A Medium-Term Fiscal Framework (MTFF) is an institutional framework designed to guide and inform the public about the achievement of multi-year fiscal policy objectives. It uses medium-term macro-fiscal projections and analyses national or subnational public finances. At the core of an MTFF is a medium-term economic and fiscal outlook report, which forecasts the key government revenue and expenditure lines over the coming fiscal years. It also analyzes how the government plans to comply with its fiscal rules and maintain debt at sustainable levels.
The accuracy and transparency of these reports are crucial to ensure MTFF can effectively guide for decisions on budget allocations and implementation of public policies aligned with the government’s fiscal policy objectives[1]. In many countries, the preparation of such reports is carried out internally, with varying degrees of sophistication, by one or more departments within the Ministry of Finance. However, following the 2008 financial crisis, several independent fiscal institutions (IFIs) have increasingly taken on the role of producing these macro-fiscal forecasts.
This blog[2]. aims to share some best practices on how some high-income countries are managing the process of producing such forecasts through different institutional arrangements. We will discuss lessons learned of four countries: The United Kingdom and its Office of Budget Responsibility (OBR), Portugual and its Conselho das Finanças Públicas; Australia and its Parliamentary Budget Office (PBO); and the United States with its Office of Management and Budget (OMB) and Congressional Budget Office (CBO).
The United Kingdom has long been recognized as a leader in medium-term fiscal forecasting. That is also true for Australia, a country where states have strong spending independence, which further increases the complexity of fiscal forecasting. The United States also has a governance structure along those lines and serve as a good example for studying potential institutional challenges in MTFF design. Lastly, Portugal is particularly strong on medium-term forecasting.
How MTFF Institutions Work
There are several ways to produce a meaningful medium-term forecast to support an MTFF. Concerning institutional arrangements, the established best practice is for the forecasting institution to have some independence from the government to allow maximum objectivity. However, even in environments in which full independence is not feasible or desirable, there are certain key conclusions from the experiences of the UK, Portugal, Australia, and the United States. Table 1 summarizes the key characteristics of these institutional arrangements.
Table 1 – Fiscal Institutions
Country | UK | Portugal | Australia | US |
Institutional Background | The MTFF is designed by the government, but the OBR plays the key role in its implementation. | The Ministry of Finance produces limited internal medium-term fiscal forecasts, superseded by the projections of the CFP. | Medium-term forecasting is conducted by the Ministry of Finance and the Ministry of Planning, as well as by the PBO, located within the Australian Parliament. | The OMB works within the White House and collaborates to produce the macro fiscal projections underlying the MTFF. The CBO is and IFI that helps Congress make effective decisions. |
Accountability and Independence | The OBR is independent, but its processes have aligned timetables to be more useful in decision-making. It is not allowed to make normative commentary on government policies. | The CFP is independent of both the legislature and the executive. | The PBO is one of four parliamentary departments, indirectly reporting to the Parliament. However, the constitutor legislation established it as fully independent to perform its functions. | The OMB is accountable to the president and has little independence. The CBO is an independent body which makes no policy recommendations. |
Leadership | Three-person Budget Responsibility Committee. | Governed by the Senior Board, the Executive Committee, and the auditor. | One appointed Parliamentary Budget Officer, who serves a term of four years and is supported by six assistants and a chief operating,officer. | The OMB is accountable to the president and has little independence. The CBO is an independent body which makes no policy recommendations. The OMB is led by a director, appointed by the president and confirmed by the Senate. The CBO is led by a director appointed by Congress. |
Another key aspect of the institutional arrangement of these four countries is the ready availability of information across the government. The information provided is timely, convenient, detailed, and understandable, enabling MTFF institutions to make reliable forecasts. This access to information is the cornerstone of successful medium-term fiscal forecasting. Therefore, it is vital that the forecasting institution – whether independent or government-based – establishes formal mechanisms for accessing information.
