Posted by Guilhem Blondy

Many OECD counties face both short- and long-term fiscal pressures. While short- and medium-term fiscal projections are usually adequately presented in the budget, this is much less the case for long-term fiscal projections. The IMF and OECD have been advising ministries of finance and/or planning agencies to present long-term fiscal projections in the budget, or attached to it, for quite some time. As long as a decade ago the IMF Manual on Fiscal Transparency described as best practice for budget and fiscal transparency that governments publish a periodic report on long-term public finances. Yet the use of these long-term fiscal projections has remained limited to a relatively small number of industrialized countries.

Barry Anderson and James Sheppard presented a paper at the 30th OECD annual meeting of senior budget officials assessing practices in 12 countries : Australia, Canada, Denmark, South Korea, the Netherlands, New Zealand, Norway, Sweden, Switzerland the United Kingdom, and the United States (Anderson, Barry, and Sheppard, James, Fiscal futures, institutional budget reforms, and their effects : what can be learned?, 30th annual meeting of OECD senior budget officials, Paris, 4-5 June 2009).

The main findings of this interesting study are that :
• Long-term fiscal projections are prepared on an annual basis only in one half of the 12 countries sampled (namely, Denmark, Germany, the Netherlands, Sweden, the United Kingdom, and the United States) ;
• Although many factors, such as the fiscal consequences of aging populations, cost pressures in health care, global climate change, and contingent liabilities, pose serious risks to fiscal sustainability, most projections (except of those made in Australia and Denmark) focus only on population aging : this conclusion is consistent with an IMF study on fiscal risks published in 2008 (IMF, 2008, Fiscal risks – Sources, Disclosure and Management : see Ricardo Velloso’s post on this blog on November 28, 2008) ;
• A combination of projected fiscal aggregates (budget balance and/or debt) and of synthetic indicators (e.g. fiscal gap) are the most common measures of fiscal sustainability; generational accounting is prepared only in the Netherlands and Norway ;
• While the methodology and assumptions underlying fiscal projections are disclosed in most countries (except for Canada), few present how assumptions have changed over times and the reasons underlying the changes (Australia, Germany, the United Kingdom) ; 
• Nine of the fiscal futures reports  surveyed present sensitivity analysis to demographic and macroeconomic assumptions (Australia, Germany, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, the United States), but only three conduct analysis for change in microeconomic (e.g. expenditure) assumptions (Canada, Sweden, the United States) ;
• Long-term fiscal projections incorporate comparisons with past government assessments to highlight trends regarding sustainability only in five countries (Australia, Denmark, the Netherlands, Norway, and the United Kingdom) ;
• Few countries use long-term fiscal projections to illustrate the consequences of past reforms (Australia, Canada, Denmark, Germany and the Netherlands) or proposed policy options (Australia, Canada, the United Kingdom and the United States) ;
• While all countries surveyed, except for South Korea, have fiscal rules, and three of them (Canada, Germany and Sweden) triggers on public pension funds, long-term fiscal projections do not seem to have been explicitly used in shaping these rules.

The overall recommendations of the paper are somewhat unsurprising, but of course remain important:
• Countries should prepare long-term fiscal projections on an annual basis ;
• These projections should clearly present assumptions, methodology changes, sensitivity analysis, and comparisons with past assessments ;
• Countries should use fiscal projections to illustrate the fiscal consequences of past reforms and/or policy options and link them more closely to medium- and short-term budget practices (e.g. fiscal rules) and procedures.

The only criticism of this useful report could be that it does not explain how fiscal rules could be linked more closely with long-term fiscal projections. Indeed, if long-term fiscal projections are useful to illustrate fiscal risks and the effects of structural reforms to reduce them, fiscal rules need to be flexible enough to respond to the cycle and to evolve to adapt to the behavior of the actors of the budget process who always find solutions after a while to bypass the rule. For these reasons, hard triggers based on long-term projections might not be as effective as thought by the authors.  

The report can be found at: http://www.oecd.org/document/32/0,3343,en_2649_34119_42973088_1_1_1_1,00.html