## tnm1804 - Introduction ## Source details **Canonical URL:** [tnm1804 - Introduction](https://www.imf.org/-/media/files/publications/tnm/2018/tnm1804.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tnm/2018/tnm1804.pdf.md) - [Structured JSON version](/-/media/files/publications/tnm/2018/tnm1804.pdf.json) --- ### Purpose and role of the macrofiscal function - Conducting sound fiscal policy requires a strategic vision of public finances anchored in a medium-term perspective. - The medium-term fiscal framework (MTFF) incorporates a country’s policy choices and priorities given growth and equity objectives, available resources, and debt sustainability considerations. - The macrofiscal framework includes a medium-term fiscal framework and, in many countries, fiscal rules or targets. - The macrofiscal department (MFD) of a Ministry of Finance (MoF) is the government’s key unit for: - elaborating sustainable medium-term fiscal objectives and policy orientations; - assessing fiscal risks; - ensuring consistency between macroeconomic developments and projected revenues and expenditures. - Structure of the Note: - Section I defines the macrofiscal function and why it is needed. - Section II describes main components of the macrofiscal function. - Section III focuses on MFD’s main inputs and outputs. - Section IV discusses organizational arrangements and coordination. - Section V examines issues for building a strong MFD. - Section VI presents concluding remarks and strategy for reform. ### I What is the macrofiscal function and why is it needed? - Definition and core purpose: - Preparation of the macrofiscal framework needed primarily to attain fiscal and debt sustainability objectives, with due recognition of fiscal risks; also serves economic stability objectives and supports structural policies. - Core macrofiscal policies: revenue, expenditure, deficit- and asset-management policies. - Capacities required of the MoF: - Develop and periodically review a medium-term macroeconomic and fiscal strategy; enable iterations between MFD/MoF technical staff and political policy-makers. - Monitor fiscal objectives and targets for overall fiscal balance, public debt and total expenditure; account for fiscal rules embedded in law. - Examine impact of new fiscal policies on fiscal developments and economic growth, including feedback effects. - Identify, assess, monitor, and manage fiscal risks. - Prepare macrofiscal projections for a long-term period (more than 10 years) to inform policy-makers about structural changes (e.g., ageing populations, climate change). - Country differentiation: - Advanced countries typically perform all tasks, including sophisticated fiscal risk analysis and regular long-term projections. - Low-income countries should focus first on essentials: developing a medium-term strategy and monitoring key fiscal aggregates. ### II Main components of the macrofiscal function - Four components: 1. Macroeconomic and fiscal modeling, forecasting and debt sustainability analysis (DSA). 2. Macrofiscal policy analysis. 3. Fiscal risk analysis. 4. Monitoring macroeconomic and fiscal developments. - A Macroeconomic and Fiscal Forecasting (including DSA) - Maintain an internally consistent model that produces medium-term fiscal projections. - Key variables: real GDP (and components such as consumption and investment), nominal GDP, inflation, exports, imports, exchange rates, interest rates, oil prices, etc. - Develop revenue, expenditure and debt modules; use sub-models, assumptions and parameters for MTFF and annual budget aggregates. - Projection tasks: - Baseline projections (“no policy change” scenario): MTFF baseline medium-term projections for revenues, expenditures, financing, and debt based on existing policies. - Projections of the impact of new fiscal policies: incorporate policy changes and propose measures to maintain consistency with medium-term objectives. - Debt sustainability analysis (DSA): - DSA examines debt projections under various assumptions and feeds into fiscal policy decisions. - Debt management (DMO) is distinct: focuses on managing public debt, medium-term debt management strategy and annual borrowing plan. - MFD may propose debt targets, report compliance, and collaborate with DMO. - B Macrofiscal Policy Analysis - Assesses fiscal policy impacts on growth, macroeconomic, and budgetary objectives, including fiscal rules. - Prepares short-, medium-, and long-term scenarios and evaluates legislative proposals. - Specific roles: - Evaluate impact of fiscal policies on baseline projections; use models to quantify impacts; iterate with policy-makers. - Collate fiscal analysis within MoF or conduct directly; interact with Tax Policy Department and Budget Department. - Analyze impacts on public debt and design fiscal consolidation scenarios when needed. - Estimate fiscal multipliers and model growth endogenously for long-term analysis. - Analyze fiscal-financial sector linkages and long-term structural issues (demographics, social security, health, climate change, distributional impacts). - Prioritization: basic fiscal policy analysis prioritized in low-capacity countries. - C Fiscal Risk Analysis - Definition: possibility of short- to medium-term deviations in fiscal variables relative to MTFF or annual budget. - Causes: unmet assumptions, external shocks, automatic stabilizers, off-budget/off-balance sheet operations; government guarantees and contingent liabilities can be significant—contingent liabilities can reach up to 40 percent of GDP in extreme cases. - MFD responsibilities: - Prepare annual fiscal risk statement and collate estimates of fiscal risks. - Use alternative macroeconomic scenarios, sensitivity analyses and fiscal stress tests to illustrate implications. - Some risks require external expertise: - DMO assesses debt and debt guarantee risks. - Financial sector regulators assess financial-sector-originating fiscal risks. - SOE, subnational government and legal proceeding risks documented by MoF or relevant departments. - D Monitoring Macroeconomic and Fiscal Developments - Monitor macro economy, fiscal policy implementation, and budget execution to identify deviations from forecasts and determine responses. - Monitor fiscal risks and prepare monthly and/or quarterly reports; maintain up-to-date database and update projections regularly. - Emphasis on monitoring in developing countries. ### III Main outputs of macrofiscal departments - Typical outputs and timing: - Frequency categories: Monthly or quarterly; Twice a year; Annual; Periodic; Pre-budget review and/or mid-term review; Draft annual budget (presentation to legislature); In-year economic and fiscal reports; Updates of the FSD; Updates of MT budget strategy, objectives, macroeconomic and fiscal projections. - Typical outputs include: - Medium-term fiscal strategy document, including macroeconomic and fiscal projections. - Strategy and policy priorities for annual budget. - DSA. - Fiscal risk statement. - Report on compliance with fiscal rules. - Long-term fiscal projections (20–50 years) (optional). - Pre- and post-election fiscal updates. - Ad hoc research. - Inputs and stakeholders: - Inputs from Budget; National Treasury; Tax Policy, Tax Administration, Customs; MoF units overseeing Public Investment and Assets, Local Governments, State-Owned Enterprises, Natural Disasters; Central Bank; National Institute of Statistics; Other Government Ministries; International Organizations (IMF, World Bank, OECD, etc.). - MFD outputs: annual budget forecasts; MTFF; in-year outturns; debt statistics; DSA; fiscal risk information; fiscal risks statement; macroeconomic statistics; analysis of world economy; reports on economy and public finances. - B Fiscal Strategy Document (FSD) - Purposes: - Highlight medium-term fiscal strategy and ensure annual policies are consistent with MTFF. - Provide basis for policy dialogue within government and with legislature, civil society and media. - Assist Budget Department in draft annual budget; foster internal MoF discussions; provide a research agenda. - Typical content: - MTFF projections of revenues, expenditures, fiscal balances and debt. - DSA. - Separate and cumulative impact of proposed fiscal policy changes. - Analysis of fiscal risks. - Use of fiscal space: FSD may identify how government proposes to use fiscal space. - Timing: FSD (or update) should be prepared early in the budget cycle; good practice to update twice a year; resource-constrained countries should publish a comprehensive FSD once a year. - C Medium-Term Fiscal Framework (MTFF) - MTFF is a rolling plan establishing integrated multiyear limits or targets for key fiscal aggregates consistent with macroeconomic framework. - MTFF provides basis for MTBF and annual budget; all major policy changes with fiscal implications should be included. - MTFF coverage should be comprehensive—many advanced countries cover “general government”. - MFD should obtain medium-term projections from subnational governments and extrabudgetary funds or prepare projections when absent. - D Debt Sustainability Analysis (DSA) - MFD could lead DSA, using portfolio data from DMO. - Interpret scenario-based DSA modeling; publish DSA reports