Since 2010 the government has committed to increase the transparency and sophistication of its modelling of the effects of policies. As part of this, HMRC has been developing a Computable General Equilibrium (CGE) model, capable of modelling the dynamic macroeconomic effects.
The model has been peer reviewed by leading academics in the relevant field, who found that ‘The basic design of the HMRC model for the UK economy meets at large the key requirements for state-of-the-art applied tax policy analysis’.
In December 2013 HMRC published an Analysis of the dynamic effects of Corporation Tax, allowing (for the first time) the government to publish retrospective policy analysis of the dynamic effects of government policy, based primarily on the CGE model.
This report shows the results of applying the CGE model to the real terms fuel duty reductions announced since 2010. Modelling suggests that the tax reductions will increase GDP by between 0.3 per cent and 0.5 per cent in the long-term.
The modelling shows increased profits, wages and consumption all add to higher tax revenues. As a result, the cost of the policy falls by between 37 and 56 per cent in the long-term.