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Microsimulation at HM Treasury: methods and challenges David Roe and Doug Rendle {david.roe - PowerPoint PPT Presentation


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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. Outline. About us Main interests and methods Some experiences

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Microsimulation at HM Treasury: methods and challengesDavid Roe and Doug Rendle{david.roe/doug.rendle}@hm-treasury.gov.ukESRC/BSPS UK Microsimulation: Bridging the gapsUniversity of Sussex 11 September 2009

outline
Outline
  • About us
  • Main interests and methods
  • Some experiences
  • Current challenges
  • Possible future directions
about us
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
key microsimulation outputs
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
methods tax benefit modelling
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
methods labour supply modelling
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.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
experience model maintenance
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
case study financial support for children
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
case study personal tax reforms
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?
current challenges igotm
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)
current challenges poverty analysis
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
current challenges labour supply
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
possible future directions
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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