According to a recent NAOF survey, the economic forecasts prepared by the Ministry of Finance, which are used as a basis for the state budget, give the most accurate picture of future economic trends. Their accuracy was on a par with those produced by the Research Institute of the Finnish Economy (Etla). The review was contained in the latest assessment carried out by Fiscal Policy Evaluation, which covered the Ministry of Finance's economic forecasts.
The National Audit Office (NAOF) assesses the economic forecasts produced by the Ministry of Finance as part of its statutory task of evaluating Finland’s fiscal policy. The economic surveys produced by the ministry in the autumn, which are used as a basis for the state budget for the following year, were selected for the review. The National Audit Office examined the forecasts for Finland’s GDP growth, unemployment rate and inflation between 1976 and 2016. The ministry’s economic surveys were compared with forecasts produced by Etla, the Organisation for Economic Co-operation and Development (OECD), the Labour Institute for Economic Research (PT), and Pellervo Economic Research (PTT).
“The Ministry of Finance and Etla passed the most reliability tests in the forecasts for GDP growth, unemployment rate and inflation for the budget year, with both passing 13 of the 15 tests in these areas. According to the tests, the errors in the ministry’s forecasts were not systematically repeated, and the forecasts were unbiased. The ministry’s and Etla’s forecasts for the budget year and the ongoing year were also encompassing more comprehensive information than the forecasts produced by the other institutes. It should be added that the forecasts by PT, PTT and the OECD also performed quite well in the tests and they came close in the test results. Their forecasts were unbiased and only in a small number of cases the forecast errors included systematic variation”, explains Arto Kokkinen, senior economist at NAOF.
The forecasts produced by the Ministry of Finance were statistically reliable and among the best in the group reviewed. However, Etla was slightly better at forecasting the unemployment rate for the ongoing year.
None of the forecasting institutes was invariably accurate. For example, between 2013 and 2015, they all overestimated Finland’s economic growth. At the same time, it is now known that all institutes underestimated the growth rate for 2017. In its overestimations and underestimations, the Ministry of Finance was usually in the middle of the group reviewed in the assessment. Forecasting has proved particularly difficult at economic turning points and in times situations when Finnish export growth has not followed the development of world trade.
“In its latest assessment, the National Audit Office is looking at the reliability of the forecasts from a broader angle. In addition to testing accuracy and unbiasedness, we have now also studied the randomness of forecast errors and the information encompassed by the forecasts. The review period is also longer than in the previous assessments, covering 1976 to 2016”, Kokkinen adds.
In its previous review in 2016, NAOF assessed the reliability and independence of the forecasts produced by the Ministry of Finance. The forecasts used as a basis for Finland’s economic policy are prepared by the Ministry of Finance, and they are not endorsed by any independent external body. Even though, according to the European Commission, the Finnish system of producing official economic forecasts is unique in the EU, it is nevertheless in compliance with all relevant directives and regulations. Elsewhere in the euro area, economic forecasts are produced by independent institutions or the forecasts prepared by a country’s finance ministry are endorsed by an independent body.