Ex-post evaluation of the official short-term fiscal forecasts: Evidence from Finland

This working paper summarizes the main results of fiscal policy monitoring report 11/2023 which was published in Finnish on 28 August 2023.

This study presents an ex-post evaluation of the short-term fiscal forecasts prepared for the central government budgeting in Finland, a Member State of the EU and the Economic and Monetary Union (EMU). The analysis relies on a unique dataset including forecasts of the general government balance-to-GDP ratio, debt-to-GDP ratio, and expenditure-to-GDP ratio. The official forecasts by the Ministry of Finance are compared with those of other key forecasters of Finnish public finances. The dataset covers the period from 1997 to 2021, which is the longest period analyzed in the Nordic fiscal forecast literature so far. Also, the set of variables analyzed is expanded compared to the previous literature.

I find that, on average, there is bias towards pessimism in the general government balance-to-GDP ratio forecasts by the Ministry of Finance and other key forecasters if the year-ahead forecasts for non-crisis years are considered. In addition, similar bias is detected in the current-year forecasts for fiscal balance-to-GDP ratio by the Ministry of Finance and the OECD. No statistically significant bias is detected in debt-to-GDP or expenditure-to-GDP forecasts. The mean absolute errors of the Ministry of Finance and the other forecasters were large on average and statistically significant in most cases. The Ministry of Finance’s forecasts do not contain more bias than those of the other forecasters. In addition, the Ministry of Finance’s forecasts are as accurate or inaccurate as those of the other forecasters, except for the fact that the naïve forecasts and the OECD debt forecast are more inaccurate in some cases.