relatively frequently when gross/net debt is reaching unsustainable levels. - In countries with substantial financial assets (negative net debt), prepare asset management reports; ensure transparency of Sovereign Wealth Fund interactions with MTFF based on the “Santiago Principles”. - E Fiscal Risk Statement (FRS) - Objective: identify and, where possible, quantify fiscal risks and present policies to manage them. - FRS can be a chapter of FSD or stand-alone; should cover central government risks and, to extent possible, other public sector entities. - Importance of measuring probability of risks, sensitivity analyses, and stress tests. - Some risks are difficult to assess (off-budget/off-balance sheet, natural disasters). - F Other MFD Outputs - Reports on compliance with fiscal rules, long-term structural issues (e.g., ageing), periodic technical studies, pre- and post-election updates. - Example: New Zealand requires 40-year projections every four years. ### IV Organizational arrangements and coordination - No single model; most functions normally conducted within MoF. - Tradeoffs: - Concentrated MFD minimizes inconsistencies and reduces coordination costs. - Specialized functions may sit in other MoF departments or outside agencies (e.g., tax policy, DMO). - Common country arrangements: - Single MoF department performs all macrofiscal functions (examples: Mozambique, Niger, Sweden). - Collaborative MoF departments (example: France, Senegal). - Shared between finance and planning ministries (examples: Indonesia, Brazil, Colombia). - Multiple ministries/agencies (rare; examples: Democratic Republic of Congo, United States). - Independent fiscal institutions: - Can be attached to legislature or independent (examples: Belgium, the Netherlands, United Kingdom). - Provide forecasting and analysis but typically do not make policy recommendations; complement MFD work and appear to reduce fiscal deficit bias. - Internal structure (illustrative for medium-sized country): - Macroeconomic and Fiscal Forecasting Division: forecasting, database, reports, DSA collaboration. - Fiscal Policy Division: fiscal analysis, top-down expenditure ceilings, consistency with fiscal rules. - Structural Fiscal Policy and Risk Analysis Division: long-term projections, fiscal risks, PPP analysis. - Staffing guidance: small countries 4–6 staff; moderate countries performing all four functions 20 to 50 staff. - Coordination specifics: - MFD and Budget Department: MFD for top-down ceilings; Budget Department for bottom-up estimates. - MFD and Tax Policy Department/Tax Administration/Customs: close collaboration for revenue projections. - MFD and DMO: coordination for DSA inputs. - Planning ministry: formal agreement to align development budgets with MTFF. - National statistics office: ensure historical National Accounts and fiscal data are consistent. - Central bank: coordinate macroeconomic projections and policy stances. - Cross-level coordination: formal bodies when “general government” fiscal rules apply. ### Strategy for building a strong MFD (preconditions and sequencing) - Preconditions for lower income countries: - MFD leads in proposing MTFF and annual budget strategy. - Recurrent and investment budgets unified. - Extrabudgetary funds included in MTFF and presented with annual budget. - High-level political support required; internal restructuring may be necessary. - Priority sequencing: - For advanced countries: improve quality of all macrofiscal functions. - For lower income countries: once annual forecasting and accounts reach adequate quality, focus on establishing MTFF useful for annual budgeting; later deepen DSA and fiscal risk analyses. - Long-term projections for low-income countries are of limited value initially. ### Developing tools for macrofiscal forecasting and policy analysis - Modeling ambitions for lower-capacity countries should be modest; MFD should link key macro variables with budget forecasts and may rely on central bank forecasts. - The IMF’s Financial Programming (FP) framework: - Offers simplicity, consistency and comprehensive coverage; based on sectoral identities and limited behavioral relationships. - Four core sectors: Real Sector; Government Sector; External Sector; Monetary and Financial Sector. - Fiscal forecasting characteristics (five): - Useful; Consistency; Useable; Accurate; Sustainable. - Operational guidance: balance data reliability, staff time, and skills; refine modules as skills grow. - Revenue forecasting methods: - Extrapolating past revenue (generally discouraged). - Effective tax rates (tax base times effective rate). - Elasticities (growth relationships between revenue and tax base). - Structural models (interdependencies and feedback effects). - Micro-simulations (require detailed microdata). ### Deepening fiscal risk analysis and improving forecast quality - Fiscal risk analysis: - Publish fiscal risk statement (attainable, example: Uganda in 2016). - Start with macroeconomic risks and expand to high-priority risks (use likelihood and impact hierarchy). - Advanced countries can use fiscal stress tests and probabilistic forecasting. - Forecast quality improvements: - Ensure high-quality historical fiscal databases and independent external audits. - Evaluate forecast accuracy through post mortems and review forecast errors. - Resist deliberate optimism; lean towards pessimism in growth and revenue projections when pressured. - Compare models and external forecasts; create institutions to improve credibility. ### Strengthening human and material resources - Human resources: - Required skills: macroeconomics, forecasting/modeling, database management, IT, communication. - Training, recruitment, remuneration, promotion and retention critical; head of MFD should be remunerated comparably with other MoF departments. - Use central bank expertise and secondment where appropriate. - IT/computerization: - Systems for data collection, processing and modeling with maintenance and periodic upgrades; linkage with Budget, Tax, and Debt systems. ### Concluding remarks and reform strategy - Four core MFD functions: 1. Forecasting macroeconomic and fiscal aggregates and preparing MTFF updates. 2. Analyzing short- and longer-term impact of revenue and expenditure policies to ensure debt sustainability. 3. Analyzing fiscal risks. 4. Monitoring macrofiscal developments. - Organizational choices vary; MTFF and macrofiscal framework underlying the annual budget should be government-owned and published to enhance transparency. - For underdeveloped macrofiscal functions: establish/strengthen core MFD functions, improve short- to medium-term forecasts, ensure accurate assessment of policy changes, and progressively advance to comprehensive fiscal risk analysis and modeling to improve reliability and credibility of medium-term fiscal strategy. *Source: tnm1804 - Introduction* ### Introduction ### tnm1804 - Introduction ### Introduction: purpose and role of the macrofiscal function - Conducting sound fiscal policy requires a strategic vision of public finances that anchors the budget in a medium-term perspective. - The medium-term fiscal framework (MTFF) incorporates a country’s policy choices and priorities given growth and equity objectives, available resources, and debt sustainability considerations. - The macrofiscal framework includes a medium-term fiscal framework and, in many countries, fiscal rules or targets. - Governments need strong macrofiscal analytical capacity for preparing a sound MTFF, which underpins the medium-term budget framework (MTBF —see Harris et al., 2013) and the annual budget. - The macrofiscal department (MFD) of a Ministry of Finance (MoF) is the government’s key unit for: - elaborating sustainable medium-term fiscal objectives and policy orientations; - assessing fiscal risks; - ensuring consistency between macroeconomic developments and projected revenues and expenditures. - There is limited cross-country research on MFD design and functions; Martinez-Vazquez and Ortiz (2009) is cited as one of the few studies. - Structure of the Note: - Section I defines the macrofiscal function and why it is needed. - Section II describes main components of the macrofiscal function. - Section III focuses on MFD’s main inputs and outputs. - Section IV discusses organizational arrangements and coordination. - Section V examines issues for building a strong MFD. - Section VI presents concluding remarks and strategy for reform. ### I What is the macrofiscal function and why is it needed? - Definition: - The macrofiscal function refers to preparation of the macrofiscal framework needed primarily to attain fiscal and debt sustainability objectives, with due recognition of fiscal risks. It also serves economic stability objectives and supports structural policies. - Core macrofiscal policies: revenue, expenditure, deficit- and asset-management policies. - Capacities the MoF needs to perform the macrofiscal function: - Develop a medium-term macroeconomic and fiscal strategy; periodically review fiscal strategy to account for macroeconomic shocks or changed policy priorities; propose modifications when objectives are hard to attain; enable iterations between MFD/MoF technical staff and political policy-makers. - Monitor fiscal objectives and targets of key fiscal aggregates such as those for the overall fiscal balance, public debt and total expenditure; account for fiscal rules that may be embedded in law. - Examine the impact of new fiscal policies on fiscal developments and economic growth, including feedback effects of revenue and expenditure policies. - Identify, assess, monitor, and manage fiscal risks. - Prepare macrofiscal projections for a long-term period (more than 10 years) to inform policy-makers about structural changes (e.g., ageing populations, climate change). - Country differentiation: - Advanced countries typically perform all tasks, including sophisticated fiscal risk analysis and regular long-term projections. - Low-income countries should focus first on the essentials: developing a medium-term strategy and monitoring key fiscal aggregates. ### II Main components of the macrofiscal function - Four identified components: 1. Macroeconomic and fiscal modeling, forecasting and debt sustainability analysis (DSA). 