1. Association of Parliamentary Budget Offices Community Meeting Montreal, June 17-19, 2013

2. Outline Budget Analysis Economic and fiscal projection Tax analysis Estimates analysis Costing

3. Budget Analysis Budget projections: Short-term projections Long-term projections Tax analysis Estimates analysis

4. Budget Projections Second data point A test of reasonableness of the official government projection Using the projection as the basis for policy simulations,alternative scenarios or risk analysis Using the short-term projection as the starting point for long-term fiscal sustainability analysis Should PBOs do independent budget projections?

5. Economic Forecasts: Options OutsourcingSpreadsheet modelsReduced form macro modelsLarge macroeconometric modelsHybrid models

6. Reduced Form Model: Example IS curve: Output (GDP)= ƒ(external demand, real interest rate, exchange rate, commodity prices, others) Phillips curve: Inflation (CPI)= ƒ(inflation target, output gap) Exchange rate= ƒ(commodity prices, interest rate differential) GDP inflation= ƒ( CPI inflation, commodity prices) Taylor rule: Interest rate= ƒ(inflation expectation, output gap) Okun’s Law: Unemployment rate- natural unemployment rate)= ƒ(output gap)

7. Short-term Budget Projection Revenue projection Income tax Corporate tax Sales / VAT tax Other revenues Spending projection Transfers Direct program spending Debt service spending

8. Tax Revenues Macroeconomic forecast (e.g., GDP) Tax bases Effective tax rates Tax revenues

9. Spending projection Transfers: typically formula based; some depend on economic development Direct program spending: discretionary and determined by the government Debt service= ƒ(accumulated debt, interest rates)

10. Long-term Budget Projection Necessary for assessing long-term sustainability of fiscal structureAre prepared for 30-100 years Underlying economic projection: trend level of activity consistent with changes in demographics Tax revenue projection: unchanged tax burden Spending projection: should incorporate impact of demographic chages

11. Tax Analysis Macro level tax analysis Using macromodels or rules of thumb Distributional tax analysis Using microsimulation models

12. Estimates Analysis / Appropriation Models or specific techniques are not needed Requires reliable and detailed information on planned government spending Knowledge of the budget and appropriation processesKnowledge of public accounting principles

13. Costing of Programs and Bills May require less work and resources Provide Parliament with a Test of Reasonableness (TOR) of the government’s cost estimate of proposed legislation More difficult but may be the only estimate available Provide Parliament with an Independent Cost Estimate (ICE) of proposed legislation

14. Costing Process Understand the intent of legislation or program Understand the Key Cost Drivers to any legislative proposal, project or procurement Use analytical tools appropriate for the taskValidate output/findings against comparables

15. Costing Models/Tools Cashflow models with NPV for project analysisWorkflow/process models for program implementation Monte-Carlo simulations and other statistical techniques for projecting cost outcomes Highly specialized/powerful/expensive cost estimating tools for complex projects (e.g. military procurement) Outsource to specialized service provider

16. Costing Validation Work with other jurisdictions who have implemented similar legislation Compare implementation models, cost drivers and cost impacts Ensure data is comparable- take into account externalities unique to jurisdiction in question