My Department has participated in the development of an economic model to assist in policy evaluation, and uses it for that purpose. While this model has met strict refereeing criteria, all such models, however complex in design, are by definition a simplification of the real world; and must be used with due exercise of judgment and caution against mechanical interpretation of their output. Subject to this caveat, I will outline what the model suggests in respect of the issues in the question.
Because pay changes affect competitiveness, and competitiveness effects are largely felt in the medium term, I will put my response to the question of an economy-wide increase in pay in a medium term setting. If pay, economy-wide, were to rise by 1 per cent per annum faster than some benchmark for a six year period, then in the final year of that period PAYE receipts might be of the order of £150 million higher than otherwise. However, Exchequer borrowing in that year might also be of the order of £150 million higher, and total employment as much as 20,000 lower.
The model would suggest that the net, full year, cost to the Exchequer of abolishing the 1 per cent income levy might approach £120 million. The gross full year cost is £145 million.
While the caveat I have mentioned would caution against regarding any of the foregoing model based assessments as precise answers, I am satisfied that they reflect the broad order of magnitude involved in taking the actions concerned.