2. Macrofiscal policy analysis. 3. Fiscal risk analysis. 4. Monitoring macroeconomic and fiscal developments. - A Macroeconomic and Fiscal Forecasting (including Debt Sustainability Analysis) - Develop and maintain an internally consistent model that produces medium-term fiscal projections. - Key variables for fiscal forecasts: real GDP (and components such as consumption and investment), nominal GDP, inflation, exports, imports, exchange rates, interest rates, oil prices, etc. - MFD must develop revenue, expenditure and debt modules; use sub-models, assumptions and parameters for MTFF and annual budget aggregates. - Fiscal projections: many revenues, social transfers and interest payments are endogenous; most primary expenditure projections are based on existing policies and plans. - Coverage: aim for as comprehensive government-sector coverage as possible (general government as defined in IMF, 2014a); include central government, subnational governments, extrabudgetary funds, and public sector entities where relevant; account for transfers to/from SOEs and non-budgetary units. - Two important projection tasks: - Baseline projections (“no policy change” scenario): prepare MTFF baseline medium-term projections for revenues, expenditures, financing, and debt based on existing policies. - Projections of the impact of new fiscal policies: transform baseline to incorporate policy changes and propose measures to maintain consistency with medium-term objectives. - Debt sustainability analysis (DSA) is part of the macrofiscal function: - A “limited vision” focusing only on above-the-line variables ignores financing dynamics and debt servicing implications. - MFD should examine dynamics of fiscal deficits and debt sustainability. DSA examines debt projections under various assumptions and feeds into fiscal policy decisions. - Debt management (DMO) is distinct: DMO focuses on managing public debt, medium-term debt management strategy and annual borrowing plan (IMF and World Bank, 2009). - MFD may propose debt targets, report compliance, and collaborate with DMO to ensure consistency with the MTFF. - B Macrofiscal Policy Analysis - Assesses impact of fiscal policy changes on growth, macroeconomic, and budgetary objectives, including fiscal rules. - MFD prepares short-, medium-, and long-term scenarios based on policy objectives and possible fiscal changes. - Specific MFD roles may include: - Evaluate impact of fiscal policies and legislative proposals on baseline fiscal projections; possibly develop/use models to quantify impacts; iterate with policy-makers for corrective actions. - Collate fiscal analysis within the MoF or conduct it directly depending on organizational structure (interaction with Tax Policy Department, Budget Department). - Analyze impacts on public debt; design fiscal consolidation scenarios if debt is likely unsustainable or to exceed fiscal rules. - Analyze impact of fiscal policy on macroeconomic growth (estimate fiscal multipliers; model growth endogenously for long-term analysis). - Analyze fiscal-financial sector linkages (coherency of financial sector and fiscal policies), an area expanded after the 2008-2011 financial crisis. - Analyze long-term structural issues: demographic shifts, social security, health expenditures, climate change, and distributional impacts of revenue/expenditure policies. - Prioritization: basic fiscal policy analysis should be prioritized, especially in low-capacity countries—focus on impacts on MTFF and public debt of revenue/expenditure changes. - C Fiscal Risk Analysis - Fiscal risk: possibility of short- to medium-term deviations in fiscal variables relative to MTFF or annual budget (IMF, 2008). - Causes of deviations: unmet assumptions, external shocks, automatic stabilizers, off-budget or off-balance sheet operations; government guarantees and contingent liabilities can be significant (Cebotari, 2008); contingent liabilities can reach up to 40 percent of GDP in extreme cases (Bova et al., 2016). - Fiscal risks should be analyzed and reported; inclusion in annual budget documents informs legislature and public. - IMF’s Fiscal Transparency Code (IMF, 2014b) sets norms for fiscal risk reporting and fiscal risk statements. - MFD is key MoF department responsible for preparing an annual fiscal risk statement and collating estimates of various fiscal risks. - Some risks require external expertise: - DMO assesses debt and debt guarantee risks. - Financial sector regulators/supervisors assess financial-sector-originating fiscal risks (IMF, 2015). - SOE, subnational government, and legal proceeding risks should be documented by MoF and/or relevant departments. - Use of alternative macroeconomic scenarios to illustrate fiscal risk implications (contingent liabilities, price variations, asset recovery rates). - D Monitoring Macroeconomic and Fiscal Developments - Monitoring during the year informs forecasts and is a high priority in developing countries. - Functions include: - Monitoring macro economy, fiscal policy implementation, and budget execution to identify deviations from annual forecasts; analyze causes and determine whether administrative or policy responses are warranted. - Monitoring fiscal risks to assess imminence and adequacy of management policies. - Preparing monthly and/or quarterly reports on macroeconomic and fiscal performance and perspectives; maintain up-to-date database of macrofiscal trends and update projections regularly. ### III Main outputs of macrofiscal departments - A MFD outputs during the budget cycle (typical outputs): - Frequency categories: Monthly or quarterly; Twice a year; Annual; Periodic; Pre-budget review and/or mid-term review; Draft annual budget (presentation to legislature); In-year economic and fiscal reports; Updates of the FSD; Updates of MT budget strategy, objectives, macroeconomic and fiscal projections. - Typical outputs include: - Medium-term fiscal strategy document, including macroeconomic and fiscal projections. - Strategy and policy priorities for annual budget. - DSA. - Fiscal risk statement. - Report on compliance with fiscal rules. - Long-term fiscal projections (20–50 years) (optional). - Pre- and post-election fiscal updates. - Ad hoc research. - Inputs for MFD outputs come from MoF directorates and external institutions (illustrated in Figure 1): - Directorates/Institutions providing inputs: Budget; National Treasury; Tax Policy, Tax Administration, Customs; MoF units overseeing Public Investment and Assets, Local Governments, State-Owned Enterprises, Natural Disasters; Central Bank, National Institute of Statistics, Other Government Ministries; International Organizations (IMF, World Bank, OECD, etc.). - Main outputs of the MFD drawing on those inputs: Annual budget forecasts; Medium-Term Fiscal Strategy and Framework; In-year revenue and expenditure outturns; Debt and debt servicing statistics; Debt Sustainability Analysis; Information useful for assessing and quantifying fiscal risks; Fiscal Risks Statement; National macroeconomic statistics and in-year macroeconomic outturns; Analysis of world economy and international macroeconomics statistics; In-year reports on the economy and public finances; Objectives and policies; macroeconomic and fiscal projections; impact of new fiscal policies. - B Fiscal Strategy Document (FSD) - Key purposes: - Highlight medium-term fiscal strategy and ensure annual fiscal policies are consistent with the MTFF. - Provide basis for policy dialogue within the government, and for the legislature, civil society and the media. - Assist the MoF’s Budget Department to prepare the draft annual budget. - Foster consistency between medium-term fiscal policy objectives and annual budget targets. - Provide a basis for internal MoF discussions on policy options, fiscal risks and debt sustainability issues. - Provide a research agenda for the MFD. - Content typically integrates macroeconomic analysis, fiscal policy priorities and objectives, and policy changes needed to attain medium-term fiscal targets; may include: - MTFF projections of revenues, expenditures, fiscal balances and debt. - A DSA. - Separate and cumulative impact of