Reliability of macroeconomic forecasts

Conclusions

Macroeconomic forecasts play an important role in the planning and decision-making concerning public finances. Closer economic policy coordination in the EU and the resulting legislation have led to stricter requirements regarding the forecasts used as a basis for planning public finances.

The aim of the audit was to determine whether the forecasts produced by the Ministry of Finance give a true and fair picture of the economy and the economic outlook that can be used as a basis for fiscal policy decision-making, to assess and improve the openness and transparency of the forecasting process and methods and to examine the independence of the macroeconomic and fiscal forecasts prepared by the Ministry of Finance.

Economic forecasts produced by the Ministry of Finance are statistically reliable

A statistical analysis carried out by the National Audit Office shows that the economic forecasts prepared by the Ministry of Finance as a basis for fiscal policy are not statistically biased. According to the statistical analysis, the quality of the foreign trade forecasts was the poorest. The frequent underestimation of these variables derives from the systematic evolution of the statistical base and not from the forecasting methods or processes. The Ministry of Finance publishes tables of the evolution of the forecasts and forecast errors as appendices to its economic surveys. The surveys do not contain separate reports or comprehensive analyses of the sources or systematic nature of the errors or comparisons with the forecasts produced by other economic forecasting institutes. Changes in the fiscal forecasts compared with the previous General Government Fiscal Plan and factors affecting the changes are detailed in the appendices to the General Government Fiscal Plans.

There is no difference between the accuracy of the economic forecasts produced by the Ministry of Finance and those published by other forecasting institutes

Comparisons between the forecast errors show that there is no difference between the accuracy of the economic forecasts produced by the Ministry of Finance and those published by other forecasting institutes. Forecasting trends in foreign trade and investments has been particularly difficult for all forecasting institutes reviewed in the audit.

On average, fiscal forecasts have underestimated trends in revenue and expenditure

Fiscal forecasts systematically underestimate both revenue and expenditure in general government. Except for social security funds, expenditure underestimations have been slightly higher than revenue underestimations. The average overestimations of net lending (difference between revenue and expenditure) are, however, not statistically significant for general government as a whole.

There are no systematic descriptions of the methods for preparing the forecasts

The documents concerning the methods for preparing the forecasts are outdated or inadequate and using them it is impossible to produce a comprehensive or transparent picture of how macroeconomic or fiscal forecasts are prepared. The documentation does not provide a transparent picture of the information sources used in the preparation of the forecasts and the risks concerning the preparation and results of the forecasts are not described in a clear and systematic manner. The documentation should also contain a clear description of the timetable of the forecasting process and of the causal relations between the economic forecasts, fiscal forecasts and tax revenue estimates.

There are no clear legislative requirements concerning the formal independence of the fiscal forecasts

As regards the fiscal forecasts, the requirement for independent forecasting contained in the EU regulation on monitoring and assessing draft budgetary plans is open to interpretation. The regulation makes a clear distinction between macroeconomic forecasts and budgetary forecasts. Under the regulation, a draft budgetary plan must include a description of the main assumptions of the macroeconomic forecasts and important economic developments which are relevant to the achievement of the budgetary targets, and an annex containing the methodology, economic models and assumptions used in the budgetary forecasts.

According to the interpretation of the National Audit Office, the requirement for independence defined in the regulation specifically applies to macroeconomic forecasts. As regards fiscal forecasts, the Budgetary Frameworks Directive states that the planning of general government finances must be based on realistic macroeconomic and budgetary forecasts.

There should be more focus on ensuring that the forecasts are seen as reliable by outsiders

According to the European Commission, the Finnish arrangement in which a department in the Ministry of Finance functions as an independent institution responsible for macroeconomic forecasts is unique in the EU. Elsewhere in the euro area, macroeconomic forecasts are produced by independent institutions or the forecasts prepared by a country’s finance ministry are endorsed by an independent body.

No factors that would have compromised the independence of the Ministry of Finance as a forecasting body emerged in the audit. However, the existing arrangement is not fully in accordance with the requirements for independence laid down in the regulation on monitoring and assessing draft budgetary plans. It was also discovered in the audit that there are potential risks to independent forecasting, which can be managed by improving the practices.

Ministry of Finance experts are of the view that macroeconomic forecasts are independently prepared. However, there is no guarantee that as circumstances and personnel change continuous independence can be ensured. The Economics Department of the Ministry of Finance, the body responsible for the forecasts, does not have any special status in the ministry that would guarantee its independence in practice. Better documentation and adequate organisational independence of the forecasting activities can help to ensure that the forecasts are seen as reliable by outsiders. Special consideration should be given to interaction and sharing of information between the experts in the Economics Department, Tax Department and Budget Department and the impact of the fiscal forecasts on economic forecasts.

Recommendations of the National Audit Office

Based on the audit, the National Audit Office issues the following recommendations:

1. The forecast errors in the forecasts produced by the Ministry of Finance should be analysed and published on a regular basis. The analyses should detail to what extent the errors can be attributed to the evolution of the source material and to what extent they are caused by differences between the forecasts and the actual trends. Comparisons should also be made with the accuracy of the forecasts produced by other institutes.

2. The Ministry of Finance should produce a systematic documentation of the methods with which the economic forecasts and the fiscal forecasts are prepared. The documentation should also be publicly available.

3. Efforts should be made to ensure that the forecasts are seen as reliable by outsiders and to strengthen and highlight the independent nature of the forecasts. This should be done by supervisory means and by preparing written procedures for ensuring independence.

4. Consideration should be given to a model in which the macroeconomic forecasts used as a basis for fiscal policy decision-making are endorsed by an independent body outside the Ministry of Finance.