Third Annual Global Network of Parliamentary Budget Officers Mostafa Askari Ottawa, June 11, 2015 Fiscal Risk Analysis

Outline 1 Sources of fiscal risks 2 Changes in economic context 3 Links between economic context and fiscal risks 4 How to analyse economic risks 5 Unanticipated non-economic events 6 Budget mismanagement 7 How to minimize fiscal risks

Sources of Fiscal Risks Changes in economic context Unanticipated events Budget mismanagement

Changes in Economic Context Unanticipated international developments Unanticipated domestic developments Biased economic forecasts

Links between economic context and fiscal risks GDP Tax base Revenues GDP Unemployment rate Inflation Interest rates Expenses Income profits Cons.

How to analyse economic risks? Assess historical performance of the forecast- forecast errors Prepare a fan chart –probabilistic assessment of forecast error and bias Prepare your own forecast Prepare what if scenarios based on alternative economic developments

Forecast errors Average Error in Forecasting Real GDP Growth, (Actual –Forecast) Source: International Monetary Fund

Fan Charts

Unanticipated non-economic events Natural disasters Conflicts and wars Can’t analyse risks but can assess if budget has provisions

Budget mismanagement collection problems Revenues Over spending by line ministries Cost overruns of programs Expenses

Key Questions on Budget Mismanagement Are there large tax gaps? Are there clear, enforceable expenditure ceiling targets? Are there institutional arrangements that prevent line ministries from over spending? Have programs been costed properly with credible risk analysis?

How to minimize fiscal risks? A medium-term budget framework A credible, balanced risk macroeconomic forecast A top-down budget process Expenditure ceilings / fiscal anchors Institutional arrangements and laws Transparent and comprehensive reporting

Medium-term Budget Framework Bottom- Up Top- Down Final Decision by MOF and PM Institutional arrangements and rules