As the last few weeks we were flooded in Romania with overly optimistic forecasts for 2012(at least in my view) is good to put those numbers in perspective after reading this paper by Jeffrey Frankel:”
Over-Optimism in Forecasts by Official Budget Agencies and Its Implications“.
Here is the abstract of the paper:
“The paper studies forecasts of real growth rates and budget balances made by official government agencies among 33 countries. In general, the forecasts are found: (i) to have a positive average bias, (ii) to be more biased in booms, (iii) to be even more biased at the 3-year horizon than at shorter horizons.
This over-optimism in official forecasts can help explain excessive budget deficits, especially the failure to run surpluses during periods of high output: if a boom is forecasted to last indefinitely, retrenchment is treated as unnecessary. Many believe that better fiscal policy can be obtained by means of rules such as ceilings for the deficit or, better yet, the structural deficit. But we also find: (iv) countries subject to a budget rule, in the form of euroland’s Stability and Growth Path, make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries. This effect may help explain frequent violations of the SGP. One country, Chile, has managed to overcome governments’ tendency to satisfy fiscal targets by wishful thinking rather than by action. As a result of budget institutions created in 2000, Chile’s official forecasts of growth and the budget have not been overly optimistic, even in booms. Unlike many countries in the North, Chile took advantage of the 2002-07 expansion to run budget surpluses, and so was able to ease in the 2008-09 recession.”
What I find very interesting is that while everyone is advocating establishment of rules (make the deficit zero by constitution, make it 3% by some treaty), Frankel finds that countries subject to a budget rule — particularly the euroland’s Stability and Growth Path — make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries. Of course when when such governments exceed the deficit limits set by the rules, they respond by adjusting their forecasts rather than by adjusting their policies. This is all too familiar to anyone watching Romanian economic rhetoric by our officials.