Insights
For policymakers thinking about local economic growth, it is natural to begin with data on current performance. This works well for many topics – GVA, productivity, skills, business base – but it works less well for public investment, in part because of limitations in the available data.
Public investment is spending to increase the capital stocks provided and maintained by government for societal benefit such as roads, rail, broadband, hospitals, and schools. The public sector also invests in intangible capital stocks such as software and R&D.
Whilst a range of data is available on public investment and public capital stocks, few datasets meet local needs. The main dataset on investment (Gross Fixed Capital Formation) does not provide a breakdown across public, business, and household investment. Whilst data on public investment is available (Public Expenditure Statistical Analyses), it is only available at the national and regional level, and other available datasets only cover part of the public sector. This makes it difficult to build a complete and accurate picture of public investment in a local area.
More importantly, even if the data was improved, it would not be sufficient to answer the key question facing local growth policymakers – will our proposed public investment project help grow the local economy?
Below we set out three areas to consider when developing public investment projects.
Be clear about what investment is trying to achieve
Public investment is made for a range of reasons. For example, investments into new hospitals (buildings, equipment, software, etc.) are primarily aimed at improving health and wellbeing, even if they may also have economic effects (for example, by helping people stay in work).
Local growth policymakers are focused on investment into public capital stocks that help grow local economies. Public investment can have an impact in three main ways.
- Investment can increase local output. For example, building a new road will create jobs in the local area.
- Investment can improve productivity of existing businesses. For example, investment in public R&D leads to new technologies that businesses can adopt or investment into a new college campus can increase the skills of workforce.
- Investment can change individual and business behaviour. For example, improved transport connections can result in individuals or businesses relocating to area – although these changes tend to be longer-term.
When considering a potential public investment, policymakers should be clear about what outcomes they are seeking to change and have a clear logic model about how the proposed investment will lead to change. This should draw on a wide range of evidence. It will also normally be important to demonstrate that there is a market failure to justify public investment.
Use evaluation evidence
Evaluation evidence can be a helpful resource when developing your logic model.
Evaluations look at the impacts of a project systematically, comparing treated areas to comparison areas to establish causality. For example, What Works Growth’s review of the evaluation evidence on rail investment found that the evidence of impact on employment, business numbers, and business starts is mixed – i.e. evaluations found that rail investments sometimes had an effect on these outcomes but not always, and even where they had an effect it was often small or dissipated over time. Policymakers should therefore be careful when proposing rail investments to achieve these outcomes.
What Works Growth has reviews of the evaluation evidence on range of local economic policy areas, with those on transport, broadband, area based initiatives, and sports and culture most relevant for public investment.
Consider wider economic effects
Economic systems are complex meaning any public investment is likely to have a range of wider economic impacts – positive and negative, intended and unintended. Working through these can help better understand what the overall impact of a public investment is likely to be.
One key consideration is whether public investment will influence business investment. For example, investment into improving the transport and digital connectivity of an industrial site could provide confidence to a business to invest in new buildings or machinery on that site (known as ‘crowding in’). Alternatively, if the public sector decided to build or improve commercial property, this may discourage businesses from investing in similar facilities (known as ‘crowding out’), potentially leading a high level of deadweight.
Another major consideration is who benefits from investment. Benefits and costs may fall unevenly across different groups in the population. For example, in the rail investment evidence review discussed earlier, many studies find rail has positive effect on residential property prices. This benefits property owners but will increase costs for renters. Understanding these distributional impacts can help identify where mitigations might be needed.
More positively, public investment projects may have multiplier effects, increasing the overall impact on the local economy. They may also help increase agglomeration.
Conclusion
Across the UK, all local areas already have significant public capital stock. As a result, investment typically leads to incremental, rather than transformational, changes. This can make the case for investment more difficult. Taking a systematic approach to understanding what the impact might be can help.
We discussed these issues in more detail at a recent webinar – watch the video here. More detail on investment is available in our new ‘how to’ guide on understanding local investment.
