Medium-term projections in the planning of general government finances

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Challenges in the medium-term economic forecasting impede the planning of counter-cyclical fiscal policy. According to the National Audit Office, the Ministry of Finance should broaden its medium-term economic forecasting by introducing new methods alongside the current output gap estimates that reflect the cyclical conditions.

The audit was targeted at medium-term projections of general government finances prepared at the Ministry of Finance. Medium-term macroeconomic projections cover both short-term forecasts (the current year and the next two years) and economic projections that extend beyond two years.

Medium-term projections are used in the planning of general government finances and fiscal policy and in the setting of related targets. The aim of the audit was to examine whether medium-term projections are prepared in a consistent manner following the best available practices and whether the reporting practices give a true and fair picture of the medium-term outlook of general government finances.

The significance of the audit topic for central and general government finances is high. The fiscal policy stance, which is affected by the medium-term projections of general government finances, has significant impact on the general government fiscal balance and need for new debt. It also affects the development of the national economy. Well-timed expansionary fiscal policy can mitigate the effects of an economic downturn on the national economy. Correspondingly, timely contractionary fiscal policy can curb the overheating of the national economy during an upswing.

Based on the audit conducted, the fact that output gap estimates often need to be significantly revised afterwards weakens the reliability of the medium-term projections of general government finances. The methods applied to the drafting of the cyclical condition estimates used as a basis of medium-term projections should be improved and broadened.

There are substantial differences in the projection methods applied to medium-term projections compared with those applied to short-term forecasts. Going forward, the methodology descriptions should also specify the features of medium-term projections in a comprehensive manner. Projection reporting should also be clarified to ensure access to information that is sufficient to safeguard the budgetary powers of Parliament.

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