Jargon Buster
Economic impact
- What does this mean?
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The gross financial contribution made by an organisation or facility to the overall economy of its base area (for example, its town, region or nation).
One favoured model of this assesses such impact both in terms of money received by the organisation (incoming factors) and money paid out by the organisation (outgoing factors).
These incoming factors can include elements such as: money received to finance an organisation’s primary business (i.e. its core turnover); ticket sales; ancillary income; engagement fees for an organisation’s events presented elsewhere; subcontracting fees paid for using an organisation’s staff; and money paid to hire an organisation’s facilities.
Outgoing factors include: staff wages; payments to suppliers; income tax; National Insurance contributions; and Value Added Tax.
- How did we get this definition?
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This resource defines ‘economic impact’ as:
‘The gross financial contribution made by an organisation or facility to the overall economy of its base area (for example its town, region or nation).’
However, in a 2004 online paper, Thomas Hazinski (the managing director of the Chicago-based consultancy HVS Convention, Sports & Entertainment Facilities Consulting) suggests that:
‘Economic impact can be broadly defined as a change in wealth or utility of producers and consumers that results from investment in a project. In the language of micro-economics, this is called a change in consumer and producer surplus.’
Hence in practical terms, economic impact studies have become one of the tools available to arts organisations wishing to demonstrate and justify their relevance to the communities in which they are based by substantiating the economic contribution they make. (A comprehensive review of such approaches by Michelle Reeves [2002] is available to download at the Arts Council England website.)
- Related and similar definitions
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Essentially, measuring economic impact of an arts facility is a process concerned with carrying out a comprehensive and quantified audit of the economic activity that has been stimulated in an area as a consequence of that organisation's activity. For instance, in 2004 a study by Dominic Shellard of the University of Sheffield reports that:
'Three theatres undertook a detailed exercise looking at their local economic impact:
- Everyman Theatre, Gloucestershire - a medium-scale subsidised theatre - £4.1 million
- The Royal Centre, Nottingham - a large-scale commercial theatre - £9.4 million
- Derby Playhouse - a small-scale subsidised theatre - £3.9 million.'
Generally speaking, such economic activity can take the form of either spending or earning activity. It can also be direct or indirect.
Hence an initial list of items to include in a research instrument intended to audit economic impact would include the following:
Income (direct to organisation)
- ticket sales
- ancillary sales (e.g. merchandise and catering)
- event hires and fees
- room and equipment hires and fees
- public subsidy to the organisation
- donated and sponsorship income
Income (for other organisations indirectly engendered through the arts facility's existence)
- money spent elsewhere as part of a visit to an arts facility (e.g. as part of a shopping trip, on catering, on accommodations and on public transport or parking
Expenditure (directly by the organisation)
- purchases from suppliers
- staff wages, salaries and fees paid
- rent and wages
- income tax, VAT and National Insurance paid.
However, the Shellard report [2004] used two specific formulae to calculate economic impact. These (and the related commentary) are reproduced below.
Shellard Formula 1: Calculating the economic impact of … venue excluding turnover
(Additional visitor spend + salaries + subsistence allowances + goods and services expenditure) × a multiplier of 1.5
(The multiplier takes into account the knock-on effect in the local economy.)
Formula 2 can be used to define economic impact as the total economic activity generated by a theatre (in other words, what economic activity an area would lose in total if the theatre was not there). This second, more comprehensive formula, also includes turnover (income).
Shellard Formula 2: Calculating the economic impact of … venues including turnover
(Turnover + overseas earnings + additional visitor spend + salaries + subsistence allowances + goods and services expenditure) × a multiplier of 1.5
(The multiplier takes into account the knock-on effect in the local economy.)
Including turnover in this formula establishes the scale of the economic activity related to the theatre, and economic impact is viewed as inputs and outputs, rather than profit and loss. So, for example, turnover is made up of money from customers, funders and businesses, and produces a specific economic effect, while a theatre’s expenditure on wages and supplies produces a completely separate economic effect. It is not a strictly linear model.
This defines economic impact as what a theatre contributes to the local and national economy.
Once such an auditing scheme is in place, a key aim of an economic impact study will be to identify the Additional Visitor Spend [AVS]. This is the amount of monetary economic activity stimulated in the local economy as a whole. Thus the Shellard report found that:
‘The average AVS per audience member outside the West End is £7.77. In the West End it is £53.77.’
Once such figures are available, they can be turned into a ratio showing an organisation’s ‘multiplier effect’ – i.e. the number of pounds spent as AVS for every pound spent directly on the organisation being studied.
- When to use
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Such procedures can form a key part of any advocacy documents or reports to local authorities, RDAs and other public funders.