Truss overrides Kwarteng on number of UK investment zones

Liz Truss has overruled her chancellor, insisting the UK should not limit the number of applications for low-tax investment zones, despite internal Treasury concerns the projects could cost billions of pounds in lost taxes.

The flagship policy, designed to boost UK investment, is a key element of Truss’ “growth spurt” but Whitehall insiders said it has raised serious concerns at the Treasury.

They added that ahead of September’s ‘mini’ budget, Kwasi Kwarteng twice tried to persuade Truss to limit the number of zones to 40 – with Treasury officials warning the prime minister that the zones face a tax liability of ‘up to £12bn” a year – but was overruled by Downing Street.

As a result, the government this week invited all upper local authorities and mayoral offices in England to apply to host investment zone if you wanted one.

“The IZs have created enormous potential liability and the Treasury Department has tried to impose a cap on the number,” a government insider said. “Kwasi [Kwarteng] tried twice but was overruled and gave in to Liz who wants them everywhere – 100 or even 200.”

Downing Street denied the Chancellor had been overruled but said a decision had been made that the number of investment zones would be determined once everyone had a chance to table an application.

The Treasury declined to comment on internal discussions ahead of the budget but said it didn’t think the policy would cost £12billion. “This figure does not reflect the expected cost of this policy,” it said.

Kwarteng has told colleagues that there can be “no blank checks” for the project, insisting there is a limit to the number of zones and that “the bar must be set high for inclusion in the program,” effectively limiting numbers according to Treasury Department insiders.

In a statement, the department said: “We were aware that there will be a high bar for investment zones based on greatest impact on growth, housing supply, value for money and support for the redevelopment of underdeveloped areas.”

The huge amount of potential liability from the zones depends on forthcoming calculations from the independent financial watchdog Office for Budget Responsibility, which is preparing a new forecast for the UK economy ahead of November 23.

In her speech Speaking at the Conservative Party Conference in Birmingham on Wednesday, Truss said she wanted the zones to be in all four nations and promised they would “help businesses achieve their ambitions” by cutting taxes and cutting red tape would simplify.

In July, she suggested they would be driven by local demand. “We can no longer allow Whitehall to pick the winners and losers; like we’ve seen with the current Freeport model,” she said.

However, Kwarteng is now wrestling with how the totals should add up, having previously announced plans to implement £45bn of unfunded tax cuts requested by Truss. The investment zone scheme will increase the budget gap.

Companies establishing themselves within the zones receive a 100 percent tax reduction on investments in new plant and machinery in the first year; 100 per cent reduction in business tax rates for new premises and a leave of absence on employer’s National Insurance Contributions (NICs) for workers earning less than £50,270 a year.

Jonathan Portes, Professor of Economics at King’s College London, said that with around one in six workers or 5 million people in the UK changing jobs each year, simply offering a NICs holiday to newcomers poses a huge liability risk.

“What the Treasury Department’s estimate says is that if you don’t target those tax breaks, you could end up paying huge sums to subsidize the economic activity that’s going on anyway,” he added.

First, the government announced that 38 local authorities had expressed an interest in the zones. Councils have now been asked to submit formal expressions of interest by October 14.

https://www.ft.com/content/a3aea4e6-0b29-4783-a024-ad3629a3bc3e Truss overrides Kwarteng on number of UK investment zones

Adam Bradshaw

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