aims, then it is surely time to put this four-decade long experiment to bed. It does not mean having no incentives but distributing them differently. There is a world of reforming R&D tax credits, giving more powers to mayors, new grants, competitions, seed fundings, or anything else that the same quantum of funding could be used for.
The aim cannot be to continue to try the same things and hope for the best. Imagination is needed, especially if the government is going to achieve its ambition of building a more innovative economy, with growth that actually takes place in every postcode.