proposed fiscal policy changes. - Analysis of fiscal risks. - The FSD may identify how the government proposes to use fiscal space, if available, to meet policy commitments; fiscal space defined as the room for undertaking discretionary fiscal policy relative to existing plans without undermining fiscal sustainability. - No unique prescription for FSD content; possible content and structure shown in Box 1 (in source). - Timing and use: - The FSD (or an update) should be prepared early in the budget cycle to link strategic fiscal considerations with annual budget preparation and to enable top-down multiyear budget spending ceilings to be decided early (Dorotinsky and Watkins, 2013). - A summary of the FSD could be presented to the legislature as part of a pre-budget debate. *Source: tnm1804 - Introduction* ### BOX 1 Possible Outline of a Fiscal Strategy Document ### BOX 1 Possible Outline of a Fiscal Strategy Document ### EXECUTIVE SUMMARY - Provide a concise overview of the Fiscal Strategy Document (FSD) and its main conclusions. ### PART 1: MEDIUM-TERM MACROECONOMIC FRAMEWORK - International economic environment - Macroeconomic policies - Medium-term macroeconomic projections (extending 3, 5, or 10 years) - Table with key indicators and assumptions ### PART 2: MEDIUM-TERM FISCAL STRATEGY, PROJECTIONS, AND POLICY OPTIONS - Short- and medium-term fiscal developments - Short- and medium-term fiscal targets; progress in achieving them - Tax and non-tax revenue policies; expenditure policies - Quantification of new fiscal policy measures - Central Scenario - MTFF: revenues, expenditures, budget balance, debt - Public sector (or government) assets and liabilities - Alternative Scenario Projections - Fiscal Risks (short- and medium-term) ### PART 3: FISCAL SUSTAINABILITY AND STRUCTURAL ISSUES - Debt sustainability analysis (gross and net debt) - Longer-term structural policies and fiscal risks ### STATISTICAL AND OTHER APPENDICES - Supporting statistical detail and annexes as needed ### LEGISLATIVE ENDORSEMENT AND UPDATES - Depending on its budgetary powers, the legislature may endorse the government’s proposed FSD. - Many countries’ legislatures endorse the MTFF and the FSD, reflecting their limited budget amendment powers. - In some countries where the legislature has unlimited powers to amend the government’s draft annual budget, the legislature may endorse an alternative medium-term fiscal strategy. This endorsement may be implicit. - The FSD and macrofiscal projections should be updated during the year. Good practice is to update the FSD twice a year. - It is also good practice to pre-announce the date of the subsequent fiscal strategy update. - Resource-constrained countries should concentrate efforts on publishing a comprehensive FSD once a year. - Example: South Africa updates its Medium-Term Budget Policy Statement annually. ### TABLE 2 — Fiscal Strategy Updates (timing and document) - About 3 months before the fiscal year begins: Budget Economic and Fiscal Update - Around mid-year of the fiscal year: Half-yearly Economic and Fiscal Update ### C Medium-Term Fiscal Framework (MTFF) - The MTFF is a key component of the fiscal strategy and provides a coherent quantitative statement of the government’s fiscal strategy for key medium-term objectives and targets. - The MTFF is the foundation for developing a sound MTBF and annual budget. - The MTFF is a rolling plan that establishes integrated multiyear limits or targets for key fiscal aggregates, consistent with and supportive of the overall macroeconomic framework. - All major policy changes and new spending proposals with fiscal implications should be analyzed and included in the MTFF. - The MFD should evaluate the fiscal impact of proposed policy changes and the compliance with any fiscal rules. - The MTFF provides the basis for undertaking fiscal policy scenario analysis. - MTFF coverage should be comprehensive; many advanced countries cover “general government”. - The MFD needs to collate data and ensure consistency of medium-term fiscal projections for “general government” with its components. - The MFD should be proactive in obtaining medium-term fiscal projections from subnational governments and managers of extrabudgetary funds, especially Social Security Funds. - In their absence—and/or if their size is relatively small—the MFD could prepare the MTFF projections for non-central government units. ### D Debt Sustainability Analysis (DSA) - The MFD could take the lead in conducting debt sustainability analysis. - Much of the DSA input data relates to the existing and future public debt portfolio, which should be provided by the DMO. - Interpretation of scenario-based DSA modeling is the role of MFD’s staff with macrofiscal analytical skills and experience. - Debt sustainability reports should be published relatively frequently, especially when gross and net debt is reaching unsustainable levels. - When primary deficits and interest risk premia are high, political decision-makers should be made aware of the options facing them. - Detailed DSA reports can be less frequent in countries without high debt. - In countries with substantial financial assets (negative net debt), reports on asset management should be prepared. - The relationship between changes in financial assets (e.g., Sovereign Wealth Funds), the MTFF and annual budgets should be fully transparent, being based on the “Santiago Principles”. - Villafuerte et al. (2008) and IMF (2014c) provide guidance on asset-liability management in resource-rich economies. ### E Fiscal Risk Statement (FRS) - Objective: identify and, where possible, quantify fiscal risks and uncertainties, and present policies adopted (or proposed) to manage the different risks. - The FRS can be published as a chapter of the Fiscal Strategy Document or as a stand-alone document. - Fiscal risk analysis should cover central government risks and, to the extent possible, risks associated with other public sector entities. - Fiscal risks should be identified in various areas (see BOX 2). - The scope could eventually analyze all components of the public sector balance sheet. - The FRS should evaluate the probability of each risk materializing, to the extent that such information exists and its disclosure does not create moral hazard. - The MFD should identify and quantify fiscal risks wherever possible. - Importance of macroeconomic risks can be identified by: - alternative macroeconomic scenarios; - sensitivity analyses illustrating budgetary impact of differing assumptions for key variables (higher/lower economic growth, inflation, interest rates (domestic and foreign), commodity prices and exchange rates); - fiscal stress tests. - Some fiscal risks, such as those associated with off-budget or off-balance sheet items and natural disasters’ risks, are difficult to assess. - Appendix 1 of IMF (2016b) illustrates how various countries manage various fiscal risks. - Fiscal risks should be incorporated into the fiscal policy framework. - After the 2008–11 financial crisis some advanced countries invested extensively in improving fiscal risk analysis. - IMF (2016b) provides guidance on mitigating and managing fiscal risks from multiple sources. - Good practices include stress tests and probabilistic forecasting methods as tools for deepening fiscal risk analysis. ### BOX 2 — Fiscal Risk Statement (organization and examples) - A fiscal risk statement describes and quantifies, wherever possible, various fiscal risks. - The FRS could be organized around three main areas of risk: 1. Macroeconomic risks: - Impact on public finances of variations in key economic and other parameters from those assumed in the forecasts 2. Specific fiscal risks including: - Explicit contingent liabilities (government has an unambiguous legal obligation, or a declared policy to provide fiscal support) - Examples: - Revenue guarantees from PPPs - Debt guarantees granted by the government to an SOE, a PPP or a subnational government - Explicit government support when natural disasters occur - Implicit contingent obligations (government is expected to, or pressured to, provide support) - Examples of government support for: - SOEs, both financial and nonfinancial, when in financial difficulties (Governments may, for example, purchase assets that carry substantive risks) - Subnational governments should they fall into financial difficulty - Depositors, in the event of failure of a deposit-taking financial institution (and in the absence of an explicit government policy for bank deposit insurance) - Climate change risks - Natural disaster risks (in the absence of, or over and above the level covered by, an explicit government-run disaster insurance scheme) 3. Risks from structural or institutional weaknesses that increase either the probability of a negative event occurring or the cost to government if the event occurs - Examples include: - Health care, pensions and other risks to government expenditure overruns due to changing demographic factors - Revenue risks: when revenues are volatile and dominated by natural resources (e.g., oil, gas and petroleum products, minerals) - Difficulties in coordinating fiscal policy among different levels of government - Increases in corruption ### F Other MFD Outputs - The MFD may prepare additional reports, regularly during the annual budget cycle or periodically. - For countries with fiscal rules, the MFD would prepare reports indicating the degree of compliance of outturns and fiscal projections with the fiscal rules. - For countries with long-term structural fiscal issues (e.g., ageing populations) reports discussing long-term projections should be prepared, but not necessarily every year. - Periodic reports on specific policy-related or technical issues in macrofiscal policy analysis may also be prepared (and published, for transparency). - Examples: special reports on the impact or cyclical sensitivity of tax and spending measures on economic growth; pre- and post-election updates of the FSD. - Example: In New Zealand, 40-year projections are required to be prepared every four years. The long-term projection model is published. ### IV ORGANIZATIONAL ARRANGEMENTS AND COORDINATION - The tasks and products of the MFD have grown, reflecting the enhanced importance of the medium-term strategic approach to fiscal policy-making. - Preparing an MTFF, verifying compliance with a fiscal rule, and examining risks to the medium-term fiscal strategy are central to macrofiscal management. - Given the transfer of financial management functions to spending ministries, the role of the MoF has changed; the MFD has become a critical department for macrofiscal policy analysis, advice and projections. - There is no single “model” for where macrofiscal functions should be performed; most functions are normally conducted within the MoF as a single ministry. - Tradeoffs exist between concentrating macrofiscal functions in one MoF department and dispersing them across several MoF departments and other government agencies. - A “concentrated” MFD minimizes inconsistencies and reduces coordination costs. - Other MoF departments or outside agencies could perform specialized functions (e.g., tax policy analysis). ### A Where are Macrofiscal Functions Located in Various Countries? - Three major arrangements with country examples: - A single MoF department performs all major macrofiscal functions, including preparing the official forecasts. - Examples: Some African countries (Mozambique, Niger); Sweden. - Various departments of the MoF perform macrofiscal functions collaboratively. - Example: France (Directorate General of Treasury lead agency; Budget Department and agencies outside MoF also play roles). Senegal: one directorate-general responsible for macroeconomic projections and another for fiscal strategy. - Macrofiscal functions are shared between a “finance” ministry and a “planning” ministry. - Prevalent in Asia, the Middle East and some African countries. - Examples: Indonesia (Fiscal Policy Office in MoF since 2006), Brazil’s Ministry of Planning, Budget, and Management, Colombia’s National Planning Department. - Exceptionally, three ministries or agencies may perform macrofiscal functions (few countries). - Example: Democratic Republic of Congo (Finance, Budget, and Planning Ministries). - United States: Treasury Department, Office of Budget and Management, and Council of Economic Advisors collaborate on the President’s draft budget projections. - Independent fiscal institutions sometimes carry out important macrofiscal functions typically performed by the MoF. - Two arrangements: 1. Independent agency under a non-MoF government ministry (Belgium, the Netherlands). 2. Agency not formally under any government ministry (United Kingdom’s Office for Budget Responsibility). - In these cases, agencies focus on forecasting and analysis but do not make policy recommendations. - Independent fiscal institutions complement the work of the MFD; they are not substitutes. - Fiscal councils appear to reduce fiscal deficit bias. ### BOX 3 Sweden’s MFD and Other Government-Funded Agencies - The MoF’s Economic Affairs Department (EAD) is Sweden’s MFD. The EAD’s roles are to: - Prepare the MoF’s official macroeconomic and fiscal projections - Make fiscal policy recommendations to the government - Analyze the consistency of agencies’ policy proposals with macrofiscal objectives - Analyze long-term fiscal trends and sector developments - Conduct impact assessments of the tax, benefits and welfare systems - The EAD’s macrofiscal work is complemented by other MoF Departments, especially the Budget Department, the Tax Department, and the National Debt Office. - Autonomous agencies under the MoF provide complementary projections and models: - National Financial Management Authority: short- and medium-term fiscal projections - National Institute of Economic Research (NIER): economic and fiscal analyses and forecasts, four times a year; detailed short-term forecasts (1–2 years ahead) and medium-term analyses for the next five years - Since 2007, Sweden’s independent Fiscal Policy Council evaluates government fiscal policies, analyzes whether budget policy targets are being met and medium-term fiscal sustainability issues, and assesses the quality of official fiscal forecasts. *Source: tnm1804 - BOX 1 Possible Outline of a Fiscal Strategy Document* ### BOX 4 Independent Fiscal Institutions ### BOX 4 Independent Fiscal Institutions ### Independent fiscal agencies: principles and main roles - Various types of independent fiscal agencies have been created in several countries in recent years, especially in Europe. - Key principles: Von Trapp et al (2016) pp 27–30 lists nine key principles for guiding the work of independent fiscal institutions. Independence and transparency are particularly important. - Main roles: - Provide fiscal analysis, including an independent assessment of macrofiscal forecasts (short-, medium- and long-term). - Possibly analyze or assess fiscal sustainability, fiscal policy objectives, fiscal policy stance (including compliance with fiscal rules) and the costing of fiscal policies. - Location and institutional placement: - Some independent agencies are attached to the legislature (“parliamentary budget offices”). - In other countries there are Fiscal Councils, neither under parliament nor government. - In a few countries the external audit office (e.g., France’s Court of Accounts) prepares alternative fiscal forecasts and comments on the macrofiscal outlook. - Some General Comptrollers’ Offices in Latin America comment on whether fiscal objectives are being met. ### Possible internal structure of the Macrofiscal Department (MFD) - No “one-size-fits-all” organizational structure for the MFD; structure depends on scope, roles of other MoF departments and government agencies, and staff availability. - For small countries: MFD may have only 4-6 staff, with the “department” as a single unit. - Illustrative three-division MFD internal structure for a medium-sized country: - Macroeconomic and Fiscal Forecasting Division: - Responsible for forecasting macroeconomic and fiscal variables; maintain central database; draft regular reports of macroeconomic and fiscal developments and forecasts. - Staff possess technical and analytical expertise for macrofiscal projections and model development. - Could prepare debt sustainability analyses in collaboration with the DMO. - Two sub-units: macroeconomic forecasting; fiscal forecasting (projections for revenue, expenditures, the fiscal balance and gross debt). - Fiscal Policy Division: - Responsible for fiscal analysis and policy advice, especially for updating of the FSD. - Works closely with the MoF’s Budget Department and Tax Policy Department. - Proposes “top-down” expenditure ceilings in collaboration with the Budget Department. - Ensures consistency of medium-term projections and consistency with fiscal rules when in place. - Assesses alternative assumptions and policy scenarios (sensitivity analysis) and compares short-term fiscal projections with actual outcomes. - Structural Fiscal Policy and Risk Analysis Division: - Analyzes structural or longer-term fiscal policy issues (e.g., options for major tax reforms; impact of changes in oil prices; public investment and potential output). - Prepares long-term projections in collaboration with the Fiscal Forecasting Division (e.g., impact of ageing on pensions and health care). - Analyzes fiscal risks and prepares the fiscal risk statement (or this may be a separate division). - Diversity in practice: - Some countries have 4–5 divisions; Colombia’s MFD has only one division. - In a few countries, the MFD covers areas beyond the four main MFD functions (e.g., Peru’s MFD includes intergovernmental relations; Norway’s MFD covers employment policies). - None of the reviewed countries has a division dedicated exclusively to Fiscal Risk analysis; in Colombia and Peru the Treasury Directorate is responsible for fiscal risk analyses. - Staffing guidance: - Small countries with limited budgets and staff: MFD size could range from 5 to 10 staff (as in larger Caribbean island countries). - For a moderate sized country performing all four functions of section II: staff size could be 20 to 50, for example. - Scope and division of labor: - Where a Tax Policy Unit exists, it leads tax policy analysis; the MFD analyzes implications of major tax policy changes on the