VoxEU Column Global crisis Monetary Policy

Should the role of preparing budgetary projections be delegated to an independent agency?

Who should we trust when it comes to fiscal forecasts: governments or independent agencies? This column argues that this question is, in fact, a red herring: empirical evidence suggests that in the past, international agencies’ fiscal forecasts were partially affected by the same problems that the literature widely acknowledges for governmental forecasts. An attractive solution is independent national forecasters.

The debate about fiscal forecasts has recently been growing more intense in Europe. At its root, there is the evidence of planned government deficits significantly exceeding recurrent budgetary plans in recent years. This comes at a time of high public deficit and debt levels for EU member states. Explanatory factors for these misalignments include large GDP shocks and fiscal-stimulus packages adopted on the run. Beyond these explanations, there is also a distinct lack of both transparency and realistic accounts of the facts. As short-run budgetary targets were missed by most, medium run plans had to be revised quickly, resulting in a fast decline of the credibility of Europe's fiscal framework.

Independent agencies vs governments

One particular aspect linked to the previous discussion is the proposal to introduce independent fiscal forecasts prepared by independent agencies (Debrun et al. 2009; Leeper 2009; Wyplosz 2008; Jonung and Larch 2006; European Commission 2006). Such independent agencies could be, for example, national councils or intergovernmental agencies. The fact that some international organisations such as the European Commission, the OECD and the IMF do publish fiscal forecasts, and have been doing so for long periods of time, provides a natural benchmark for analysing their track record against that of national governments.

From a theoretical point of view, it is not clear that fiscal forecasts prepared by international agencies had to perform better than those prepared by governments. On the one hand, one may expect that international organisations prepare truly independent forecasts that are not subject to political biases. On the other hand, one may also argue that international organisations do not have the resources to make their own forecasts for each individual member state, and hence they must rely heavily on the information conveyed to them by member states (Von Hagen 2010; Kopitz 2010). More precisely, when preparing their fiscal projections, independent agencies’ staff try to grasp as much private information as possible from government's forecasts, while at the same time face a ‘signal extraction problem’ when trying to disentangle political biases from genuine private information. Thus, it could be the case that international agencies may end up ‘inheriting’ part of the biases that the literature associates with governmental fiscal forecasts.

Empirical analysis

In a recent paper (Merola and Pérez 2012), we provide homogeneous and comprehensive empirical evidence pointing to the fact that international agencies' track record of budgetary forecasts for EU countries do display correlation with electoral cycles. We look at alternative datasets, over the same sample period. We build up a large real-time dataset covering both fiscal forecasts compiled by national governments in the framework of the Stability and Convergence Programmes and the Excessive Deficit Procedure (EDP) and fiscal forecasts prepared by the European Commission and the OECD and reported respectively in the issues of the European Economy and the OECD Economic Outlook. The dataset covers fiscal forecasts for

  • 15 European countries prior to the 2004 EU enlargement;
  • Two forecast origins per year, spring and autumn of each year
  • Two forecast horizons (current year and one year ahead).

We focus on the sample 1999-2007 to eliminate three potential sources of distortions:

  • The changes in statistical standards that did occur in the preceding period (ESA79-ESA95 changeover);
  • The EMU convergence process;
  • The great recession in 2008;

Thus, we analyse a period with a common monetary-policy regime (Eurosystem) and a common fiscal policy regime (the Stability and Growth Pact). 


We find that:

  • First, the influence of electoral cycles on fiscal forecasts is significant in the case of governments, the European Commission and the OECD.

Electoral cycles contribute to optimistic public-balance forecasts. At the same time, we find that the OECD and the European Commission are more independent than governments.

  • Second, GDP errors influence significantly government balance errors, in the sense that a negative growth shock produces ex-post optimistic revenue and budget-balance deficit forecasts.

Government projections are found to be less reactive to the economic cycle (more judgemental) than European Commission and OECD fiscal forecasts.

  • Third, fiscal forecasts turn out to be more judgemental (i.e. less responsive to GDP errors) during economic downturns than during upturns;

This is consistent with the common approach to conduct discretionary policies more actively in times of distress, typically by implementing expansionary measures at the beginning of a downturn and implementing fiscal adjustment measures when public debt builds up beyond certain sustainable limits. Governments display a distinct optimistic budget-balance forecast bias in upturns, while in downturns they seem to be more in line with the other institutions.

  • Fourth, elections influence government balance deficit forecast errors more strongly during economic upturns, while EC/OECD deficit projections become more independent.
  • Finally, we also find that controlling for successive fiscal data revisions in the empirical models unveils that the ‘optimistic bias’ of the projections turns out to be larger ex-post.
Conclusions and policy implications

Our results seem to point out that, in the past, international agencies’ fiscal forecasts were affected to some extent by the same type of problems that the literature widely acknowledges for governmental ones. Informational shortages may lead independent agency’s staff to internalise ‘political biases’ when trying to grasp genuine ‘private information’.

The analysis and results of this paper do have important implications for the current policy debate. The first policy implication of our paper is that independent national fiscal institutions might be a natural option, to the extent that they may have better access/knowledge to/of inside national information than international organisations. In order to strengthen the watchdog role of international organisations, some institutional changes would need to be implemented to improve the transparency of fiscal data reporting by governmental agencies, so as to minimise ex-ante the private information bias. In addition, institutional changes should aim at improving the accountability of governments and at minimising ex-ante the political bias either by increasing peer pressure or by increasing the ex-ante pressure on misbehaving governments. For instance, the threat of sanctions (i.e. a penalty on poor government's track record of fiscal forecasts) might be instrumental for the purpose of minimising the private information bias in governments' forecasts. Some of these elements are either part of the provisions of the so-called ‘Six-Pack’ or have been included in the documents currently under discussion under the umbrella of the ‘Two-Pack’, even though they have still to be implemented in practice.


Debrun, X, D Hauner and M S Kumar (2009), "Independent fiscal agencies", Journal of Economic Surveys 23, 44-81.

European Commission (2006), "Part III: National numerical fiscal rules and institutions for sound public finances", 135-195, part of "Public finances in EMU", European Economy 3.

Jonung, L, and M Larch (2006), "Fiscal policy in the EU: are official output forecasts biased?", Economic Policy, July, 491-534.

Kopitz, G (2010), "Brussels can't monitor 27 budgets", The Wall Street Journal, 11 October.

Leeper, E M (2009), "Anchoring Fiscal Expectations", NBER Working Papers 15269.

Merola, R and J Pérez (2012), "Fiscal Forecast Errors: Governments vs Independent Agencies? ", Banco de España Working Paper No. 1233.

Von Hagen, J (2010), "Sticking to fiscal plans: the role of institutions", Public Choice, 144, 487-503.

Wyplosz, C (2008), "Fiscal policy councils: Unlovable or just unloved", Swedish Economic Policy Review, 15, 173-192.

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