1 BBVA Foundation workshop November 2004 MADRID Aino Salomäki DG: Economic and Financial Affairs European Commission MICROSIMULATION AS A TOOL FOR THE EVALUATION OF PUBLIC POLICIES

2 EX ANTE EVALUATION  DIFFERENT TYPES OF MODELS Static, dynamic Hypothetical, actual data on microunits Rules, behaviour  MS MODELS ARE POWERFOOL PLANNING TOOLS From micro calculations to aggregated results Flexibility (reg. varying objectives and instruments) Reveal policy dilemmas Promote rational and dispassionate debate Transparency, easy to understand  ANALYSE CHANGES AND REFORMS Details in isolation, interactions between and cumulative effects of different measures, total impacts

3 POLICY PERSPECTIVE  GOAL-ORIENTED ANALYSING TOOL  NATIONAL OBJECTIVES Social and distributional objectives Budgetary costs Labour market behaviour, incentives  EUROPEAN OBJECTIVES Focus on behavioural changes (more employment, more social cohesion) Evaluation of national policies against common objectives National policy changes in the light of EU objectives

4 NATIONAL TAX-BENEFIT MODELS  Variety of tax and benefit reforms  Illustrate the impacts on hypothetical cases  Total cost estimates  Distributional impacts  Change in indicators (incentives, poverty)  Behavioural impact  Ex-post assessment (isolation) of reform impacts

5 FINNISH APPLICATIONS  Income tax reforms 1987, 1988, 1989  Student’s allowance reform 1992  Capital income tax reform 1993  Value-added tax reform 1994  Work incentive reform  Annually: Tax expenditure calculations Evaluation of tax-benefit changes proposed in annual budgets Forecasting tax yields Impact of collective wage bargaining agreements  Positive externality: Expertise in tax-benefit systems

6 MULTI-NATIONAL MODELS: COMPARISON OF TAX-BENEFIT POLICIES ACROSS COUNTRIES  SEVEN COUNTRIES STUDIES - pioneering policy comparisons  OECD-EU TAX-BENEFIT MODEL - Lisbon strategy and structural indicators  EUROMOD - Invaluable source for the description and formalization of different national policies - Comparison of policies with actual income distribution data

7 PUBLICATIONS Employment benefits and social assistance in Seven European countries, the Netherlands 1995 Income benefits for early exit from the labour market in eight European countries, European Economy, Reports and studies, 1998:3 Remain or withdraw from the labour market? A comparative study on incentives, European Economy, Economic Papers No. 193, cpapers193_en.htm Indicators of unemployment and low-wage traps (marginal effective tax rates on labour), European Economy, Economic Papers No. 197, cpapers197_en.htm ; also on the OECD web-site