The National Wealth Fund: improving the assessment of regional and local economic growth

The Fund needed a better way to understand the wider economic consequences of individual investments. Direct effects can be relatively straightforward to identify: an investment may create jobs, increase capacity or raise output at a particular business. But understanding what happens next is much harder. Investment can increase demand through supply chains, improve the productivity and competitiveness of customers, change demand for workers and skills, and generate additional economic activity elsewhere. At the same time, some apparent gains may reflect displacement of workers or economic activity from other businesses and places rather than genuinely additional growth.

Traditional approaches typically estimate indirect impacts using input-output multipliers before applying standard assumptions. These approaches can miss how a particular investment interacts with the characteristics of the sector, its supply chains, and the local labour market.

Cambridge Econometrics was commissioned to develop a more sophisticated and practical approach: a model that could estimate these wider effects while requiring only the relatively limited information available to National Wealth Fund analysts during the deal-assessment process.

Approach

We developed an interactive Excel-based Local and Regional Impact Model built around an explicit theory of how an investment propagates through the economy.

The model follows the economic effects of an investment through three stages. First, it assesses what the investment does to the target business and sector, including changes in capacity, output, productivity and employment. Second, it considers how these changes affect workers, investors, customers and suppliers, including the potential for productivity improvements to pass downstream through lower costs or improved inputs. Finally, it estimates how these effects ripple through the wider local, regional and UK economy and labour market.

At the heart of the model is a multi-region input-output framework, combined with detailed labour-market and distributional analysis. Rather than applying the same assumptions to every investment, the model incorporates sector- and place-specific evidence and considers effects that can otherwise remain hidden, including supply-chain impacts, leakage, displacement and substitution.

The tool distinguishes between two fundamentally different stages of an investment:

• the investment phase, including the economic activity associated with construction, equipment and other expenditure; and
• the operational phase, capturing how the resulting asset or business activity affects output, productivity, employment and supply chains over its lifetime.

Crucially, the model is dynamic. It produces trajectories over the lifetime of an investment rather than a single static multiplier, allowing for changes in productivity and resource efficiency and examining how the resulting economic gains are distributed between wages, profits and other stakeholders.

Impacts can be assessed at three spatial scales: the local investment area, the wider region and the UK as a whole. Outputs cover economic indicators including output, GVA, trade, employment and labour productivity alongside labour-market outcomes such as wages, unemployment, graduate underemployment, poverty and inequality.

We designed the model to be both sophisticated and usable. An analyst can assess an investment using a small number of deal-specific inputs, with sector modules supplying appropriate assumptions where detailed information is unavailable. The initial development included dedicated modules for areas including the EV supply chain and ports, while the modular structure allows the National Wealth Fund to extend the tool to additional sectors as its investment portfolio develops.

What was different about our approach

The model was designed to move beyond the question “how large is the multiplier?” towards a more economically meaningful question: “what does this particular investment change, how do those changes move through the economy, and how much of the resulting activity is genuinely additional?”

This matters particularly for strategic investments. An intervention that increases productive capacity or improves the efficiency of a strategically important sector can affect customers and suppliers very differently from an equivalent amount of generic expenditure. Similarly, labour-market impacts depend on whether new demand draws previously underused workers into employment or simply displaces workers from existing employers.

By modelling these mechanisms explicitly, the approach provides a more nuanced account of local economic growth than applying standard assumptions uniformly across very different investments.

Impact

The model has moved from a research exercise into a practical part of the National Wealth Fund’s impact-assessment infrastructure.

During development, National Wealth Fund analysts tested the model using individual deals and worked with Cambridge Econometrics to ensure the outputs were credible and the model could operate using the information actually available during investment assessment.

The tool has subsequently been integrated into the Fund’s impact-assessment process and is being used extensively.

Key findings

The principal finding from the work was methodological rather than a single aggregate impact estimate: the wider economic value of an investment cannot be understood reliably from its direct effects or generic multipliers alone.

Three lessons were central to the model’s development:

1. Investment impacts depend on what the investment changes. Additional capacity, productivity improvements and other forms of investment generate different operational effects and therefore need different transmission mechanisms.
2. Where impacts occur matters as much as their aggregate size. Supply-chain leakage, labour availability and displacement mean that an increase in activity around an investment does not translate one-for-one into additional local, regional or national growth.
3. Strategic investments can produce important effects beyond the initially funded business. Changes in capacity, productivity, costs and product quality can propagate upstream through suppliers and downstream through customers, affecting economic performance well beyond the direct recipient.

The result is therefore not simply a tool for calculating larger sets of multipliers. It is a structured framework for understanding the mechanisms through which individual investments create, redistribute or displace economic activity.

Outcomes

Cambridge Econometrics delivered a reusable modelling capability rather than a one-off impact assessment.

The National Wealth Fund can apply the model to successive investments, update its underlying local and regional data, and expand its sector-specific modules as its portfolio develops. This allows a consistent analytical framework to be applied across different deals while retaining the flexibility needed to reflect the characteristics of individual investments and sectors.

Most importantly, the model is now embedded within the Fund’s approach to measuring regional and local economic growth. It provides a stronger evidence base for understanding how individual investments contribute to wider economic objectives and for communicating those impacts internally, externally and to government.

The project demonstrates how bespoke economic modelling can bridge the gap between rigorous economic analysis and practical investment decision-making, giving analysts a tool sophisticated enough to capture how economies actually respond to investment but practical enough to use within a real-world deal-assessment process.