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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
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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.
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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
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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
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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


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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
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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
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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
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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
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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
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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.
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