macroeconomic and fiscal outlook. - MFD should avoid focusing on fiscal issues that have an insignificant impact on the macrofiscal framework and projections. ### Organizational arrangements for subnational fiscal issues - When subnational governments have a sizeable impact on the fiscal framework, two options: - MFD examines macrofiscal issues related to intergovernmental fiscal relations. - A separate MoF department is established to handle intergovernmental fiscal matters. - Typical tasks under either approach: - Proposing the size of intergovernmental transfers. - Designing transfer mechanisms and tax-sharing arrangements. - Monitoring fiscal developments in local governments. - Monitoring compliance with subnational fiscal rules, should such rules exist. - Example: In Canada the Department of Finance (DoF) “intergovernmental” branch reports to the Minister of Finance on fiscal issues of provinces and coordinates closely with other DoF branches. ### Coordination within the Ministry of Finance and with other government agencies - Strong coordination across institutions is essential to realize the benefits of macrofiscal work. - MFD and Budget Department: - Close coordination is crucial, especially for multi-annual spending projections. - MFD usually responsible for “top-down” spending ceilings and the Budget Department provides “bottom-up” estimates of budget spending. - Comprehensive Spending Reviews require collaborative approaches with inputs from other ministries and agencies. - MFD and other MoF departments: - For revenue projections and analysis, MFD collaborates closely with the Tax Policy Department and consults Tax and Customs Administrations. - MFD should ensure revenue projections are on a gross basis, not only revenues net of earmarked expenditures. - In preparing DSA projections, MFD must coordinate with the DMO. - Planning ministry and development budgets: - When a Planning Ministry exists and prepares medium-term or long-term plans or macroeconomic projections, its development budget and investment spending analysis must be consistent with the MFD’s MTFF and annual fiscal strategy. - A formal agreement between the two ministries on respective macrofiscal tasks should be drawn up and agreed. - Statistics and non-MoF agencies: - Coordination with the national statistics office is needed so historical National Accounts and fiscal data are identical to the MFD’s database. - Other agencies for coordination include those responsible for SOEs, energy, civil service, etc. - Central bank collaboration: - Coordination ensures consistency of fiscal, monetary and structural policies and assessment of macroeconomic effects of fiscal policies for a given monetary policy stance. - MFD and the central bank’s “macro-economy” department should compare macroeconomic projections and, if possible, develop a consistent macroeconomic and budgetary framework. - Coordination across levels of government: - Formal coordination bodies are needed when “general government” fiscal rules apply across central and subnational governments, to align central and subnational MTFFs, annual budgets, and fiscal policies. ### Strategy for building a strong Macrofiscal Department (preconditions) - Preconditions for a strong MFD in some lower income countries: - The MFD takes the lead in proposing the MTFF and annual budget strategy, consistent with policy-makers’ decisions on fiscal objectives or fiscal rules. - The recurrent and investment (“development”) budgets are unified. - Extrabudgetary funds (EBFs) are included in the MTFF and information on them presented with the annual budget. - High-level political support is needed to sustain the MFD’s strategic position; internal restructuring may be required. - Priority setting for macrofiscal activities: - For advanced countries: priorities on improving quality of all macrofiscal functions and outputs discussed in sections II and III. - For lower income countries: once annual budget forecasting, budget documentation and annual accounts reach adequate quality, focus resources on establishing and improving the medium-term fiscal strategy and framework to ensure usefulness for annual budgeting. - Later stages: deepen or begin debt sustainability and fiscal risk analyses. - For low-income countries, preparation of long-term fiscal projections is barely worthwhile given large uncertainties surrounding short-term fiscal projections. ### Developing tools for macrofiscal forecasting and policy analysis - Macroeconomic forecasts for lower capacity countries: - Modeling ambitions should not be high; official projections of key macro variables could be forecast by other agencies or taken as targets. - MFD focus: establish links between key macroeconomic variables and budget forecasts. - With limited human resources, MFD could rely on the central bank for forecasts or assumptions for variables such as GDP, inflation, exchange rate, and interest rates. - The IMF’s Financial Programming (FP) framework: - One approach for macroeconomic forecasts offering simplicity, consistency and comprehensive coverage. - Based mainly on identities for all sectors of the economy and a limited number of behavioral relationships. - In small economies, the MFD and central bank and/or other agencies could jointly develop the framework or at least agree on key assumptions and parameters, since monetary and external sectors are included and are essential inputs for the central bank’s analysis. *Technical Notes and Manuals 18/04 | 2018* ### BOX 5. Financial Programming Framework ### BOX 5. Financial Programming Framework ### Overview and Purpose - The Financial Programming (FP) Framework provides a macroeconomic framework for understanding the economy and its inter-linkages and can be used to assess macrofiscal policies aimed at achieving desirable macroeconomic objectives. - Typical analytic process is usually done in three steps: - (1) understanding the current state of the economy; - (2) assessing the trajectory of the economy if current policies stay the same; and - (3) setting of desirable macroeconomic objectives and formulating policy changes to realize macrofiscal objectives. ### Core Sectors in the FP Framework - The FP framework lays out the key relationships between the following four sectors of the economy: - 1 Real Sector: In-depth analysis of the National Accounts and real economic transactions of the different economic agents: households, firms, government, and the rest of the world - 2 Government Sector: This sector links revenues and expenditures to macroeconomic and policy parameters. The fiscal balance is linked to net financing and government debt - 3 External Sector: The relationships between residents and non-residents of an economy as portrayed by the external Balance of Payments accounts - 4 Monetary and Financial Sector: This block examines different types of financial sector intermediaries and their overall impact on macroeconomic variables ### Fiscal Forecasting: Characteristics of a Good System - There are five characteristics of a good fiscal forecasting system. The most important is usefulness: medium-term fiscal projections must feed into the annual budget forecasts. - The MFD should evaluate the relative weight of the following aspects (trade-offs exist): - Useful. The forecasts must inform the budget process, particularly by providing analysis and advice useful to the Minister of Finance and senior staff of the MoF. The forecasting processes must also respond to the MoF’s evolving needs. - Consistency. The “models” used within and between different departments of the MoF—and agencies outside the MoF—should use the same assumptions for GDP, inflation, the exchange rate, etc. for the official forecasts that underlie the macroeconomic and budget forecasts. - Useable. The forecasting “model” must be easy for MoF staff to use, straightforward to learn, and produce easy-to-understand results. In low-income countries, modeling ambitions and expectations need to be managed carefully by the MFD director and senior MoF staff. - Accurate. Accuracy improves budget credibility and builds trust in the forecasting framework. However, more-accurate forecasts typically use more sophisticated forecasting techniques. - Sustainable. One main forecasting model should be used for a number of years. For sustainability, models should not depend only on a very limited number of staff. User manuals should be prepared for training purposes. - Operational guidance: - Lower data quality and limited skilled people imply less sophistication in fiscal modeling. - Balance availability of reliable recent data, staff time, and skills/tools (trained people and computers). - As skills are acquired, refine specification of modules for revenues, expenditures, fiscal deficit financing, and debt sustainability analyses. - Advanced models can simulate impact of economic and fiscal policy shocks, including incremental GDP impact of changes in revenue or expenditure policies. ### Revenue Forecasting Methods - Various methods and models can be used to forecast revenues. Many revenues are driven by economic variables. - Choice of approach could include: - Extrapolating past revenue. Under this approach, there is no link