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Blog // 02/03/2017

Protecting the golden egg in uncertain times

Special economic zone finance sector

It is fair to say that the economic outlook for the UK for the next few years is at best uncertain. With new trade agreements to be proposed and others re-negotiated with the major powers and developing economies, maintaining and fostering future growth will be a growing priority.

As the UK continues its journey towards an exit from the European Union, this uncertainty could have a detrimental impact on economic activity. In the months since ‘Brexit’ inflation has picked up due to the weaker pound. This now appears to be feeding its way into consumer spending (which makes up two-thirds of the economy) per the January retail figures, all of which points to lower future economic activity.

Why don’t we all just give up?

If the period since Brexit has proved anything, it is the resilience of the UK economy. Most credible economists were predicting a recession for this period with the Bank of England (BOE) going as far as to make further interest rate cuts in a bid to avert the forecast economic apocalypse.

What actually transpired was the UK growing faster in the latter part of 2016 than in the period before the referendum, which made the UK the fastest growing G7 country for 2016!

On that note of positivity, it would be important for the country not to rest on its laurels and continue looking for ways to grow. One such option would be to set up special economic zones around the industries in which the UK has a comparative advantage.


What is a special economic zone?

Special economic zone for the UK finance sectorA special economic zone is an area in which business and trade laws are different from the rest of the country. It can also be tailored so that it is targeted at specific industries rather than geographical areas of activity. Its aims include to increase trade, investment, and job creation. It can also be used to reduce the administrative burden on companies by cutting ‘red-tape’. To encourage businesses to set up in the special economic zone, ‘friendly’ financial policies are introduced usually around taxation, investment, trading, customs, labour regulations. Additionally, companies may be offered tax holidays, where upon establishing in a zone they are granted a period of lower taxation.

It is well publicised that the services industry contributes nearly 80% of the UK’s GDP. Of this sector, financial services is ‘head-and-shoulders’ above the rest employing over 7% of the UK workforce. It produces about 12% of economic output, contributing £66bn in taxes and generating a trade surplus of £72bn.

Since 2007, it is estimated that around £100bn (more than any other) of direct foreign investments have been made in the financial sector. It would therefore make sense for the ‘golden egg’ of the economy to be shielded from the inevitable period of uncertainty which lies in wait.

How would a special economic zone work for the financial sector?

One proactive response could be to set up (or just the announcement of the intention to set up) a special economic zone for the financial services industry. The policies could be arranged in such a way that shows companies, that long term investment into the sector would be beneficial to their bottom line irrespective of the political climate. Goldman Sachs has recently announced plans to close the London operations of its hedge fund GSIP, and while they have said it is not in response to Brexit, other financial institutions are said to be reviewing their UK operations with moves to Dublin and Frankfurt being mooted as possible destinations.

The special economic zone therefore serves to commit financial service businesses long term to the country, which would serve to improve economic activity, reduce unemployment further and on the whole increase the total tax take for the country i.e. income taxes, VAT, national insurance etc.

Why aren’t special economic zones more prevalent?

Emerging markets - ChinaOne place where the use of special economic zones are particularly popular is China. While the growth of the country could be attributed to a number of factors, special economic zones would undoubtedly have contributed to an average annualised rate of 9.76% since 1989.

Detractors of special economic zones point to looser environmental policies that could arise from them which could be causing irreversible damage to the planet for generations to come. Poor working conditions – attributed to relaxed labour conditions and high up-front costs are also seen as negative attributes of implementing special economic zones.
 
Having said that, the positives of such a policy if managed carefully with the right legislative oversight would more than outweigh the costs, and would be a timely reminder to the global economy that Britain is indeed open for business.

For more information on the above, contact Arinze Nwobodo by phone on 0207 465 1934 or by email on anwobodo@menzies.co.uk.


Menzies Business Services Support

We advise lawyers, barristers, accountants, marketing, advertising and recruitment practices, as well as sector-dependent clients. We work closely to find solutions to industry issues, utilising our expertise in everything from business strategy and corporate finance, to audit and tax advice.
Find out more about our Business Services sector support.

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