1. Microsimulation at HM Treasury: methods and challenges David Roe and Doug Rendle 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
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 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