1. Macro-Fiscal Forecasting Sami Yläoutinen Fiscal Affairs Department (IMF) & METAC Workshop on MTFF December 16 th –19 th, 2014, Beirut, Lebanon

2. 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 2 2

3. 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

4. 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

5. 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

6. 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

7. II. Ensuring Consistency Macro- forecasts Revenue and expenditure Policy adjustments 7 7

8. 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 8 III. Ensuring Credibility Systematic Overestimation of Performance 8

9. III. Ensuring Credibility Transparency 9 9

10. III. Ensuring Credibility Addressing Bias Prudency factor Panel forecastBenchmark forecasts Independent forecasts Canada Chile Netherlands Sweden UK 10

11. 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

12. V. How to Organize Forecasting Possible macro-fiscal entities Macroeconomic forecasting Fiscal policy analysis Fiscal objectives and rules Economic Affairs Department Expenditure forecasting Expenditure sensitivity analysis Fiscal rules and objectives Budget Department Revenue forecasting Revenue sensitivity analysis Revenue Department Macroeconomic forecasting Fiscal policy analysis Fiscal objectives and rules Fiscal forecasting Macro-Fiscal Unit Macroeconomic forecasting Fiscal policy analysis Fiscal forecasting Fiscal objectives and rules Fiscal Council Macroeconomic forecasting Central Bank 12

13. 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

14. V. How to Organize Forecasting The Functional Departments Model 14 1.Consistency Unambiguous and clearly defined responsibilities 2. Updates  Coordination of forecasting Communication and coordination across departments 3. Informed policy formulation /  The need for fiscal analysis can be reflected in the organization … but coordination with revenue and budget dep’t needed 4. Integrity and unbiasedness Checks and balances Professional integrity 14

15. 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

16. V. How to Organize Forecasting The Macro-Fiscal Unit Model 16 1.Consistency /  One source of macro-forecasts … but fiscal assumptions have to be coordinated 2. Updates /  Iteration of macro and fiscal are done within the unit … but requires access to updated info on new policies 3. Informed policy formulation /  Good conditions for preparing fiscal policy recommendations … but actual implementation demands coordination 4. Integrity and unbiasedness Center for macro-fiscal analysis 16

17. VII. Conclusion 17 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