EU Twinning Project: GE18 ENI FI 06 21

Strengthening Parliamentary Oversight

in Public Finances

Activity and mission No: Activity 1.1.2.1 Assessment of models and approaches currently used by PBO
Venue: Tbilisi / The Hague
STE name(s): Iris van Tilburg and Wim Suyker

Disclaimer
This presentation has been produced with the assistance of the European Union. Its contents are the sole responsibility of authors
and do not necessarily reflect the views of the European Union.
The ideal
toolkit of a
PBO
Webinar
13 October 2022
Forget resource
constraints for an
hour.

The sky is the

limit for now
 Short-term economic forecasting
Medium-term forecasting
Costing of budget and major laws
Tasks and Check on fiscal rules

duties of a Monitoring current economic situation

PBO max Monitoring budgetary developments

Sustainability analysis government budget
Analysis of election platforms
Scenario analysis
 PBO max =
CBO of US + a Fiscal Council in EU-country
 Required tools
• Macro-econometric model (for short-term and medium-term forecasting of
economy and budget)
• Supplementary nowcasting models (Bvar etc.)
• Suite of detailed additional models on public sector and purchasing power
• Long-term models: demographics, labour supply, fiscal sustainability
• Cost-benefit techniques
• Macroeconomic tools for scenario analysis

Besides:
• Ad-hoc (sectoral) tools to address particular issues
• Monitoring system on incoming economic and budgetary data
• Always ensure flexibility and possibility of expert judgement.
September 18, 2019 • Detailed knowledge of budget and economy is essential.
 1. Macro-econometric model
• No fancy model but a workhorse model to be
helpful in PBO’s daily work.
• Keynesian in the short term (demand matters)
• Rather large government budget block
• Equations estimated where possible, calibrated if
needed.
• Able to provide information on impact on economy
and budget of major shocks (oil price, global
growth)
• Able to provide information on impact of policy
measures on economy and budget
2. Nowcasting model(s)
• A macro-econometric model is insufficient for
projection of the current quarter and the
coming quarters.
• It does not take into account all available
information.
• To supplement the macro-econometric model
nowcasting models are required.
3. Supplementary models on government
budget
• Macro-econometric model cannot contain all
details required. It would make the model Economic developments
unbalanced and inefficient in use.
• So supplementary macro models on:
• Taxes (all types of tax in model)
• Expenditure (outlays and employment by ministry) tax 1 Tax 2
• Disadvantage of supplementary budget
models: coordination problem
Tax … Tax N

Total taxes
4. Short-term microsimulation model on taxes,
social security and real disposable income
• Taxes and allowances are complex in many
countries.
• Economic policy influences income distribution.
Gross income (wages, profit,
• A microsimulation model is needed to analyze
social payments, pensions)
impact of policy measures on various groups in
society.

Taxes Allowances

Disposable
income
5. Long-term demographic model
• Not necessarily done by PBO, it could also be
done by another independent institute.
6. Labour supply model
• A model for both short- and long-term analysis
• Takes into account different trend in
participation and hours worked by age group. Labour supply by age group period t
• Takes into account demographic development
by age group.

Demographic
development

Labour supply in period t+1

7. Long-term microsimulation model on taxes,
social security and real disposable income
• Taxes and allowances are complex in many
countries.
• Taxes and allowances impact labour supply and
Possible maximum labour
investment decisions. supply given demography
• A microsimulation model is needed to analyze
impact of policy measures on incentives.

Taxes Allowances

Actual labour
supply
 8. Long-term fiscal sustainability model
• How do demographic developments impact
public finances?
Demography
• OLG model with age groups to take
demographics into account

Age-specific policies
• Macro-economic model that covers all sectors of Macro-economic
and economic
the economy (government, households, developments
behaviour
companies, pension funds) to be able to include
knock-on effects

Public finances
9. Guidelines for cost-benefit analysis
• Tool for use in the ex ante assessment of policy
options.
• Develop guidelines to quantify as much as
possible the effects, risks and uncertainties of a
measure and the resulting costs and benefits to
society as a whole.
• Write and publish a manual with a widely
endorsed set of guidelines.
• Apply the standard after it is clear what will
happen without the measure.
10. Tools for scenario analyses
• What-if analysis: what is the macro-economic
impact of shocks on international trade or the
financial system?
• Making use of gravity models or DSGE-
models

• Uncertainty: growth rates, fiscal balance and

interest rates are highly uncertain.
• Stochastic debt sustainability analysis
(sDSA) to show the distribution of possible
outcomes.
 Most tasks of PBO requires use of various tools

Detailed
Macro-econometric supplementary Knowledge of fiscal
model models of rules
government budget

Check on fiscal rules

And now back
to earth
• All PBOs have resource constraints.
• Choices have to be made.
• No need to invent the wheel
yourself; no need to be at the
model frontier; approaches
elsewhere are giving guidance.
• Always adapt models to national
circumstances. (Key tasks of PBO
also depends on national
circumstances)