5. Financial Modelling

The Chancellor is in charge of the Treasury. He decides on the amount of money (budget) that different Government departments can spend. For example, the NHS will be given a budget for the year, so will the Education Department as will the Armed Forces.

This money has to come from somewhere and generally it is raised from various types of tax.

If you have ever listened to one of the Chancellor's budget speeches you will hear his plans to raise taxes on things like fuel, alchohol and cigarrettes.

But, how does he know how much to raise or lower taxes? How does he know how much money he can give to each Government department? If he got it wrong, it could have disasterous results.

Well, the way he decides what to do is to use a computer model to answer all sorts of questions such as:

• "If I put up child benefit by £5.00 a week, how many billions of pounds extra will that cost?"
• "If I give an extra £50 million to education, how much will I have to take away from the NHS?"
• "If I put up the tax on petrol, how much will that affect the average family?"

The model that the Chancellor uses is a lot more complex than the spreadsheet models that you have been using at school.

His model has thousands of variables which can take into account the impact of changing one thing. But it does give him a pretty good idea of how much he needs to increase taxes in order to pay for other things.