New tool to help understand local economic impacts of transport

In an economy with less funding, new tools are needed to help make the right decisions. We have developed a sub-regional economic impacts model called SpECTra – Spatial Economic Consequences of Transport.

The current economic climate, with sluggish growth and severely constrained public purses, demands a change in the way transport projects are prioritised. With less money to go around, local authorities and central government departments alike need to consider carefully how to extract the most value for money out of the resources they have.

Although less funding is available, the localism agenda and end of ring-fencing offer more freedom for local authorities to prioritise funds to meet their own objectives, rather than central government objectives.  Councils may care less about delivering time savings per se and national value for money and more about supporting growth in local employment, population, productivity and land values.

However, existing appraisal tools are too centrally focused to enable an understanding the impacts of transport improvements at a local or regional level.  The new funding environment requires new appraisal tools.

To help fill the gap we have developed a sub-regional economic impacts model, SpECTra. Technically, SpECTra falls within a class of economic models called Computable Generalised Equilibrium (CGE) model. It represents detailed interactions between economic sectors and households in a given area, as well as trade with other parts of the world. This type of model has strong foundations in how economists believe actors in the economy interact, where prices adjust to ensure supply and demand are in balance.

Based on standard outputs from transport appraisal and published official statistics, the model can help to understand how a scheme affects the economy ‘on the ground’. Time savings to business travellers, for instance, are converted into productivity gains to the firms employing them – giving a boost to their production. This in turn forces a reduction in prices, which ensures demand for their products keeps up. In order to increase production, the firms will increase the use of labour and other inputs, bidding up the price for those. Households are better off  because of a combination of higher real wages, lower prices and, ultimately, higher consumption. The final outcome is a composite of all these effects.

The new model will not find any ‘new’ net national benefits that DfT appraisal does not capture. But it will give us an understanding of the distribution of impacts across space and economic sectors (including households) as well as the manifestation of the benefits in terms of prices, wages, output, jobs and incomes.

With this model, we will be able to advise local and regional stakeholders about how individual projects deliver against their economic objectives as well as helping them demonstrate how schemes deliver economic growth and tax dividends at a local and national level.