Protecting the golden egg (the SEZ) in uncertain times

Mike Ayres

Mike Ayres – Senior Manager

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 continue to be a priority. 

With the UK officially out of the EU and under a year for the new trade agreements to be signed, sealed and delivered can everything be completed in time? 

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 once we voted for Brexit and though there has certainly been challenges over the last few years, now the withdrawal agreement is in place we are still not seeing the awful effects that many had predicted. 

The UK economy is a resilient beast and although we have all suffered through increasing prices due to the changes in the value of the pound, other measures continue to buoy expectations. 

On these notes of positivity, it would be important for the country not to rest on its laurels and to continue looking for ways to grow. One such option would be to set up Special Economic Zones (SEZ) around the industries in which the UK has a comparative advantage. 

What is a special economic zone?

origami question

A 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 firms are employing over 3.1% of the UK workforce, producing 6.9% of economic output, contributing £29bn in taxes and generating a trade surplus of £44bn

In 2017 it is estimated that around £385m of a total £1.3bn of direct foreign investments were 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.  

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?

One 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 around 10% 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. 

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.

Posted in Blog, Financial Services