Dynamic modelling

The biggest macro implication of the Budget was the chancellor’s decision to ease the squeeze on public spending, a mostly political move to neutralise Labour’s best attack line on the Conservative party — that it doesn’t care about ordinary people.

But there are of course some interesting micro policies, not least the announcement of a “Help to Buy ISA” targeting people saving to buy their first home. The diagram below outlines how the policy is supposed to work. Savers can deposit up to £200 per month into a Help to Buy ISA, which the government will match with 25p for every £1 up to the total government contribution of £3,000. In other words, savers can deposit up to £12,000 and earn a maximum “bonus” taking it up to £15,000. (This doesn’t take into account any possible interest earned on the amount saved.)

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The approach taken by the UK government to estimate the effects of the carbon budgets on economic growth uses the HMRC CGE (“computable general equilibrium”) model. (See the 2011 carbon plan, p.181). This model has proved controversial for its use in assessing tax cuts but its use in climate change policy also warrants scrutiny.

Here is how it works:

First, calculate how the economy would work under a few simplifying assumptions.

Suppose there is never any unemployment or idle capacity.

Suppose there is no risk or uncertainty about the future.

Imagine there is no financial system or monetary policy. Read more

Dynamic modelling sounds like something Cara Delivinge might do as she scatters hashtags across Instagram. But it is actually even more subversive and exciting than our Cara. If the advocates of this mathematical economic modelling technique get their way, then it could transform how public policy is assessed in Britain. In doing so, it could make arguing for tax cuts and a smaller state a lot easier.

Let’s look back to the Autumn Statement. In its response to the chancellor’s annual announcements, The Taxpayers’ Alliance highlighted three areas where it says there are “weaknesses in tax policy”. Predictably, one weakness is that taxes are too high. Another is that there are too many of them. But the third recommendation is more esoteric. The pressure group said that “dynamic modelling” should be used for “all fiscal policy changes announced by the government”.

What is so important about this?

One clue comes in the form of a paper released on Monday by the Treasury and HM Revenue & Customs into the coalition’s policies on fuel duty, the tax on refined petrol, diesel and other fuels.  Read more