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Budget 2006 Home Page Half Year Economic & Fiscal Update 2006

Annex 1 – The Treasury’s Fiscal Forecasting Performance

This Annex discusses the historical accuracy of fiscal forecasts produced in the Budget economic and fiscal updates. One means of assessing the Treasury’s forecasting performance is to compare it with the track record of Treasuries and Finance Ministries in other countries. We have been able to draw on benchmarking studies carried out by the International Monetary Fund and HM Treasury in the United Kingdom. Forecasts will always have a range of uncertainty around them, and the merit of comparing forecasting performance across countries is that it draws comparison with the actual levels of achievement seen in practice.

Nevertheless, it is important to look directly at the properties of the New Zealand forecasts. In the past, we have published reviews of the accuracy of the Treasury’s forecasts (to be found at: www.treasury.govt.nz/forecasts/performance). This annex extends those reviews. The current pattern of forecast errors makes effective forward-planning and Budget decision-making more difficult for the Government. We need to improve the quality of the forecasts.

Finally, the annex reports briefly on work that we have undertaken in the Treasury and that work currently underway to improve the performance of the forecasts.

International perspectives

Two recent studies are available to “benchmark” the Treasury’s forecasting performance against like-for-like forecasters such as other government agencies.

In February 2005, the International Monetary Fund (IMF) produced a report Canada – Selected Issues as part of its 2005 Article IV Consultation with Canada. That report compared the forecasting performance of government agencies in 11 different countries over the period 1995 to 2003. It found the following:

  • The performance of the New Zealand Treasury’s tax revenue forecasts ranked first for one-year-ahead forecasts (in terms of the size of average and average absolute forecast errors)[3] and third for two-year-ahead forecasts.
  • For forecasts of the fiscal balance, the New Zealand Treasury’s forecasts ranked third for both one-year-ahead and two-year-ahead forecasts.

In its December 2005 end of year fiscal report, HM Treasury compared the performance of forecasts of the net borrowing requirement in 15 member states of the European Union (EU) over the period 1997 to 2004. It found that:

  • Average forecast errors ranged from -3% to +2% of GDP, with the New Zealand Treasury’s result being 1.2% of GDP, ie, towards the top end of the EU range.
  • Average absolute forecast errors ranged from 0.26% to more than 3% of GDP, with the New Zealand Treasury’s result being 1.5% of GDP, ie, near the middle of the EU range.

Overall, these studies show that the Treasury’s forecasting performance compares well with that of similar agencies around the world.

Notes

  • [3]Throughout this annex, forecast error is defined as the actual outcome less the forecast of that outcome.
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