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July 26, 2012

Sydney’s Olympic party cost us $2.2 billion so what are the chances of London reaping rewards?

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By John Madden, Monash University and James Giesecke, Monash University

The London Olympic Games are about to begin. There will be much fierce competition as contestants “go for gold”. That London is the host city for the 2012 Summer Olympics involved another sort of competition; one stretching back to 1997 when the British Olympic Association first began working on the bid, which would eight years later make London the first city to be awarded a third Olympics.

But is the Olympics host city really a “winner”? Olympic Games are usually highly subsidised affairs, with taxpayers picking up a bill amounting to billion of dollars. Given the large costs of staging the Olympics, politicians and other proponents of hosting the event tend to latch on to economic assessments declaring large economic benefits from hosting the Games. But do the Olympics actually bring such economic benefits?

In order to examine this question, we undertook an economic assessment of the Olympic Games hosted by Sydney in 2000. A number of studies during the 1990s estimated that the Sydney Olympics would bring substantial increases in Australian consumption, with a top estimate of $5.6 billion.

 Did the estimates made before the Games turn out to be realistic? Many factors influenced what happened to the Australian economy besides the Olympics, so we used an economic model developed by our Centre to isolate the economic effects of hosting the Games. We simulated the behaviour of industries, households and government resulting from hosting the Games for each of eight Australian regions over the years from 1997 to 2005. Our results revealed that rather than producing an economic benefit the Sydney Games actually reduced Australian household consumption by $2.1 billion.

What explains the difference between the optimistic estimate back in the 1990s and what we estimate actually happened? Some of the difference simply comes from improvements in economic modelling. For instance, we were careful to ensure that public services, such as increased security, were fully treated as an economic cost. Much of the difference comes from the advantage of hindsight. In the pre-Games modelling, it was assumed that Games expenditure would stimulate the labour market and lower unemployment. The modelling also incorporated tourism forecasts which predicted that the Games, by showcasing Sydney, would leave a legacy of a large boost in overseas tourism to Australia. As it turned out, the Games occurred during a period of low unemployment in Australia, meaning that Olympics activities – like venue construction, event organisation and sports tourism – merely acted to displace employment in other economic activities, instead of boosting employment.

Furthermore, the modelling we undertook after the Games revealed no evidence that the Sydney Games had left a tourism legacy. Research by us and others indicates that hosting the Games in well-known tourism destinations does not have a strong advertising effect. With the Sydney Olympics failing to increase employment or leave a large tourism legacy, there are few other avenues for the Games to generate a net economic benefit.

The financial contribution made by taxpayers to the Sydney Games was in the vicinity of $2.2 billion, or approximately $3.0 billion in today’s dollars. This figure represents approximately $420 per Australian household. It is instructive to observe that our estimate of the real consumption loss from the Sydney Games of $2.1 billion is very close to the total taxpayer contribution to the Games of $2.2 billion. This is no accident. Without unemployed resources or a tourism legacy, there is little remaining in the economic modelling that can lift the size of the net economic benefit above the size of the Games’ accounting loss. The Games’ losses, which ultimately must be covered by taxpayers, can thus be viewed as a natural floor or starting point for the calculation of the net economic benefits of any Games.

This allows us to speculate on the lower bounds of the possible economic benefits of the London Games. When London bid for the 2012 Games in late 2004, the cost to the UK taxpayer was estimated at £3.4 billion. By 2008, this figure had reached £9.3 billion. Four months out from the Games, the UK’s Public Accounts Committee was warning that the taxpayer contribution to the Games was likely to be in the vicinity of £11 billion. This represents almost £420 (about $A640) per UK household.

This establishes perhaps a worst-case scenario for the costs of the London Games. There are a number of plausible reasons for believing that the economic costs will be lower than this. Firstly, the public costs include almost £1.7 billion for regenerating the Lower Lea Valley in east London. Secondly, unlike Australia in the year 2000, the UK currently finds itself in the midst of a recession. Fortuitously, the London Games are at a time when they might bring a useful stimulus to the UK economy that partly offsets their economic costs. Of course, it might be argued that in a time when public expenditures are being constrained in efforts to counter the UK’s rising debt, some of the Games expenditure could be seen as crowding-out expenditure on more socially useful items, such as education and health. Nevertheless, there are reasons to believe that the net economic costs of the Games might be considerably lower than £420 per household. It also must be recognised that the hosting of the Games bring other benefits, such as feelings of national and sporting pride, to the citizens of the host country. One study of the London Games estimated these benefits at about £75 per household.

It would seem that while the London Games will bring much pleasure to many people, it is unlikely that this will come without a sizeable price tag.

James Giesecke and John Madden received funding from the Australian Research Council.

John Madden does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

The Conversation

This article was originally published at The Conversation.
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