CPB: Role and position in policy preparation in the Netherlands

1. CPB: Role and positionin policy preparation in the Netherlands Johan Verbruggen

2. Content • CPB in headlines • Independency is crucial • CPB’s role in budgetary process • Ideal position of forecasting authority? • How to remain independent?

3. ‘Stylized facts’ about CPB • Founded in 1945 (by Tinbergen) • ± 150 employees (100 economists) • Formally part of Ministry of Economic Affairs ...... • .... though completely independent • Legal basis for making forecasts

4. Illustrations of CPB’s unique position • All political parties ask CPB to analyse the economic effects of their election programmes (results are published before election) • Consensus about taking CPB’s short-term forecast as basis for: 1) Budget Proposal 2) Wage negotiations

5. Central Planning Bureau? • No planning in strict sense • Independent analyses relevant for economic policy • Official name: CPB Netherlands Bureau for Economic Policy Analysis • Customers: • Government, ministries • Parliament, political parties • Trade unions, employers’ associations • Public debate

6. Tasks of CPB • Short-term economic forecasting (4 times a year) • Medium- and long-term economic scenarios • Economic analysis of policy proposals (short-term & long-term, CBA) • Economic research (policy relevant)

7. Position of CPB • Part of Ministry of Economic Affairs • Budget, personnel policy • Outside requests need Minister’s approval • Insight in confidential reports and plans • No political interference with models, methods and analyses • No paid assignments from third parties (all publications free of charge)

8. Most GDP forecasts are biased • EC (2004) analysed forecasting errors of GDP growth in EU countries (Econ. Papers No 210) • Conclusion: optimism bias GDP growth projections used in budgetary process => negative effect on fiscal performance • Reason: Ministries have incentives to paint a rosy picture (they appear successful; down playing unpopular measures)

9. Official GDP growth T+1, projections, 1987 - 2004 Average error RMSE Germany 0.61 * 1.91 France 0.42 * 1.45 Italy 0.76 * 1.39 Belgium 0.30 1.23 Austria  0.10 1.24 Netherlands  0.18 1.41 * significantly different from 0 at 10 % source: EC (2004), Economic Papers No 210

10. Independent forecasts? • 3 countries with ‘unbiased’ GDP growth forecasts: Netherlands, Belgium, Austria • In these 3 countries independent institutes, in other countries forecasts made by ministries • Advice: forecasting in budgetary process done by independent authority

11. IMF (2006) about CPB: • “The CPB occupies a unique position in fiscal policy making in the Netherlands. (....) In such a situation, its independence and credibility are essential, and the IMF-mission fully supports the continuation of the current institutional set up.” (ROSC Report, p. 9)

12. Budget Plan and CPB forecast • Budget Plan always published on 3rd Tuesday in September • CPB’s short-term forecast published on same day • CPB’s economic forecast includes Budget Plan; Budget Plan includes CPB’s economic forecast • Only possible for forecast institute that is part of government

13. Headlines of Budget process prel. budget plan MoF (May) macro forecast budget forecast CPB (June) adapted budget plan MoF (Aug) final macro forecast final budget forecast CPB (Sept) final budget MoF (Sept)

14. Budget influenced by plans and economy • Expenditures:largely driven by policy measurespartly endogeneous (wages civil servants, unemployment benefits, ...) • Taxes, premiums: largely endogenous (econ. growth, wages ...)partly driven by policy measures

15. Several budget forecasts • EMU budget balance = taxes -/- expenditures • Structural budget balance: taking account of business cycle • Robust budget balance: taking account of business cycle, temporary receipts (gas revenues) and net interest payments Long term perspective (ageing)

16. Actual and robust budget balance

17. Ideal position of forecasting authority Independent Ministry institute -------------------¦-------------------------¦------------------------- Public sector unbiased biased confidential info confidential info -------------------¦-------------------------¦------------------------- Private sector unbiased n.a. no confidential information -------------------¦--------------------------¦------------------------

18. How to remain independent? • Scientific basis • Total transparancy(results, assumptions, instruments) • No revenues from clients • Organise your own criticism (national and international visitations) • Large risk of harming good reputation (organise internal checks and balances)

19. More information? Look at:www.cpb.nl