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Microsimulation at HM Treasury: methods and challenges David Roe and Doug Rendle ESRC/BSPS UK Microsimulation:

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Presentation on theme: "Microsimulation at HM Treasury: methods and challenges David Roe and Doug Rendle ESRC/BSPS UK Microsimulation:"— Presentation transcript:

1 Microsimulation at HM Treasury: methods and challenges David Roe and Doug Rendle {david.roe/doug.rendle}@hm-treasury.gov.uk ESRC/BSPS UK Microsimulation: Bridging the gaps University of Sussex 11 September 2009

2 Outline About us Main interests and methods Some experiences Current challenges Possible future directions

3 About us Work Incentives and Poverty Analysis team Budget, Tax and Welfare Directorate Microsimulation modelling of personal tax, tax credits and benefits Small unit working across the directorate Stephen Slater: General distributional analyses including Budget/Pre- Budget Report announcements Doug Rendle: Income distribution, poverty and work incentives David Roe: Model building projects

4 Key microsimulation outputs Analysis of tax-benefit reforms winners, losers, amounts etc; by family type, household income decile includes impact of packages of reforms, e.g. in a Budget, or since Government took office Analysis of the income distribution impact of reforms on e.g. child poverty summary measures of household income inequality Analysis of work incentives and labour supply distribution of e.g. in/out of work income ratios (incentives to participate) or effective marginal tax rates (incentives to progress) labour supply responses to reforms

5 Methods: tax-benefit modelling Intra Government Tax Benefit Model (IGOTM) users in HM Treasury, HM Revenue & Customs, Office for National Statistics, Communities and Local Government, Scottish Executive Classic household tax-benefit microsimulation model see also PSM, TAXBEN, EUROMOD etc. Partial benefit coverage e.g. disability/incapacity benefits are reported not modelled Input data Expenditure & Food Survey or Family Resources Survey Static ‘no behaviour’ model labour supply and consumption decisions fixed

6 Methods: labour supply modelling ‘Employment transitions’ model Myck, M. & Reed, H. (2005), “A Dynamic Model of Labour Market Transitions and Work Incentives”, available at www.ifs.org.ukwww.ifs.org.uk labour market entry/exit conditional on in/out of work incomes and personal/family characteristics matching of data from Labour Force Survey (for transitions) and Family Resources Survey (for modelled incentives) participation effects only, likely in work wage/hours fixed no ‘feedback’ from changed behaviour to household incomes New model of hours worked under development

7 Experience: model maintenance Challenge of developing and maintaining ‘complex’ models: detailed tax-benefit rules and maintenance estimation of behavioural models 5-year period with ‘out-of-house’ model maintenance and development Some points to watch: became less critical model users ‘ready-to-use’ tools not always sufficiently flexible

8 Case study: financial support for children Background 2000: First in series of explicit Government target to reduce relative child poverty rates April 2003: tax credits reformed into single source of means-tested support for children Microsimulation contribution costs, impacts, and ranking of range of possible reforms to financial support trade-offs with work incentives uncertainty in modelling outcomes Issues strict focus on ‘changes’ assumptions, e.g. take-up

9 Case study: personal tax reforms Background Budget 2007 ‘personal tax package’: changes to income tax rates, aged allowances, NICs thresholds, and tax credit thresholds, rates and taper Microsimulation contribution highlighting complex patterns of distributional gains and losses compensating the losers e.g. see Treasury Committee, Budget Measures and Low-Income Households, 28 June Issues e.g. household, family or adult level analysis?

10 Current challenges: IGOTM IGOTM review 2009 audit against 2009-10 rules coverage of benefits code rationalisation model documentation Progress from scratch rewrite of income tax, indirect tax and IS/JSA etc. modules rationalisation and documentation of most remaining modules need review of measurement framework against DWP Households Below Average Income (HBAI)

11 Current challenges: poverty analysis Background Government legislating commitment for ‘eradication’ of child poverty by 2020 Issues consistency with key poverty source: HBAI horizon too long to base policy analysis on current population more ‘scenario’ modelling improved flexibility, e.g. on take-up assumptions

12 Current challenges: labour supply New labour supply model under development with Alan Duncan (Nottingham University) structural discrete model of hours worked observable + unobservable variation in leisure/income preferences probabilistic simulation Some issues assumptions, e.g. rational choices with perfect information estimation, e.g. functional form, choice states, fixed costs simulation, e.g. runtime

13 Possible future directions Longer-term modelling e.g. rise in women’s state pension age Distributional ‘forecasting’ e.g. winners/losers as growth, jobs, prices, interest rates evolve Behaviourally-adjusted microsimulation outputs e.g. ‘in-work’ poverty Intra household allocations e.g. which individuals really win/lose? Typically active research areas in academic/wider community and/or techniques well established


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