25 ÓCentre for Economics and Business Research Table 7 Impact of 20% cut in Fuel Duty modelled using the Treasury Dynamic General EquilibriumModel % Difference in GDP level compared to baseline 0.4% Difference in investment level compared to baseline 2.0% Difference in consumption level compared to baseline 0.3% Tax recovery rate 49% Model description A CGE model is a large-scale numerical model that simulates the core economic interactions of different agents in the economy. It uses data on the structure of the economy, along with a set of equations based on economic theory, to calculate the effects that a policy change will have on the economy. Modelling policy changes in the CGE model is a complex activity, and providing robust analysis requires an in-depth understanding of how the model works. It also requires a number of steps to be completed – checking data and model calibration, coding the logic for policy scenarios of interest, and carrying out comprehensive sensitivity analysis to check robustness of simulation results with respect to changes in model assumptions and data. HMRC’s CGE model is a single-country dynamic model. It is typically aggregated to 15 industries, 15 sectors and 15 household groups, although this can vary according to modelling requirements. The model is dynamic, so it can track the evolution of the economy over time as it reacts to policy changes, capturing the intertemporal aspect of agents’ decision making. For example, if businesses are expecting a tax reduction in three years’ time, this will influence their decisions about investment today. There are a number of assumptions, grounded in economic theory, about various other interactions in the economy. Information on the CGE model assumptions can be found in the HMRC CGE Model Documentation33. 5.6. Conclusions Taking all these modelling results together, it is clear that a 12p rise in fuel duty will raise much less revenue than the OBR assumes. The OBR’s gross revenue calculation suggests that if behaviour were not affected it would raise £5,700 million. In practice, the highest estimate from any of the model results presented here for revenue raising is from the Treasury CGE model which suggests the actual revenue that might be raised is half this. The estimates based on scaled results from other models 33https://www.gov.uk/government/publications/computable-general-equilibrium-cge-modelling
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