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4.1 The Counterfactual Assumptions

The following graphs show the projected stocks where pre-GFC (2005-08) inflow, outflow and inter-benefit transition rates are applied from February 2011 and continue across the forecast period. This scenario provides benefit recipients under the hypothetical situation whereby there is an immediate return to Pre-GFC transitions on and off the benefit system and between benefit categories. Other profiles incorporate the effect of the GFC (and other structural changes) on benefit numbers, but make assumptions about the timing of the return to pre-GFC transitions. Thus, the profile labelled Post-GFC+Recovery assumes that post-GFC transitions prevail until February 2012 after which beneficiary numbers begin a gradual transition back to Pre-GFC levels. However a complete convergence would not occur inside the forecast period.

The profile labelled Post-GFC->Transition->Pre-GFC assumes that post-GFC transitions prevail till November 2012 but there is a delay before Pre-GFC transitions apply and lead to relatively reduced stocks of beneficiaries. Finally, the Post-GFC profile assumes that post-GFC transitions prevail across the forecast period. As expected, this implies a continued rise in beneficiary numbers across the period. The profile Post-GFC+Recovery suggests that a return to pre-GFC rates by February 2012 results in numbers on a benefit falling to around 325,000 within about 12 months. However, a more delayed return to pre-GFC transition rates could result in benefit numbers being 25,000 higher than with an earlier return to pre-GFC rates; see Figure 8. As these simulations are alternative counterfactuals against which policy changes are to be compared, the assumption that the inflows and transitions remain unchanged for a number of quarters at either their pre- or post-GFC values, or at transitional values, reflects an explicit assumption that there are no policy changes over the projection period.

All simulations thus begin, in the initial period, from the same vector of stocks. These clearly do not reflect a long run equilibrium, especially since the actual November 2010 stocks arise from circumstances which have operated for a relatively short time. As explained in Section 2, the application of fixed inflows and transition rates ultimately produces a long run equilibrium in which the total outflows are matched by inflows, and the vector of stocks of individuals in each benefit category remain fixed. Three of the four counterfactuals ultimately move to, and then continue to apply, the pre-GFC inflows and transition rates. Hence it is clear that these cases will ultimately converge on the same vector of the distribution of individuals across benefit types. It can take many periods to approach the long-run equilibrium, although the stocks for some benefit types may converge more quickly than others. The starting points where the pre-GFC inflows and transition rates apply are obviously different. For example, the benefit numbers are much higher at the point where pre-GFC rates finally operate, for the fourth counterfactual above in which there is a transition period from pre- to post-GFC rates.

An important implication of starting from a disequilibrium stock of beneficiaries is that, when switching to a new set of inflows and transitions which imply lower equilibrium stocks in all benefit categories, the numbers in receipt of some of the benefits need not necessarily initially fall. The numbers in some benefit categories may increase for a period, particularly if the 'starting stocks' involve large (disequilibrium) numbers of those benefit types from which there are significant flows into the category of interest.

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