This blog is the tenth in our series on the key concepts to consider when thinking about local economic growth policies. We’re using the series to test-drive a way of explaining concepts in economic growth that we hope to use in new training and resources. We are keen to hear from readers, particularly those in local and central government, about whether they find these useful and accessible, and if there are other topics you would like to see us cover.
This week we are covering additionality and deadweight, the twin concepts which are essential to assessing policy effectiveness.
What is additionality?
Additionality is the ‘value added’ of a policy intervention – the changes that happen over and above what would have happened had there been no intervention. For local economic policies, these are the additional jobs, output, productivity, or other economic outcomes which would not have happened without the intervention.
Additionality can happen in different ways, for example:
- Scale – more of something, such as greater employment because of more business for local SMEs;
- Timing – outcomes achieved earlier, such as productivity improvements brought forward by a grant;
- Coverage – outcomes benefitting additional groups, such as increased numbers of start-ups run by women or ethnic minorities being offered access to finance.
Additionality might come directly or indirectly from the policy intervention. An important example of indirect additionality is employment multiplier effects – for example new jobs in firms that supply goods and services to public sector employers that relocate to an area. We covered multipliers in our previous blog in this series.
What is deadweight?
Deadweight can be thought of as the other side of the coin to additionality. Deadweight is the loss that occurs when the intervention doesn’t change anything, or when some of the change would have happened anyway. The money spent to change nothing is deadweight.
Because spending on policy interventions pays for something – e.g. advice for firms or a subsidy for training – assessing deadweight means looking at policy objectives, not outputs. For example, a policy might seek to increase the amount of people employed in a local economy by exempting local businesses from business rates. After the policy is introduced, new businesses start-up, some businesses relocate to the area, and some existing businesses in the area expand. Is this additionality or deadweight? If none of this would happen without the business rate exemption, then this is additionality. However, if all these businesses already planned to make these changes, that’s deadweight. Businesses are setting up, relocating and expanding all the time – so the fact that some of this happens after the policy change doesn’t tell us much. We need to know what would have happened if the policy hadn’t been in place and compare this to the changes we see.
Deadweight is often expressed as a percentage of a policy’s cost. For the example above, a deadweight loss of 30% means 30% of the tax relief went to those businesses who would have started up, moved or expanded anyway.
For most policies, some deadweight is inevitable, so the objective is to minimise deadweight, not eliminate it.
Why do we need to think about additionality and deadweight?
Additionality and deadweight are crucial to understand because together they help determine policy effectiveness. Too little additionally and too much deadweight and a policy is ineffective and a poor use of public money. Cost effective policies generate lots of additionality and little deadweight.
What to consider when thinking about additionality and deadweight?
Assessing additionality and deadweight requires comparison to a ”do nothing” scenario.
This sounds simple in theory, but it can be very hard to measure additionality and deadweight in practice because the “do nothing” scenario will also involve change – just as we discussed in the tax relief example above. The difficulty of ascertaining what additional impact a policy has had above and beyond the changes that would have happened anyway is why impact evaluation is so important for understanding what works in local growth.
Impact evaluation uses comparison against a control – a group or area similar to the one receiving the intervention – to try to get an understanding of what would have happened without the intervention taking place. The outcomes for the group receiving the intervention can then be compared against the outcomes for the control to get a measure of the additionality arising from the policy.
Often, we might want a feeling for the amount of additionality or deadweight before we spend money on a policy. Existing (robust) impact evaluation evidence that assesses whether similar policies were effective compared to a control “do nothing” scenario can help. So too can applying economic theory and evidence – for example smaller firms tend to be more credit constrained than larger firms, so we might hope for more additionality and less deadweight when offering support for access to finance to SMEs as opposed to large multinationals. While it can be hard to get precise assessments of additionality and deadweight, combining existing evaluation with theory and evidence can often go a long way in avoiding spending large amounts of money to change very little.
Where can I learn more?
- Our previous blog looking at deadweight in relation to investment zones provides an example of how to think about and mitigate this issue in relation to a specific spatial policy.
- For an example of the importance of additionality in a specific policy setting, you can read this article explaining the concept as it relates to carbon offsetting programmes.
The next blog in our understanding key concepts in local economic growth series will be on displacement, crowding out and leakage. Sign up to our newsletter to get an update on our next blogs, briefings and events.