What is the actual economic benefit of the Grand Prix?

After the unhappy experience of the cancelled Commonwealth Games, Victorian citizens might reasonably ask whether the annual Grand Prix represents a similarly unaffordable drain on the public purse. No need to worry about that, according to Big Four consulting firm Ernst & Young.

Although the government lost more than $100 million on the 2023 Grand Prix, Ernst & Young found an economic benefit to the state of $266 million. 

So, it seems, the state comes out more than $150 million ahead. Not so fast! The $100 million is a genuine cost to the public. By contrast, the figure of $266 million is the total value of economic activity generated by the Grand Prix, as estimated by Ernst & Young. That’s made up of $144 million in direct expenditure, and another $124 million in supposed flow-on effects, generated using the “input-output” analysis technique beloved of project boosters.

Ernst & Young notes that “this report has not undertaken a full cost-benefit analysis of the event”, and it is not hard to see why. A full cost-benefit analysis would drastically reduce the estimated direct benefits of the project and completely exclude the discredited notion of input-output multipliers.

The direct benefits estimate consists of total (gross) visitor spending on things like hotel accommodation. But this is a massive overestimate for two reasons. First, while lots of people come to Melbourne for the Grand Prix, lots of others stay away or go elsewhere. Smaller events are cancelled to avoid clashes. Some potential visitors don’t particularly want to interact with the noise and smoke, or with the spectators attracted by car races. Others are simply put off by the difficulty and expense of booking hotel rooms on a major sporting weekend.

But even if hotels fill more rooms, the net benefit to Victoria is much less than the total revenue. Providing a hotel room requires inputs of various kinds and additional labour, which must be paid for. While some workers might welcome an extra shift, the cost of working those hours is a real economic cost, even if the accountants at Ernst & Young choose to ignore it. The net benefit is the surplus over the cost of providing services, typically well under 40% of the associated revenue.

Even if we suppose, very generously, that 50% of the money spent by visitors is a net economic gain to hotels and hotel workers, the direct benefit of the Grand Prix would still fall well short of the public subsidy required to stage the event.

Now let’s look at the input-output multipliers. Ernst & Young states that it obtained its multipliers from another consulting firm, REMPLAN, which presumably derived them from Australian Bureau of Statistics (ABS) input-output tables (the calculation isn’t hard). But if they had been preparing the report last century, they could have got the numbers directly from ABS. It’s worth reading in full why that’s no longer possible.

The ABS frequently receives requests from users seeking updated input-output (I-O) multipliers. The ABS has not published I-O multipliers since the 1998-99 issue of our product Australian National Accounts: Input-Output Tables, and does not plan to compile and reissue this table. As such, the ABS is unable to support user requests for assistance with multipliers.

Production of multipliers was discontinued with the 2001-02 issue for several reasons. There was considerable debate in the user community as to their suitability for the purposes to which they were most commonly applied — that is, to produce measures of the size and impact of a particular project to support bids for industry assistance of various forms.

To put it less politely, the I-O multiplier technique is utterly discredited. It makes sense only in the context of a deep depression, with plenty of unemployed workers and idle capital. In a context of near-full employment like the present, it simply shows that an event like the Grand Prix diverts workers and resources from other activities.

Given the scale of the public expenditure involved, it’s noteworthy that the government didn’t commission a proper analysis using a computable general equilibrium model, which could have done by one or two Victorian Treasury economists in the space of a few months. But of course, the answer would not have been the one the government wanted to hear.

All of this is likely to make readers’ heads spin, as is probably the intent. So let’s try a simpler way of looking at the issue. Instead of staging a car race, the Victorian government could have offered free return airfares to Melbourne to interstate and international visitors on a first-come first-served basis. At $2,000 a pop for internationals, and $100 return interstate (the cheapest fares currently on offer), the government could have covered the 8,800 international visitors and 72,000 interstate visitors claimed by Ernst & Young — and still had change.

The freebies scheme could improve on the Grand Prix by offering return tickets incorporating a weeklong stay, rather than the three days typical of racegoers. A sufficiently creative consulting firm could have spun this idea into an economic bonanza for Victoria. In reality, of course, the idea is every bit as nonsensical as it looks — though not as nonsensical as the Grand Prix.

Finally, given all the recent controversy about the Big Four consulting firms, just suppose that the Victorian government had bitten the bullet and decided to let the Grand Prix go to Sydney, then commissioned a Big Four firm to do an economic analysis of the decision. How likely is that the resulting report would have shown a massive economic loss to the state? Or would the consultants have avoided the errors described above and correctly concluded that Victoria was well rid of this noisy white elephant?