between the revenues collected and the tax base; except for minor taxes unlinked to economic activity, this approach should be avoided. - Effective tax rates. Revenues from each tax are forecast by multiplying a forecast of the tax base by the corresponding effective tax rate (calculated by dividing tax collected for recent periods by estimated tax base). A proxy tax base is often used. - Elasticities. Assume a consistent relationship between growth in revenue for each tax and growth in corresponding tax base. Estimates of elasticity values are commonly done via: (i) macroeconomic models; (ii) theoretical considerations; and (iii) time-series analysis (e.g., Wolswijk, 2007). - Structural models. Produce revenue forecasts that include interdependencies of the tax system with economic variables, including feedback effects. - Micro-simulations. Mimic provisions of tax laws; require detailed data and aggregate micro-level forecasts. Useful for revenues not dependent on economic factors. - Institutional practice: - If a separate Tax Policy Department exists, it could lead tax revenue forecasting and show components (policy changes, admin/compliance improvements) separately. - The MFD would collate all revenue forecasts and possibly prepare forecasts of some revenue types (e.g., nontax revenues and, for low-income countries, projections of external grants). ### Expanding the Scope of the MFD’s Tasks While Ensuring Coordination - In weak-capacity countries, scope could be confined initially to macroeconomic and fiscal projections, policy analysis and fiscal monitoring, emphasizing a sound MTFF and fiscal projections for no more than three years. - First-year projections should feed directly into the annual budget framework; new tax and spending policies should be analyzed at least in a basic manner; prepare/update a fiscal strategy document at least annually. - As capacity grows, the MFD should progressively: - Deepen revenue analysis and forecasting. - Analyze impact of new expenditure policies with greater rigor. - Examine links between deficit financing and public debt; prepare debt sustainability analyses. - Begin or deepen fiscal risk analysis. - Coverage expansion: - Expand MTFF coverage to “general government” when substantive fiscal powers are devolved to subnational governments. - Include non-central government and extrabudgetary transactions as needed; whole-of-government balance sheets are an ambition for few advanced countries. - Coordination mechanisms: - MFD should coordinate closely with other MoF departments and government agencies to ensure consistency of macroeconomic and fiscal projections. - Formalize exchanges with agencies outside MoF (e.g., Memorandum of Understanding outlining responsibilities, timing, and issues). - Establish working groups with staff from MoF departments, planning ministry, national statistics office and central bank to share datasets and methods—particularly important for official macroeconomic projections. ### Deepening Fiscal Risk Analysis - Publication of a fiscal risk statement is an attainable objective, including for some low-income countries (example: Uganda’s MoF published a fiscal risk statement in 2016). - MFD should gradually deepen fiscal risk analysis: - Start with easy-to-identify risks (e.g., macroeconomic risks). - Expand to cover more risks shown in Box 2, prioritizing those posing greatest threat to fiscal sustainability. - Assess PPP risks using IMF and World Bank staff (2016) tool. - Establish a hierarchy of fiscal risks by balancing likelihood and impact; prioritize analysis of high-likelihood and high-impact risks (red and orange zones of Table 4). - Advanced countries can incorporate fiscal stress tests that examine impact of macroeconomic shocks and realized contingent liabilities on fiscal flows and stock variables using GFS concepts and government balance sheets. Examples provided for Iceland, Peru, and the UK’s 2017 fiscal report. ### Improving the Quality of Fiscal Information and Fiscal Forecasts - The MFD must ensure fiscal information underlying forecasts is high quality. Forecasts suffer when historical database is not up-to-date, inaccurate and/or incomplete. - Key quality assurances: - Independent external auditor opinion on government’s annual financial statements. - Ensure fiscal projections are consistent with historical database for central (or general) government flows and stocks. - The MFD should promote: - Good cooperation and coordination among data-producing agencies within MoF and with other agencies; participate in working groups to improve national accounts and budgetary data. - Efficient and timely data collection systems with timely publication. Explain large revisions and take actions to prevent reoccurrences. - Comprehensiveness: include financial transactions of autonomous noncommercial government agencies and extrabudgetary funds in fiscal data. - Ways to improve forecast quality: - Evaluating accuracy of forecasts via post mortems; disentangle impacts of discretionary fiscal policy, macroeconomic developments, and statistical changes. - Reviewing forecast errors and determining sources to improve future forecasts; some jurisdictions require this by law (example: Australia). - Avoiding deliberate optimism in GDP and revenue forecasts; MFD should resist political pressure and lean towards pessimism rather than optimism in growth and revenue projections. - Comparing models in-house (simple vs alternative) to improve specification and parameters. - Comparing with forecasts of non-MoF forecasters to examine methods and parameters. - Creating institutions to improve credibility (see Institutions section). ### Institutions for Improving Forecast Credibility - Institutional arrangements that help improve robustness of fiscal forecasts include: - Establishing/strengthening a macroeconomic and fiscal forecasting Working Group across MoF, Central Bank, Statistics agency, etc., to agree on common assumptions. - Using a panel of competent experts to produce alternative forecasts or review forecasts (examples: Chile, Poland). - Creating an independent fiscal institution to verify and endorse macroeconomic forecasts and/or fiscal stance (EU requirement for Euro-zone countries since 2013). - Using consensus assumptions for key variables or tax forecasts; some US States do this and three States outsource revenue forecasting. - Limitations of forecast evaluations: changing projection methods, imperfect assessment of fiscal policy impacts, small sample of past forecasts, and possible errors/revisions in recent historical outcomes. ### Strengthening Human and Material Resources - Human resources: - MFD needs staff with analytical skills and knowledge of modeling and forecasting techniques, including: - (1) strong understanding of macroeconomics; - (2) ability to analyze macroeconomic and fiscal developments; - (3) ability to construct models and forecast key macroeconomic and fiscal variables for short-, medium- and long-terms; - (4) database management and IT skills. - On-the-job or external training may be needed; communication and interpersonal skills are also required to explain MTFF outputs to senior management, policy-makers, parliament and the public. - Availability of skilled staff depends on recruitment, remuneration, promotion, and retention policies; salaries compatible with required skills are needed. Head of MFD should be remunerated comparably with other MoF departments such as Treasury and Budget. - If macrofiscal modeling is underdeveloped, MFD staff could avail central bank macroeconomic modeling expertise; central bank staff may be seconded to the MoF. - IT/computerization: - Information technology systems for data collection, processing and modeling are required to manage databases and software. - Systems need skilled maintenance and periodic upgrades and should be linked with Budget, Tax, and Debt Departments’ systems. ### Concluding Remarks and Strategy for Reform - A well-functioning MFD is strategic within the MoF: formulates initial versions of medium-term fiscal strategy, ensures policy coherence, analyzes fiscal policy proposals, monitors fiscal developments, and challenges inconsistent data. - Four core MFD functions identified: - (1) forecasting macroeconomic and fiscal aggregates and preparing updates of medium-term fiscal strategy; - (2) analyzing short- and longer-term impact of revenue and expenditure policies to ensure debt sustainability; - (3) analyzing fiscal risks; - (4) monitoring macrofiscal developments. - Organizational approaches vary; one option is divisions specializing in modeling/forecasting, revenue/expenditure analysis, and fiscal risk/structural policy issues. - MTFF and macrofiscal framework underlying annual budget are key outputs and should be government-owned and published to enhance transparency. - Emphasis for underdeveloped macrofiscal functions: establish/strengthen core MFD functions, improve short- to medium-term macroeconomic and fiscal forecasts, ensure accurate assessment of revenue and expenditure policy changes, and later advance to comprehensive fiscal risk analysis and modeling to improve reliability and credibility of medium-term fiscal strategy. *Technical Notes and