The Money Trail: Measuring Your Impact on the Local Economy Using LM3

About this book

Money does not simply arrive in a community and stay there — it moves. It flows from hand to hand, from organisation to employer, from worker to shopkeeper, before eventually seeping out of the local economy and into the wider national or global system. The key question is not how much money enters a community, but how long it circulates before escaping.

This is precisely the problem that the New Economics Foundation (NEF) set out to address in The Money Trail: Measuring Your Impact on the Local Economy Using LM3, published in 2002. The book presents the Local Multiplier 3 (LM3) — a practical, accessible tool for measuring and improving the economic impact of spending decisions at a local level. At the heart of LM3 lies a deceptively simple metaphor: the leaky bucket.

Imagine a local economy as a bucket filled with water. Each time money is spent outside the local area — on supplies sourced from distant corporations, wages paid to commuters who shop elsewhere, or contracts awarded to non-local firms — value drains out through the holes. The goal of LM3 is not to plug every hole permanently, but to make the holes visible so that deliberate choices can slow the leakage and keep more economic value circulating locally for longer.

The methodology tracks spending across three successive rounds, which is why the tool carries the number 3 in its name. Round 1 captures the original income or investment entering an organisation or project — a hospital's annual budget, a regeneration grant, a local authority's procurement spend. Round 2 examines how that initial sum is subsequently spent by the direct recipients: wages paid to staff, contracts placed with suppliers, and services purchased.

Round 3 then follows those secondary flows one step further, asking how the individuals and businesses who received Round 2 income in turn spend that money — and, critically, how much of it stays within the defined geographic boundary. The LM3 score is calculated by summing all three rounds of local spending and dividing by the first round, yielding a ratio that reflects how deeply money circulates before leaving the defined area. What distinguishes LM3 from more conventional economic impact assessments is its accessibility.

Traditional input-output models and regional multiplier analyses require detailed sectoral data, econometric expertise, and considerable resources — tools largely inaccessible to small community organisations or rural councils. LM3 by contrast can be applied through a combination of financial records and straightforward staff and supplier surveys. The data requirements are modest, the calculation is transparent, and the result is a single number that communicates local economic performance in terms that non-specialists can grasp and act upon.

The practical value of this simplicity was demonstrated in a landmark application across the 26 local authorities of North East England, which collectively managed over three billion pounds of annual expenditure with approximately 140,000 suppliers. The exercise revealed a striking finding: every pound spent with a local supplier generated approximately £1.76 of value within the regional economy, while the same pound directed to a non-local supplier returned only 36 pence. This evidence was instrumental in shifting procurement policy debates and ultimately influenced national frameworks such as the Social Value Act, which requires public bodies to consider social, environmental, and economic wellbeing in contracting decisions.

The book does not restrict itself to large public institutions. It addresses a wide range of organisations — charities, social enterprises, housing associations, health services, and private businesses — demonstrating how each can adapt the methodology to their own scale and context. For community development practitioners in particular, LM3 offers a way to move beyond vague assertions about supporting local economies and produce credible, comparable evidence of impact.

It enables them to articulate to funders, policymakers, and residents exactly what difference their procurement choices make to the surrounding community. NEF also uses the book to argue a broader case about the nature of economic development itself. Mainstream development strategies have long prioritised attracting inward investment — persuading multinational firms to open facilities, lobbying for infrastructure spending from central government, competing for flagship cultural or sporting events.

LM3 reframes the argument: the fastest and cheapest route to local prosperity may not be attracting new money but retaining the money already flowing through an economy. Plugging the leaky bucket is less glamorous than filling it anew, but often far more effective. For professionals working in green building and sustainable construction, the relevance of LM3 extends beyond abstract economic theory.

Local procurement of materials, selection of regional contractors, preference for locally sourced timber or stone, investment in local workforce training — all of these decisions carry measurable economic multiplier effects that LM3 can quantify. A sustainable building project that commissions local tradespeople and sources regional materials generates measurably higher local economic returns than an equivalent project managed by distant contractors — making LM3 a tool for justifying local supply chains on economic grounds as well as environmental ones. Published at a moment when localisation debates were gaining momentum in both academic and policy circles, The Money Trail remains a foundational text in community economic development.

Its contribution is not a complex theoretical framework but a practical measuring instrument — one that translates abstract ideas about economic circulation into actionable evidence. For any organisation wishing to understand and strengthen its role in the local economy, LM3 provides both the lens and the language to begin that conversation.