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Microsimulation at HM Treasury: methods and challenges David Roe and Doug Rendle [email protected] ESRC/BSPS UK Microsimulation: Bridging the gaps University of Sussex 11 September 2009. Outline. About us Main interests and methods Some experiences

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Microsimulation at HM Treasury: methods and challengesDavid Roe and Doug [email protected]/BSPS UK Microsimulation: Bridging the gapsUniversity of Sussex 11 September 2009

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  • About us

  • Main interests and methods

  • Some experiences

  • Current challenges

  • Possible future directions

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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

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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

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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

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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

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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

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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

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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?

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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)

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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

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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

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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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