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Macro-Fiscal Forecasting Sami Yläoutinen Fiscal Affairs Department (IMF) & METAC Workshop on MTFF December 16th–19th, 2014, Beirut, Lebanon Macro-Fiscal Forecasting Outline of Presentation I. Why macroeconomic forecasting II. Ensuring consistency III. Ensuring credibility IV. Statistics and time series V. How to organize forecasting VI. Conclusion 22 I. Why Macro-Fiscal Forecasting? Motivation • Where we are now? – nowcasting • Where we are going? – forecasting – short-run (6-24 months) – medium-run (2-5 years) – long-run (5+ years) • From cycle through convergence to potential • From demand side to supply side • From fixed to endogenous structures • Essential information for decision making and policy planning 3 I. Why Macro-Fiscal Forecasting? Decision making • Forecasts assess the impact of actions which is materialized with lags. • Forecasts tackle the inherent uncertainty and assess risks. • Framework which draws together relevant information and spells out the costs, benefits and risks associated with economic agents behavior. 4 I. Why Macro-Fiscal Forecasting? Policy planning • Stabilization policies – Automatic – Discretionary • Structural policies – Social benefits and incentives – Innovation and investments – National Vision 2030 – Market failures 5 IV. Macroeconomic and Fiscal Forecasts Policy planning • Distributional policies – Social transfers – Income equalization through taxes • Sustainability – Growth potential in the long run – National Vision 2030 – Demographics – Fiscal position to guarantee sustainability and fiscal space – Scenarios and sensitivity testing 6 II. Ensuring Consistency Macroforecasts Policy adjustments Revenue and expenditure 77 III. Ensuring Credibility Systematic Overestimation of Performance • Political bias – Good economic performance suggests successful policies – Strong growth leads to additional revenue – The ‘shoot the messenger’ syndrome • Informational bias – Excess burden of taxation • Independent input can help overcoming biased forecasts 88 III. Ensuring Credibility Transparency Genereal Government Expenditures (% of GDP) 6 5 Real GDP Growth (%) 7 0.0 6 4 -1.0 5 3 -2.0 Absolute Forecast Errors 3 -4 SRB* -3 RO** 4 SI* -2 HUN* 5 CZE* 0 -1 GR * Inflation (%) 6 Genereal Government Balance SK* RO** FI GR P IRL ITA HUN* UK SK* PL* UK AT LI* FRA FRA t+2 1 AT t -7.0 SI* t+1 0 FI t+2 -6.0 t 1 t+1 -1 t+2 -5.0 t 2 t+1 0 t+2 -4.0 t Bias (right axis) t+1 3 t+2 1 t -3.0 t+1 Abs. Errors Adjusted for Volatility t+2 4 t 2 6 5 Absolute Forecast Errors 4 Abs. Errors Adjusted for Volatility 3 2 2 -5 -6 -7 0 -1 SRB* RO** HUN* CZE* SK* BG* UK GR P PL* SI* AT ITA FRA RO** 0 FI t+2 GR t IRL t+1 t+2 HUN* t SK* t+1 t+2 UK t t+1 LI* t+2 FRA t t+1 AT t+2 SI* t t+1 t+2 t FI 1 1 99 III. Ensuring Credibility Addressing Bias Prudency factor Canada Independent forecasts Sweden UK Benchmark forecasts Chile Netherlands Panel forecast 10 10 IV. Statistics and Time Series National Accounts • Statistical standards – National System of Accounts – GFS • Release calendar • Level of detail – Decomposition of GDP – Price statistics – Balance of payments • Demographic statistics • Statistical integrity 11 11 V. How to Organize Forecasting Possible macro-fiscal entities Economic Affairs Department Budget Department Revenue Department • Macroeconomic forecasting • Fiscal policy analysis • Fiscal objectives and rules • Expenditure forecasting • Expenditure sensitivity analysis • Fiscal rules and objectives • Revenue forecasting • Revenue sensitivity analysis Macro-Fiscal Unit •Macroeconomic forecasting •Fiscal policy analysis •Fiscal objectives and rules •Fiscal forecasting Fiscal Council •Macroeconomic forecasting •Fiscal policy analysis •Fiscal forecasting •Fiscal objectives and rules Central Bank • Macroeconomic forecasting 12 V. How to Organize Forecasting The Functional Departments Model • Macroanalysis is done by an Economics Affairs Department • Expenditure forecasting and analysis is the responsibility of the Budget Department 13 13 V. How to Organize Forecasting The Functional Departments Model 1. Consistency 2. Updates 3. Informed policy formulation 4. Integrity and unbiasedness Unambiguous and clearly defined responsibilities Coordination of forecasting Communication and coordination across departments / The need for fiscal analysis can be reflected in the organization … but coordination with revenue and budget dep’t needed Checks and balances Professional integrity 14 14 V. How to Organize Forecasting The Macro-Fiscal Unit Model • Macro-fiscal consistency is ensured by organizing all functions into one unit • Pooling of resources and a center of excellence for macro-fiscal issues • Close coordination with the budget and revenue department is crucial 15 15 V. How to Organize Forecasting The Macro-Fiscal Unit Model 1. Consistency / 2. Updates / 3. Informed policy formulation / 4. Integrity and unbiasedness One source of macro-forecasts … but fiscal assumptions have to be coordinated Iteration of macro and fiscal are done within the unit … but requires access to updated info on new policies Good conditions for preparing fiscal policy recommendations … but actual implementation demands coordination Center for macro-fiscal analysis 16 16 VII. Conclusion 1. Macroforecasting is challenging in the region, highlighting the need for strong capacity 2. Macroforecasting is a key building block in various types of fiscal analysis 3. Consistency between macroforecasts and fiscal policy requires coordination and iteration. 4. Positive forecasting bias is well documented, and can be addressed through transparency and independent input 5. Deficiencies in national accounts statistics can be an obstacle for the development of macroeconomic forecasting 6. The traditional model is to separate responsibility into functional departments within the ministry of finance (and ministry of economy). 7. A macro-fiscal unit can spearhead the development of macro-fiscal capacity, but requires constructive cooperation with budget policy dep’t. 17 17