Authorities’ Fiscal Forecasts in Latin America: Are They Optimistic?

IMF Working Papers, June 4, 2021

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Authors: Metodij Hadzi-Vaskov, Luca A Ricci, Alejandro M. Werner, Rene Zamarripa
Published: June 4, 2021
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9781513573403.001

Authors: Metodij Hadzi-Vaskov, Luca A Ricci, Alejandro M. Werner, Rene Zamarripa
Date: June 4, 2021
Scope: Six Latin American economies using annual budget documents over the period 2000-2018.
Research question: Do governments in Latin America tend to be optimistic when preparing budgetary projections?

Constructed a novel dataset of the authorities’ fiscal forecasts in six Latin American economies using data from annual budget documents over the period 2000-2018.
Compared authorities’ forecasts with outturns reported in the corresponding budget documents of the following years to measure fiscal forecast errors and their evolution.

For most countries, there is no general optimistic bias in the forecasts for the fiscal balance-to-GDP ratio (though there may be bias for the components).
Fiscal forecasts have improved for some countries over time, albeit they have worsened for others.
Forecast errors for public debt-to-GDP ratios are negatively associated with surprises to GDP growth.
Budget balance rules seem to help contain the size of the fiscal forecast errors.

Forecast errors for the fiscal balance-to-GDP ratio are:
- Positively correlated with GDP growth.
- Positively correlated with terms of trade changes.
- Negatively correlated with GDP deflator surprises.
Forecast errors for public debt-to-GDP ratios are negatively associated with surprises to GDP growth.

Presence of budget balance rules is associated with smaller fiscal forecast errors, suggesting fiscal rules can improve forecast accuracy or constrain error magnitude.
Heterogeneity across countries indicates that institutional settings and components of forecasts (revenues, expenditures, debt) matter for the presence and direction of bias.
Improving forecasting practices could focus on better accounting for GDP growth volatility, terms of trade shifts, and GDP deflator surprises.