Manuals 18/04 | 2018* ### REFERENCES ### REFERENCES ### Reference list - Allen, R., Y. Hurcan, P. Murphy, M. Queyranne, and S. Yläoutinen, 2015, “The Evolving Functions and Organization of Finance Ministries”, IMF Working Paper 15/232, www.imf.org. - Allen, R., R., and B. H. Potter (eds.) 2013, The International Handbook of Public Financial Management (New York: Palgrave Macmillan). - Batini, N., L. Eyraud, L. Forni and A. Weber, 2014, “Fiscal Multipliers: Size, Determinants, and Use in Macroeconomic Projections”, Technical Notes and Manuals, TNM/14/04, www.imf.org/external/pubs/ft/tnm/2014/tnm1404.pdf. - Beetsma, R. M. W. J. and X. Debrun (2016), “Fiscal Councils: Rationale and Effectiveness”, IMF Working Paper WP/16/86, www.imf.org/external/pubs/ft/wp/2016/wp1686.pdf. - Beetsma, R. M. W. J. and X. Debrun (2018), Independent Fiscal Councils: Watchdogs or lapdogs?, Centre for Economic Policy Research (CEPR) Press, https://voxeu.org/content/independent-fiscal-councils-watchdogs-or-lapdogs. - Bogaert, H., L. Dobbelaere, B. Hertveldt and I. Lebrun, 2006, “Fiscal councils, independent forecasts and the budgetary process: lessons from the Belgian case”, Working Paper 4-06 (Brussels: Federal Planning Bureau). - Bos, F., 2008, “The Dutch fiscal framework; history, current practice and role of the Central Planning Bureau”, OECD Journal on Budgeting, Vol. 8, No. 1, 7-48. - Bova, Elva, Marta Ruiz-Arranz, Frederik Toscani, and H. Elif Ture, 2016, “The Fiscal Costs of Contingent Liabilities: A New Dataset”, IMF Working Paper 16/14, www.imf.org. - Budina, N, Kinda, T. Schaechter, A. and A. Weber, 2013, “Numerical Fiscal Rules: International Trends”, Chapter 3 of Public Financial Management and Its Emerging Architecture, Cangiano et al., op cit. - Budina, N. and M. Petrie, 2013, Managing and Controlling Fiscal Risks, Chapter 5 of Public Financial Management and Its Emerging Architecture, Cangiano et al., op cit. - Buettner, T., and B. Kauder, 2009, “Revenue Forecasting Practices: Differences across Countries and Consequences for Forecasting Performance”, CESIFO Working Paper No. 2628, April. - Cangiano, M., Curristine, T. and M. Lazare (editors), 2013, Public Financial Management and Its Emerging Architecture, (Washington: International Monetary Fund). - Cebotari, A., 2008, “Contingent Liabilities: Issues and Practice”, IMF Working Paper 08/245 (Washington: International Monetary Fund). - Cebotari, A., J. M. Davis, L. Lusinyan, A. Mati, P. Mauro, M. Petrie, and R. Velloso, 2009, “Fiscal Risks: Sources, Disclosure, and Management”, Fiscal Affairs Department (Washington: International Monetary Fund). - Crandell, W., 2010, Revenue Administration: Autonomy in Tax Administration and the Revenue Authority Model, Technical Notes and Manual TNM/10/12, Fiscal Affairs Department (Washington: International Monetary Fund). - Debrun, X, T. Kinda, T. Curristine, L. Eyraud, J. Harris, and J. Seiwald, 2013, “The Functions and Impact of Fiscal Councils”, IMF Policy Paper, July 16, International Monetary Fund. - Donihue, M. and J. Kitchen, 1999, The Troika process: Economic models and macroeconomic policy in the USA, MPRA Paper No. 22216, http://mpra.ub.uni-muenchen.de/22216. - Dorotinsky W. and J. Watkins, 2013, “Common Practices in Setting Expenditure Ceilings within National Budgets”, World Bank GET Note, http://siteresources.worldbank.org/PUBLICSECTORANDGOVERNANCE/Resources/285741-1368636830774/201201.pdf. - Everaert, G., M. Fouad, E. Martin, and R. Velloso, 2009, “Disclosing Fiscal Risks in the Post-Crisis World”, IMF Staff Position Note 09/18, www.imf.org. - Glenday, G., 2013, “Revenue Forecasting”, chapter 20 of International Handbook of Public Financial Management, Allen, R. et al., Palgrave Macmillan, op. cit. - Grote, Martin, 2017, “How to Establish a Tax Policy Unit”, How To Note 17/02, International Monetary Fund. www.imf.org/en/Publications/Fiscal-Affairs-Department-How-To-Notes/Issues/2017/10/19/How-to-Establish-a-Tax-Policy-Unit-45322. - Harris, J., Hughes, R., Ljungman, G. and C. Sateriale, 2013, “Medium-Term Budget Frameworks in Advanced Economies: Objectives, Design and Performance”, Chapter 4 of Public Financial Management and Its Emerging Architecture, Cangiano et al, op cit. - Hemming, R., 2013, “The Macroeconomic Framework for Managing Public Finances”, Chapter 1 of International Handbook of Public Financial Management, Allen, R. et al., Palgrave Macmillan, op. cit. - IMF, 1987, “Theoretical Aspects of the Design of Fund-Supported Adjustment Programs” Occasional Paper No. 55 (Washington: International Monetary Fund). - IMF, 2008, Fiscal Risks—Sources, Disclosure, and Management, www.imf.org/external/np/pp/eng/2008/052108.pdf. - IMF, 2014a, Government Financial Statistics Manual, www.imf.org. - IMF, 2014b, (revised) Fiscal Transparency Code, www.imf.org/external/np/fad/trans. - IMF, 2014c, “Sovereign Asset-Liability Management—Guidance for Resource-Rich Economies”, www.imf.org/external/np/pp/eng/2014/061014.pdf. - IMF, 2015, “From Banking to Sovereign Stress: Implications for Public Debt”, IMF Policy Paper, www.imf.org/external/np/pp/eng/2014/122214.pdf. - IMF, 2016a, “Assessing Fiscal Space: An Initial Consistent Set of Considerations”, IMF Staff Paper, December, www.imf.org/external/np/pp/eng/2016/111816.pdf. - IMF, 2016b, “Analyzing and Managing Fiscal Risks—Best Practices”, Policy Paper, www.imf.org/external/np/pp/eng/2016/050416.pdf. - IMF, 2017, “Uganda: Fiscal Transparency Evaluation”, IMF Country Report 17/130, May, www.imf.org/en/Publications/CR/Issues/2017/05/25/Uganda-Fiscal-Transparency-Evaluation-44935. - IMF and World Bank, 2009, “Developing a Medium-Term Debt Management Strategy—Guidance for Country Authorities”, www.imf.org/external/np/pp/eng/2009/030309a.pdf. - IMF and World Bank staff, 2014, “Revised Guidelines for Public Debt Management”, www.imf.org/external/np/pp/eng/2014/040114.pdf. - IMF and World Bank staff, 2016, “PPP Fiscal Risk Assessment Model—User Manual”, Preliminary, www.imf.org/external/np/fad/publicinvestment/pdf/PFRAMmanual.pdf. - IWG, 2008, “Sovereign Wealth Funds - Generally Accepted Principles and Practices—Santiago Principles”, International Working Group (IWG) on Sovereign Wealth Funds, www.ifswf.org/sites/default/files/santiagoprinciples_0_0.pdf. - Kyobe, A., and S. Danninger, 2005, “Revenue Forecasting—How is it done? Results from a Survey of Low-Income Countries”, IMF Working Paper WP/05/24 (Washington: International Monetary Fund). - Leal, T., J. J. Pérez, M. Tujula, and J. Vidal, 2007, Fiscal forecasting lessons from the literature and challenges, ECB Working Paper Series No. 843, European Central Bank, www.ecb.europa.eu/pub/pdf/scpwps/ecbwp843.pdf. - Lienert, I., 2015, “Independent Fiscal Institutions: International Experience and the Scottish Fiscal Commission, Finance Committee, Parliament of Scotland, October, www.scottish.parliament.uk/parliamentarybusiness/CurrentCommittees/93009.aspx. - Martinez-Vazquez, J. and E. Heredia Ortiz, 2009, “Designing and Establishing Fiscal Policy Analysis Units”, United States Agency for International Development (USAID), https://www.yumpu.com/user/frp2.org. - Mühleisen, M, S. Danninger, D. Hauner, K. Krajnyáck, and B. Sutton, 2005, “How do Canadian Budget Forecasts Compare with Those of Other Industrial Countries?”, IMF Working Paper WP/05/66. - Office for Budget Responsibility, 2017, “Fiscal risks report”, Command Paper, www.gov.uk/government/publications. - Ostry, J., D., Atish, R. Ghosh, J. I. Kim, and M. S. Qureshi, 2010, “Fiscal Space”, IMF Staff Position Note 10/11 (Washington: International Monetary Fund). - Ouanes, A., and S. Thakur, 1997, “Macroeconomic Accounting and Analysis in Transition Economies” (Washington: International Monetary Fund). - Robinson, Marc, 2012, “Aggregate expenditure ceilings and allocative flexibility”, OECD Journal on Budgeting, Vol. 2012/3, http://dx.doi.org/10.1787/budget-12-5k468nqj1f7g. - Robinson, Marc, 2013, “Spending Reviews”, OECD Journal of Budgeting, Vol. 2013/2, http://dx.doi.org/10.1787/budget-13-5jz14bz8p2hd. - Schick, A., 2001, “The Changing Role of the Central Budget Office”. OECD Journal of Budgeting, Vol. 3, No. 1, www.oecd.org/gov/budgeting/43515497.pdf. - Villafuerte, M, R. Ossowski, T. Thomas and P. Medas, 2008, “Managing the Oil Revenue Boom : The Role of Fiscal Institutions”, IMF Occasional Paper No. 260, www.imf.org. - von Trapp, L., I. Lienert, and J. Wehner, 2016, “Principles for Independent Fiscal Institutions and Case Studies, OECD Journal of Budgeting 2015/2 (Paris: Organization for Economic Cooperation and Development). - Warren, K., 2013, “The Development and Use of Public Sector Balance Sheets”, Chapter 26 of International Handbook of Public Financial Management, Allen, R. et al., Palgrave Macmillan, op. cit. - Wolswijk, G., 2007, “Short- and Long-run Tax Elasticities: The Case of the Netherlands”, ECB Working Paper Series No. 763, European Central Bank. ### IMF contact - TNM/18/04 - International Monetary Fund - Fiscal Affairs Department - 700 19th Street, NW - Washington, DC 20431 - USA - T. +(1) 202.623.8554 - F. +(1) 202.623.6073 *Content from: tnm1804 - REFERENCES (tNM/18/04).* --- _Source: https://www.imf.org/-/media/files/publications/tnm/2018/tnm1804.pdf_