Th i rd Annua l G loba l Ne twork o f Par l i amentary Budget Officers

Mostafa Askari Ottawa, June 11, 2015

Fiscal Risk Analysis

Outline1 •Sources of fiscal risks

2 •Changes in economic context

3 •Links between economic context and fiscal risks

4 •How to analyse economic risks

5 •Unanticipated non-economic events

6 •Budget mismanagement

7 •How to minimize fiscal risks

Sources of Fiscal Risks

Changes in economic context

Unanticipated events

Budget mismanagement

Changes in Economic Context

Unanticipated international developments

Unanticipated domestic developments

Biased economic forecasts

Links between economic context and fiscal risks

• GDP Tax baseRevenu

es

•GDP•Unemployment rate•Inflation•Interest rates

Expenses

Incomeprofits

Cons.

How to analyse economic risks?Assess historical performance of the forecast- forecast errors

Prepare a fan chart –probabilistic assessment of forecast error and bias

Prepare your own forecast

Prepare what if scenarios based on alternative economic developments

Forecast errors

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

Average Error in Forecasting Real GDP Growth, 2000-2007(Actual –Forecast)

Source: International Monetary Fund

Fan Charts

Unanticipated non-economic events

Natural disasters

Conflicts and wars

Can’t analyse risks but can assess if budget has

provisions

Budget mismanagement

Revenues

• collection problems

Expenses

• Over spending by line ministries• Cost overruns of programs

Key Questions on Budget Mismanagement

Are there large tax gaps?

Are there clear , enforceable expenditure ceiling targets?

Are there institutional arrangements that prevent line ministries from over spending?

Have programs been costed properly with credible risk analysis?

How to minimize fiscal risks?A medium-term budget framework

A credible, balanced risk macroeconomic forecast

A top-down budget process

Expenditure ceilings / fiscal anchors

Institutional arrangements and laws

Transparent and comprehensive reporting

Medium-term Budget Framework

Bottom- Up

Top- Down

Final Decision by MOF and PM

Institutional arrangements and

rules