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Fiscal Projections

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Best Practices Project


 

Practice Advice on Public Financial Management

Fiscal Projections (OECD)

Summary Advice: The OECD advises that fiscal projections on government revenues and expenditures help governments evaluate the sustainability of policies over an extended period of time against select summary fiscal indicators, demographic, macroeconomic, microeconomic and other assumptions.

Main Points: Fiscal sustainability focuses on government solvency measured using either government liabilities (gross or net) and/or government net worth.  In order to achieve fiscal stability, the present value of future budget surpluses must exceed the present value of future budget deficits.  Alternatively, the present value of future primary surpluses must exceed the present value of future primary deficits. Simply put, while there may be an overall deficit, debt service can be met and gross debt will grow at a sustainable rate.

Government liabilities are a measure of the government’s financial obligations and may be defined in gross or net terms. Gross liabilities comprise all financial liabilities, net liabilities comprise all financial liabilities minus all financial assets. Any approach to assess fiscal sustainability based on an evaluation of a government’s solvency is misleading if it not based on an assessment of current government policies and the economic conditions. OECD Recommendations for fiscal sustainability:

  • Fiscal projections should be prepared on an annual basis to highlight the long-term fiscal consequences of current policies and to eliminate discretion over when projections are produced.  Irregular projecitons, or those which are out of sync with the electoral cycle, may allow for gaming, in pre-election times, over when to prepare projections.
  • Fiscal projections should incorporate comparisons with past government asessments to highlight whether the government’s fiscal position has improved or deteriorated.
  • Fiscal projections should include sensitivity analysis (alternative scenarios) for changes in demographic, macro- and microeconomic, and other assumptions to illustrate the exposure, and general direction of the impact of this exposure, to fiscal risks.
  • Fiscal projections should clearly present the methodology, key assumptions, and data sources to provide assurance about the credibility and reliability of the methodology.
  • Countries should use fiscal projections to illustrate the fiscal consequences of past reforms or general policy options. This would allow  policymakers to demonstrate that improvements in the country’s long-term fiscal position are possible, but may not completely eliminate the country’s fiscal position.
  • Fiscal projections should be linked to other budget practices and procedures to ensure that the fiscal consequences of current policies receive adequate attention. Results of fiscal projections must be linked to fiscal targets, medium-term budget ceilings, or entitlement benefit formulas through either hard or soft budget triggers.
  • Assessment of the effectiveness of fiscal projections should include disclosure of methods, assumptions and supporting information in order to provide assurances about the quality and reliability of projections.  The model of fiscal projections must be relevant to the key assumptions; the sources and quality of data must be reliable and accesssible. 

The following guiding questions should be considered when evaluating fiscal projections: 

  • What types of fiscal indicators are used and are these compared against previous projections?
  • Is sensitivity analysis presented for changes in the projection’s underlying assumptions?
  • Do projecitons highlight the long-term fiscal costs of past and possible future policy change?

As far as the institutional dimenstion is concerned, one must determine whether:

  • Fiscal projections are presented to the legislature together with the annual budget.
  • Whether consideration is given to long-term costs of new programs and reforms?
  • Whether projections trigger adjustments to expenditures of revenues, or to fiscal rules in the medium term.

Governments should also introduce expenditure rules, as they are more effective in focusing on discretionary spending than existing deficit and debt rules. The advantages are as follows:

  • Violation of expenditure rules become more transparent
  • Exenditure rules provide firm guidance to policy makers irrespective of economic conditions
  • Expenditure rules help ensure that resource availability remains preditable
  • The potential of "creative accounting" is minimized

-     Source: OECD (2009). "Fiscal Futures, Institutional Budget Reforms, and their Effects: What can be learned?" at: http://www.oecd-ilibrary.org/governance/fiscal-futures-institutional-budget-reforms-and-their-effects_budget-9-5kmh6dnl056g (accessed 28 October 2012). 

P    Page Created By: Khilola B. Zakhidova on 15 November 2012. Updated by Ian Clark on 2 January 2013. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.

 

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