The purpose of the study is to evaluate European approaches to modeling and forecasting in order to increase the efficiency of the preparation of the State Budget and medium-term financial and structural documentation in the Ministry of Economy, Trade and Agriculture of Ukraine. The result of the work was practical recommendations for the government in the form of a “matrix of policy recommendations”. As well as conclusions – to what extent the experience of the 6 studied countries meets the needs of Ukraine in the context of European integration, and a package of the most successful sample documents, which will facilitate the application of the conclusions in practice in the work of the Ministry.
The KSE Institute conducted a study of the practices of Switzerland, Germany and Poland within the framework of the project “Swedish Centre for European Future at KSE”, which is implemented with financial support from Sweden. The Center for Economic Strategy (CES) studied the practices of Croatia, the Netherlands and Latvia with the support of the European Union and the International Renaissance Foundation within the framework of the joint initiative “Joining the EU Together”.
Key findings of the study:
Ukraine needs to establish a clear framework for the forecasting process, following the example of European countries — defining who prepares, checks and is responsible for the forecasts and how discrepancies are recorded. The government forecast will remain the basis for the budget and medium-term planning, but should be created in cooperation with and verified by independent experts. This will ensure public professional assessment of assumptions and risks and transparency, which is most consistent with practices adopted in the EU.
It is important to establish the forecast as an institutional product and to establish procedures for updating, documenting assumptions, and archiving versions. This will help avoid politicizing forecasts and enhance their accuracy through internal procedures and the involvement of external experts in consultations.
It is critical to establish and update a basic forecast calendar that:
• Provides forecast updates to key stages of budget formation;
• Allows international partners (EC, IMF) to work with agreed figures;
• Leaves room for discussions with partners, experts and stakeholders to verify the forecast;
• Establishes a plan of action in case of publication delays due to force majeure.
Formalizing the calendar is a necessary condition for submitting macroeconomic forecasts to the European Commission within the framework of the economic dialogue and European semester procedures. And the publication of not only data, but also explanations with assumptions, risks, and alternatives will signal greater maturity of Ukrainian institutions.
It is worth establishing a mandatory list of macroeconomic indicators with clear rules for their application and definitions compatible with ESA 2010. These indicators should be the basis for all key strategic and budgetary documents of the state. Any deviations should be documented and justified. A single, officially approved macro-basis will increase the confidence of international partners in Ukraine’s forecasts and fiscal planning.
Analysts recommend using potential GDP as a tool for analyzing potential, rather than as actual “proof,” avoiding optimistic estimates of potential in budget calculations without sufficient justification, and conducting scenario analysis based on estimates of potential GDP and, accordingly, the gap.
It is important to formalize the processes for fixing monetary (rate, inflation, exchange rate) and external (prices, demand from key partners, financing conditions) assumptions in order to reduce the risk of implicit estimates and increase the transparency of forecasts for external users.
A key recommendation for forecasting state budget revenues and the effects of changes in tax policy and reforms is to allocate factors to the mechanical impact of macro indicators on revenues, the effects of tax changes, the effects of structural reforms and investments. It is important that the effects of reforms are not included in the baseline scenario until they are legally and financially entrenched in practice. This approach is standard for IMF programs and meets the expectations of the European Commission.
The main technical recommendation is to create a national system that is built from the beginning, taking into account future integration with EU instruments, minimizes duplication of reporting, and has clearly defined data owners and responsibilities.
For more information about the approaches and practices in the studied countries, comparisons, and recommendations based on the analysis, read the full version of the report “Institutional Architecture of Macroforecasting: EU Experience and Implications for Ukraine” at the link .
Source: KSE
