diff --git a/changelog.d/1400.md b/changelog.d/1400.md new file mode 100644 index 000000000..d8991f014 --- /dev/null +++ b/changelog.d/1400.md @@ -0,0 +1 @@ +- Add a standalone documentation page summarising the Resolution Foundation's nowcasting methodology (LSO 2025 appendix: wage-floor and spillover modelling, NLW age extensions, PIPR-based rent uprating, UC-statistics caseload anchoring, four- to five-year horizon) and pointing back at PolicyEngine's own assumptions for comparison. diff --git a/docs/book/assumptions/rf-nowcasting-methodology.md b/docs/book/assumptions/rf-nowcasting-methodology.md new file mode 100644 index 000000000..67209e12f --- /dev/null +++ b/docs/book/assumptions/rf-nowcasting-methodology.md @@ -0,0 +1,114 @@ +# Resolution Foundation nowcasting methodology + +This page summarises the Resolution Foundation (RF) microsimulation +nowcasting methodology, drawing on the appendix to RF's [Living Standards +Outlook 2025][lso] and the methodological notes in [Black holes and +consolidations][bhac]. It is a paired reference for PolicyEngine UK's +own assumptions — see [`growthfactors.md`](./growthfactors.md) for the +PolicyEngine growth rates and [`nowcasting-comparison.md`](./nowcasting-comparison.md) +for the high-level differences. + +## Data foundation + +RF's nowcast starts from the same UK household microdata that +PolicyEngine uses — the **Family Resources Survey (FRS)** and its +**Households Below Average Income (HBAI)** companion — combined with a +range of administrative aggregates used to anchor outputs to published +totals. + +## Earnings growth + +RF projects earnings forward year-by-year, with explicit minimum-wage +handling rather than uniform indexation: + +1. **Wage floor**. In every projected year RF lifts anyone whose hourly + wage falls below their age-appropriate **National Minimum Wage / + National Living Wage** up to that floor. Floors come from the + announced NMW/NLW schedule and (beyond 2025-26) are assumed to grow in + line with average earnings. +2. **Spillover effect**. For workers whose wage sits just above the + floor, RF applies a partial uplift to capture wage compression at the + bottom of the distribution. The magnitude is calibrated to historical + evidence on NMW spillovers (RF cites the Low Pay Commission research). +3. **NLW age extensions**. RF models the **2024-25 extension** of the + NLW to 21- and 22-year-olds and, **provisionally**, the **2029-30 + extension** to 18- to 20-year-olds. These show up as discontinuities + in the modelled wage floor for the affected cohorts. +4. **Uniform uprating beyond the floor**. Earnings above the floor are + uprated equally for employees and the self-employed using OBR/BoE + wage projections (constrained to ONS outturn data once published). + +## Housing costs + +RF separates rent and mortgage interest: + +- **Private rents** are uprated using the ONS **Price Index of Private + Rents (PIPR)** rather than a generic CPI-housing measure. +- **Social rents** are uprated according to the published social-rent + policy in force in each year (typically CPI + 1 percentage point, with + exceptions and caps where the government has announced freezes or + variations). +- **Mortgage interest** flows are projected using OBR base-rate paths + and the FRS-recorded interest portion of mortgage payments. + +## Benefits + +RF takes the legislated/announced statutory uprating of working-age and +pension-age benefits as given, layering on: + +- **Caseload anchoring** to current **Universal Credit statistics** for + in-payment caseloads, so simulated UC numbers track DWP outturn rather + than drift with FRS take-up. +- **Take-up modelling** based on historical receipt rates by household + type, used to scale the eligible population down to expected caseload. +- **Discretionary CoL payments** modelled as announced (and reset to + zero once the policy ends). + +## Inflation indices + +RF uses the OBR EFO inflation paths (CPI, CPIH, RPI) as headline +indices, supplemented by ONS-published outturns once available. Beyond +the EFO forecast horizon RF holds rates flat at their final forecast +value rather than constructing a separate long-run rule. + +## Calibration + +RF aligns outputs to a mix of HMRC, DWP and ONS aggregates — most +prominently income tax receipts, NI receipts, UC caseload and +expenditure, and Pension Credit caseload. The exact target list and +weights vary across reports. + +## Horizon + +The Living Standards Outlook publishes detailed nowcasts about **four +to five fiscal years ahead** of the current outturn year. Longer-run +sensitivity analyses are run separately and are not part of the headline +nowcast. + +## Where this differs from PolicyEngine + +For a side-by-side comparison see +[`nowcasting-comparison.md`](./nowcasting-comparison.md). The three +biggest divergences are: + +1. **Wage-floor / NLW handling** — RF models the floor and spillovers + explicitly; PolicyEngine uprates earnings by the OBR average-earnings + index and only invokes the NLW when a reform query asks for it. +2. **Housing-cost projection** — RF uses PIPR for private rents and + social-rent policy for social rents; PolicyEngine uprates rents using + `policyengine-uk-data` local-authority targets and ONS rent indices. +3. **Calibration targets** — PolicyEngine carries finer-grained + local-authority targets for council tax and rents that the public RF + nowcast does not surface. + +## References + +- Resolution Foundation, [Living Standards Outlook 2025][lso] — methodology + appendix. +- Resolution Foundation, [Black holes and consolidations][bhac] — fiscal + context and short methodology summary. +- Low Pay Commission, [National Minimum Wage research reports](https://www.gov.uk/government/publications/national-minimum-wage-low-pay-commission-research-reports) — empirical basis for the spillover assumptions. +- ONS, [Price Index of Private Rents (PIPR)](https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/priceindexofprivaterentsuk/latest). + +[lso]: https://www.resolutionfoundation.org/publications/living-standards-outlook-2025/ +[bhac]: https://www.resolutionfoundation.org/publications/black-holes-and-consolidations/