Optimal policy modelling: a microsimulation methodology for setting the Australian tax and transfer system

Abstract

The complexity of the social security system makes it challenging for policy makers to assess what changes should be made to the system to achieve policy objectives, and the implications of changes to the system. This paper describes the results of an initial attempt to develop a new methodology and modelling tool for optimising the social security system to achieve a particular outcome. The illustrative case used is minimising relative income poverty. We do this by using a microsimulation approach in which we alter welfare payments (or other parameters) to minimise household poverty, subject to a range of constraints, such as the overall social security budget or relationships between payment rates. The relationship between payment rate and poverty gap is then estimated using a linear regression model that provides parameter values for an equation that describes how changes in payment rates affect the poverty gap. This equation can be used to determine "optimal" payment rates, subject to constraints such as a budget constraint or changes from current payment levels. Show more