Content and Structure of Forecast Reports
The process of producing the reports also takes many forms. Methodologies both top-down, equation-based models and bottom-up models based on iterative dialogue with government departments are valid approaches and the right option may be determined by institutional circumstance. Top-down happens when the central ministry (finance or budget) makes spending caps based on an intertemporal strategy, and budgetary units must accommodate it to comply with the central guidelines. This may confer better control of budget allocations and fiscal policy targets.
On the bottom-up approach, the central ministry initially receives budget proposals from all government and iterates from it, with discussions that may confer a spillover benefit as it allows greater engagement, scrutiny and legitimacy in to the budget-making process because all the ministries are involved and participate actively.
Tabe 2 summarizes some key characteristics of the reports produced in the four countries.
Table 2 – Reports
Country | UK | Portugal | Australia | US |
Frequency of publication | Twice a year | Twice a year | Annual | OMB: Annual CBO: Annual + update |
Length of projections | 5 years | Current fiscal year + 4 years | 10-year period | 10-year period |
Methodology | The OBR uses economic data released since the previous forecast to project key economic variables. Departments across the government use them to forecast each line of tax and spending. The forecast is then refined in further iterations, which may include new data and constructive dialogue. | Equation-based approach, with a macroeconomic model of the five-year period of the forecast. Portuguese Macro-Fiscal (PMF) model, a combination of neoclassical long-term optimization and short-term Keynesian dynamics. | Estimates for the initial four-year period come from the most recent budget. Medium-term projections are from an independent suite of models for receipts, payments, and their relationship. Projections produced under the assumption of unchanged policy, as a baseline. | OMB’s forecasting models are not public. The CBO maintains several economic models, including a large-scale macroeconometric model, in a multi-stage process. |
Inputs and data | Office of National Statistics, government departments, OECD, financial institutions. | INE (Statistics Agency), Bank of Portugal, IMF, Eurostat | Latest budget and Intergenerational Report | Department of Treasury, Joint Committee of Taxation, internal offices. |
Monitor of compliance with fiscal rules | Explicit reference to the fiscal targets and assessment of likelihood of meeting them | No explicit reference to fiscal targets. | The government has no formally declared fiscal targets. | The CBO references explicitly the Deficit Control Act. Projections incorporate the rule rather than assess compliance. The OMB makes little reference to rules and targets. |
The inclusion and treatment of uncertainty in scenarios and projections is also essential to the success and trustworthiness of the projections. Reports can incorporate that information by explaining the expected uncertainty, using probabilistic fan charts, assessing multiple scenarios, and providing detailed explanations of key model inputs. Additionally, conducting sensitivity analyses, measuring the effects of shocks to individual variables, and regularly evaluating previous projections and forecasting errors can also be used to incorporate the impact of uncertainty in the forecasts.
Conclusions: Institutional Arrangements Can Help Build Credibility and Transparency
The rigorous process of producing fiscal projections and reports across the world, backed by governments and independent fiscal institutions, has fostered a culture of openness and transparency in these four countries. As we can see, MTFF models are flexible and heterogeneous across these nations. However, their success in guiding fiscal policy sustainability in the medium-term hinges on credibility, which is reinforced through transparency in processes, methodologies, and governance.
By publishing frequent explanatory papers, institutions like the ones studied above have provided valuable resources for countries seeking to produce their own forecasts. These successful experiences can guide countries in Latin America and the Caribbean towards robust design and implementation of this key instrument for the conduction of fiscal policy.
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Related Blogs
How to incorporate the multi-year perspective into fiscal policy through Medium-Term Frameworks (in Portuguese)
Three lessons to advance the implementation of Medium-Term Frameworks in subnational governments
[1] As discussed on a previous blog, the ultimate aim of a MTFF is to increase the credibility of fiscal policy, strengthen fiscal sustainability and the allocation of public spending.
[2] This blog is based on a report produced by FMA (Francis Maude Associates) and led by Sir Robert Chote.
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