Let’s not inadvertently give the idea that official forecasts are being controlled in Finland

Failure of the Ministry of Finance in detecting the latest twist of the economy has been criticised in public. The primary requirement for forecasts is, however, not them being accurate also in the case of surprising situations – instead, the primary requirement is for decision-makers not to control the forecasts.

The institutions forecasting the Finnish economy – the Ministry of Finance (FM) and almost all of the Finnish and foreign forecasters – were yet again unsuccessful in anticipating a turning point. This time, it was the turn for the better at the end of 2016 and in the beginning of 2017, when exports suddenly started to flow, unlike in the previous years.

The difficulty in forecasting this twist has been regarded with astonishment in public. Some politicians already had an idea that the economy would experience a clear upswing before this came up in the forecasts by the FM. Reasonableness of the 2017 forecast by the FM was suspected in this connection. Some stated that the FM is always overly pessimistic in its forecasts. The FM was dubbed “the Harbinger of Doom”.

It’s only natural that political leaders have opinions on the development of the economy, and they should voice their opinions. However, producing official forecasts in an actually independent manner is of utmost importance.

“The claim that the economic forecasts by the FM are always pessimistic is not true.”

The idea of a turning point in the economy that was voiced before the official forecasts turned out to be right, which was truly a feat worthy of praise. However, the claim that the economic forecasts by the FM are eternally pessimistic is not true – this comes clear when the claim is studied in detail.

We recently assessed the reliability of forecasts by the FM in our report covering the years 1976–2016. The reliability of forecasts on GDP growth, the unemployment rate and inflation was studied. Deviations in the Ministry’s forecasts from the actual GDP growth figures proved to be unbiased. In other words, the FM had overestimated and underestimated the economic growth roughly as often – the forecasts for 21 years were overestimated and the forecasts for 20 years were underestimated. This fully corresponds to the research results on the forecasts by the FM that were previously published.

Macroeconomic forecasts play an extremely important role in the planning and decision-making concerning central government finances. Requirements regarding the forecasts have become stricter due to EU rules on central government finances and the resulting Finnish legislation. However, the primary requirement for forecasts is not them being accurate also in the case of surprising situations, even though this is desirable – instead, the primary requirement is for decision-makers not to control the forecasts.

“The forecasts must be independently produced. Otherwise, decision-makers could adjust the forecasts right before an election.”

The forecasts must be independently produced. If this is not the case, decision-makers can, for example, adjust the economic forecasts upwards right before an election year to give the idea that the Government tax revenue will increase in order to make proposals on increasing central government expenditure and create an “electoral budget”.

The forecasts used as the basis for the fiscal policy in Finland are prepared by the Ministry of Finance, and they are not confirmed by an independent third party. Elsewhere in the euro area, macroeconomic forecasts are produced by independent institutions or the forecasts prepared by a country’s finance ministry are approved by an independent body.

According to the European Commission, the Finnish arrangement is exceptional in the EU, but it is not in violation of the EU regulations. This is why it is even more important for the NAOF to regularly assess the reliability of the forecasts, which is one of its statutory duties as an Independent Fiscal Institution of Finland (IFI). In the future, the assessment will cover forecasts on central government finances, among other issues.

In the report mentioned above, the forecast errors in FM’s economic growth forecasts proved to be random as well. This means that there was no systematic temporal variation in the forecast errors. If forecasts were controlled, the forecast errors would most likely have shown some type of systematic variation.

In a previous report (in Finnish) made in 2016, we also studied the independence of the preparation of the macroeconomic forecasts. No factors that would have compromised the independence of the Ministry of Finance as a forecasting body emerged in the audit.

The results indicate that the FM’s forecasts have been independently produced. However, this does not guarantee that as circumstances and personnel change, independence can also be ensured in the future. That is why attention must be paid to this issue also in the future.

“Assessing of the FM’s forecasts is allowed and even desirable.”

Naturally, everybody in Finland has freedom of speech, and political rhetoric should be colourful. Criticising  the FM’s forecasts is allowed and even desirable.

I would like to kindly ask, however, that the politicians would always remember to add the following when assessing the forecasts: “I do not mean that I would like to control the FM’s forecasts; in Finland, official forecasts are produced in a manner that is independent from political decision-making.”