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The evolution of local multipliers

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Our latest policy toolkit considers the evidence for and size of local multiplier effects. The theory of public spending multipliers dates back to Keynes and the 1930s Great Depression. Keynes advanced a theory that increased government spending may not simply be a net drain on the taxpayer but may generate positive benefits for the UK economy. He argued that government expenditure may create employment (which puts wages into the pockets of workers) which are then spent supporting other workers. Government expenditure may also create demand for goods and services (which supports businesses to purchase further goods and services through the supply chain). Depending on the scale of the effect, that initial public expenditure may more than pay for itself in terms of the economic activity it generates.

This concept has been widely applied in the local economic development community for many years to support business cases or funding applications and is applied most commonly to job creation or GVA estimates. Most readers are likely to be familiar with multipliers and will probably have applied them to their own business cases or funding bids.

However, there has been increasing scepticism at the way in which they are applied, and the magnitude of benefits claimed. Some suggest any benefits may be offset by increases in prices and wages. In recent years multipliers have fallen out of favour in central government appraisal guidance. The Green Book, which is the central point of government guidance on appraisal and evaluation, no longer recommends that appraisals applying multiplier assumptions are used at national level. It asserts that ‘they are likely to have limited additionality and the effects are already generally accounted for at macro level’. Further, it’s hard to distinguish differences between multipliers arising from different programmes or projects at UK level.

If multiplier effects are primarily about the spatial distribution of jobs and expenditure, rather than the total value, this will still matter a lot to local policymakers, and to national policymakers who are interested in rebalancing economic activity towards less successful areas. And, indeed, the Green Book notes that labour market and supply chain effects may be used to demonstrate a case at a local level with ‘sound, objective evidence’; after accounting for deadweight, displacement, and substitution; and when those local impacts are presented alongside national level estimates which do not include multipliers.

So, what did we find?

We took a step back, looking at estimates that are not derived from input-output tables but are based on ex-post observation of what actually happened to job creation in a local context. In summary, we do find evidence to support the existence of local level multipliers.

One new job in a tradable sector may create between 0.4 and 0.9 additional jobs. Skilled jobs or those in high-tech industries may have much larger multipliers – between 1.9 and 2.5. Public sector employment appears to have much lower multiplier effects on private sector employment: around 0.25 with potential for high levels of crowding out in manufacturing jobs particularly.

As a practitioner, I’m interested to see that there is evidence to support the existence of the multiplier effect. For general job creation they may be lower than we have previously assumed Homes England Additionality Guidance gives ‘ready reckoner’ values ranging from 1.05 to 1.7) but for job creation in a few high tech sectors, we may have been underestimating. The scepticism we have seen in recent years may not have been fully justified – at least if we are interested in local effects. Of course, this demonstrates a fundamental tension in the Green Book guidance. If the new jobs that sparked the multiplier effect resulted from displacement – i.e. came from elsewhere in the UK – then those indirectly created jobs are the result of displacement too. No net additional activity at the UK level – the focus of the Green Book – may still be consistent with big local effects.

Take a look at the toolkit which gives more information on the evidence we found, and what local policymakers might want to consider as a result.