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Independent forecasts and the budgetary process: lessons from Belgium

Independent forecasts and the budgetary process: lessons from Belgium. Joint CPB-FPB Seminar – February 1st, 2006 Henri BOGAERT, FPB Commissioner. OUTLINE OF THE PRESENTATION. The role of Fiscal Councils in the budgetary planning process in Belgium

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Independent forecasts and the budgetary process: lessons from Belgium

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  1. Independent forecasts and the budgetary process: lessons from Belgium Joint CPB-FPB Seminar – February 1st, 2006 Henri BOGAERT, FPB Commissioner http://www.plan.be

  2. OUTLINE OF THE PRESENTATION • The role of Fiscal Councils in the budgetary planning process in Belgium • Independence and usefulness of the Fiscal Councils • Lessons drawn from the Belgian experience in the framework of the SGP

  3. 1. The role of Fiscal Councils in the budgetary planning process in Belgium • Role of Fiscal Councils • The institutions fulfilling this role • Timing and place in the budgetary planning process

  4. Role played by Fiscal Councils • Independent macroeconomic forecasts • Public finance forecasts • Impact analysis of shocks or policies • Policy recommendations : rules, targets, strategies • Assessment of fiscal performance • 1-2-3 = « Positive economics » • 4-5 = « Normative economics »

  5. Federal Planning Bureau National Accounts Institute Positive Economics

  6. Federal Planning Bureau National Accounts Institute Study Committee on Ageing Positive Economics

  7. Federal Planning Bureau National Accounts Institute Study Committee on Ageing Positive Economics

  8. Federal Planning Bureau National Accounts Institute Study Committee on Ageing Positive Economics High Council of Finance Normative Economics Recommendations about fiscal targets

  9. Positive Economics Normative Economics Recommendations about fiscal targets Governments Decision- Making

  10. 2. Independence and usefulness of Fiscal Councils • Why independent forecasts? • How is it guaranteed in Belgium? • Is the government obliged to use the forecasts? • Do the governments follow HCF recommendations?

  11. WHY INDEPENDENT FORECASTS? • Virtuous circle: independence, unbiased forecasts, credibility of the forecasting agency • “Unbiased” forecasts, also an elegant word for saying “not politically decided or bargained” • Absence of political interventions is an incentive to invest more in forecasting tools

  12. How is independence of forecasts guaranteed in Belgium? • Legal status (public agency) of institutions involved (NAI, FPB) • Economic budget approved by NAI-board; Report on Ageing approved by Study Committee • Legal basis for producing independent forecasts : used to compute transfers between the federal level and Regions & Communities • Limited to positive economics • Transparent: methods, figures and post-mortem are published

  13. Is the government obliged to use the forecasts? • Legal basis: The NAI makes up the short-term economic forecasts that are required for the preparation of the Federal Government’s Revenue and Expenditure Budget (Law of December 1994) • Formal obligation? • De facto: always followed (reputation cost for the government) • Government can include safety margins in periods of high uncertainty

  14. Do governments follow HCF recommendations? • Remarkably well followed by Regions and Communities • Remarkably well followed by federal government until the beginning of this decade • Since 2001, consensus on strategy aimed at pursuing sustainability by accumulating large fiscal surpluses • But, difficulty to implement recommendations during long periods of slow growth • More important role played by EU Council : EU and HCF must support each other

  15. 3. Lessons drawn from the Belgian experience in the framework of the SGP • Revise the Commission forecast calendar • Recommendations of the Council on the governance of the Pact : • In their macroeconomic and budgetary projections MS should use the “common external assumptions” if provided by the Commission in due time. Divergences between the national and the Commission forecasts should be explained in some detail. This explanation will serve as a reference when assessing a posteriori forecast errors.

  16. 3. Lessons drawn from the Belgian experience in the framework of the SGP The Council considers that domestic governance arrangements should complement the EU framework. National institutions could play a more prominent role in budgetary surveillance to strengthen national ownership, enhance enforcement through national public opinion and complement the economic and policy analysis at EU level. • Positive and Normative parts have to be separated • The Belgian experience shows us that sharing responsibility between several independent institutions has been beneficial • Better mutual recognition and support of EU level and national institutions would be very helpful

  17. Real GDP growth: quality of short-term forecasts • Accuracy: forecast errors are on average well within acceptable margins • Forecasts are unbiased (not systematically too optimistic or pessimistic) • First-round forecasts (4 to 6 quarters ahead) are too conservative

  18. Sources of GDP forecast errors(first- and second-round short-term forecasts errors, 1994-2004, in %-point) GDP forecast error Error in foreign export market assumption

  19. TIMING

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