Modeling with Impact

Quantitative Methods for Fiscal and Budgetary Policies

INTRODUCTION:

- Challenges of today's Fiscal Policy

- Introducing participant's assignment

Your task is to make an Medium-Term Budgetary framework including implementation of expenditure fiscal rule. You should be guided in your work by lessons and examples you learned during this course. The purpose of building your Medium-Term Budgetary framework is to define expenditure ceiling for next three years and to see if there is a need to cut expenditure or to increase taxes. Thus your assignment includes the following tasks:

  1. defining MTO including time horizon in which you plan to approach your objective,
  2. trend GDP growth estimation,
  3. forecasting government revenues,
  4. forecasting government expenditures based on the assumption of an unchanged fiscal policy,
  5. estimate of the Cyclically-Adjusted Budget Balance,
  6. define expenditure fiscal rule,
  7. calculate necessary expenditure cats in order to meet MTO in required time horizon.

You should try alternative scenarios and decide which one gives the most reliable/sustainable results. Lessons in our course are designed in such a way to provide solution to all above required tasks.

FISCAL SUSTAINABILITY

UNIT 1. Defining targets of fiscal convergence

1.1 Fiscal sustainability and public debt dynamics

EXAMPLE 1.1. Calculation of debt stabilizing fiscal balance

1.2 Debt indicators - understanding the public debt phenomena from different perspectives

EXAMPLE 1.2. Calculation of different debt indicators

1.3 DEBT TRAPS - analytical framework to analyze equilibria in public-debt and growth dynamics

Demonstration Session 1: analytical framework to analyze the interactions between government debt and GDP growth

1.4 Sustainability of fiscal policy in connection with demographic projections

EXAMPLE 1.3. Calculation of ageing costs

Demonstration Session 2: Generational Accounting Model

1.5 Methodology beyond Medium Term Objective – MTO

EXAMPLE 1.4. MTO calculation according to EU methodology

UNIT 2. Scoreboard for the surveillance of macroeconomic imbalances

EXAMPLE 2.1. Calculation of scoreboard indicators

Impact of Economic Activity on Fiscal Position

UNIT 3. Estimation of Potential Output Growth / Output Gap

3.1 Production Function Approach

EXAMPLE 3.1. Cobb Douglas Production Function estimation

3.2 HP filter Approach

EXAMPLE 3.2. HP filter example (example includes seasonal adjustment and exponential smoothing)

UNIT 4. Forecasting government revenue

4.1 Good practices in revenue forecasting

4.2 Estimation of the Revenue Elasticities

EXAMPLE 4.1. Elasticity of indirect taxes example

UNIT 5. Estimation of the Cyclically-Adjusted Budget Balance (CAB)

5.1 Cyclical sensitivity of the fiscal position

5.2 Estimation of the CAB

EXAMPLE 5.1. Cyclically-Adjusted Budget Balance calculation

5.3 Minimal benchmarks

EXAMPLE 5.2. Minimal benchmark calculation

5.4Expenditure benchmark

EXAMPLE 5.3. Expenditure benchmark calculation

5.5 Fiscal stance over the Cycle

EXAMPLE 5.4. Pro-cyclical / counter-cyclical behavior of Fiscal policy

UNIT 6. Fiscal rules

6.1 About Fiscal rules

6.2 Choosing the Pace of Fiscal Consolidation -calculating consolidation needs

6.3 Framework for determining government expenditure ceilings

Demonstration Session 2: Medium-term fiscal sustainability model

PARTICIPANT'S ASSIGNMENT: Building of Medium-Term Budgetary framework (Workshop approach: every participant/group of participants will prepare and demonstrate their own Medium-Term Budgetary framework!)