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
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About us
Main interests and methods
Some experiences
Current challenges
Possible future directions
About us
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Work Incentives and Poverty Analysis team
Budget, Tax and Welfare Directorate
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Microsimulation modelling of personal tax, tax credits
and benefits
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Small unit working across the directorate
• Stephen Slater: General distributional analyses including Budget/PreBudget Report announcements
• Doug Rendle: Income distribution, poverty and work incentives
• David Roe: Model building projects
Key microsimulation outputs
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Analysis of tax-benefit reforms
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Analysis of the income distribution
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Analysis of work incentives and labour supply
• 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
• impact of reforms on e.g. child poverty
• summary measures of household income inequality
• 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
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Intra Government Tax Benefit Model (IGOTM)
• users in HM Treasury, HM Revenue & Customs, Office for National
Statistics, Communities and Local Government, Scottish Executive
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Classic household tax-benefit microsimulation model
• see also PSM, TAXBEN, EUROMOD etc.
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Partial benefit coverage
• e.g. disability/incapacity benefits are reported not modelled
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Input data
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Expenditure & Food Survey or Family Resources Survey
Static ‘no behaviour’ model
• labour supply and consumption decisions fixed
Methods: labour supply modelling
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‘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
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New model of hours worked under development
Experience: model maintenance
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Challenge of developing and maintaining ‘complex’
models:
• detailed tax-benefit rules and maintenance
• estimation of behavioural models
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5-year period with ‘out-of-house’ model maintenance and
development
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Some points to watch:
• became less critical model users
• ‘ready-to-use’ tools not always sufficiently flexible
Case study: financial support for children
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Background
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Microsimulation contribution
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Issues
• 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
• costs, impacts, and ranking of range of possible reforms to financial
support
• trade-offs with work incentives
• uncertainty in modelling outcomes
• strict focus on ‘changes’
• assumptions, e.g. take-up
Case study: personal tax reforms
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Background
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Microsimulation contribution
• Budget 2007 ‘personal tax package’: changes to income tax rates, aged
allowances, NICs thresholds, and tax credit thresholds, rates and taper
• highlighting complex patterns of distributional gains and losses
• compensating the losers
e.g. see Treasury Committee, Budget Measures and Low-Income Households,
28 June
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Issues
• e.g. household, family or adult level analysis?
Current challenges: IGOTM
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IGOTM review 2009
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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
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Background
• Government legislating commitment for ‘eradication’ of child poverty
by 2020
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Issues
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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
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New labour supply model
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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
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Longer-term modelling
• e.g. rise in women’s state pension age
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Distributional ‘forecasting’
• e.g. winners/losers as growth, jobs, prices, interest rates evolve
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Behaviourally-adjusted microsimulation outputs
• e.g. ‘in-work’ poverty
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Intra household allocations
• e.g. which individuals really win/lose?
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Typically active research areas in academic/wider
community and/or techniques well established