Dynamic tax modelling: Two thirds of health and social care levy could be lost to slower growth

Ahead of Wednesday’s spring statement, the TaxPayers’ Alliance (TPA) have launched a dynamic tax model estimating the impact of the planned national insurance contributions (NIC) rise on growth, wages, and investment.

The model compared a ten-year baseline scenario to an altered scenario with a 1.25 percentage point change in three classes of NIC (reflecting the new health and social care levy). This found: 

  • GDP would decrease by 0.76 per cent, equivalent to £24 billion. 
  • Investment would decrease by 1.99 per cent, equivalent to £6 billion. 
  • Average weekly earnings would decrease by 0.76 per cent, equivalent to £5 per week.
  • 66 per cent of the tax rise, or £13 billion, would be lost through lower growth. 

The model assumes the NIC rise will be permanent. It does not apply NIC to working age pensioners, who will have to pay.  

SECTION 1: AGGREGATE TAX RATES

 

Scenario: Effect on respective aggregate tax rate

Tax category

2022-23

2023-24

2024-25

Income tax

0.99%

1.00%

0.98%

Capital gains tax

0.00%

0.00%

0.00%

Corporation tax

0.00%

0.00%

0.00%

Expenditure tax

0.00%

0.00%

0.00%

SECTION 2: COMPARISON BASELINE AND SIMULATED SCENARIOS

Baseline

GDP (£bn)

Investment (£bn)

Average Weekly Earnings (£)

2019

£2,255

£224

£540

2029

£3,219

£296

£718

Growth rate

3.62%

2.81%

2.90%

Simulated scenario

     

2019

£2,255

£224

£540

2029

£3,195

£290

£712

Growth rate

3.54%

2.60%

2.82%

Difference in levels after 10 years, relative to baseline, of

GDP (£bn)

Investment (£bn)

Average Weekly Earnings (£)

(NB change in long-term from measures introduced after 2022)

-£24

-£6

-£5

       

% change in levels after X years, relative to baseline, of

GDP (in %)

Investment (%)

Average Weekly Earnings (%)

(NB change in long-term from measures introduced after 2022)

-0.76%

-1.99%

-0.76%

       

Change in growth rates over 10 years

GDP (in %)

Investment (%)

Average Weekly Earnings (%)

 

-0.08%

-0.21%

-0.08%

Share of tax rise eventually lost through lost growth

     

£bn

£13

%

66%

 

The TaxPayers’ Alliance is calling on the chancellor to scrap or defer the NIC rise in his spring statement and avoid damaging Britain’s long term economic prospects.  



Dynamic Tax Modelling - Frequently Asked Questions 

 

What is it? 

The model predicts the dynamic impact of tax changes on the economy and wages. Most of the modelling of tax changes only looks at how much HMT will bring in. Yet this static approach often does not reflect what happens in the real-world economy. It is based on the Ramsey-Cass-Koopmans model. This is similar to the CGE (Computable General Equilibrium) modelling, which the government has used to map the impact of cuts in corporation tax and fuel duty. 

 

How does it work?

It uses official data from the Office for Budget Responsibility among others, to calculate the aggregate impact of tax changes. It then uses data from a previous ten year period, between the financial crash and covid pandemic, to project this forward. The numbers won't be perfect, as after all they are estimates obtained from an economic model. But they will give a clear indication as to whether tax changes could help or hinder growth or wages. 

 

Who designed it? 

It is the result of a collaboration between economic consultants Europe Economics and think tank the TaxPayers' Alliance. 

 

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