PFTAC GDP Compilation and Forecasting Workshop GDP and macroeconomic and fiscal forecasts Suva, Fiji October 18, 2016
Financial programming... is a quantitative approach used at the International Monetary Fund (IMF) to analyze macroeconomic developments. It provides a macroeconomic and fiscal framework for medium-term projections that captures the main economic linkages. It can be used to: ensure consistency between forecasts of individual sectors of the economy evaluate macroeconomic performance and identify vulnerabilities prepare policy scenarios and evaluate the sustainability of policies 2 of 17
A financial programming framework... is built specifically for an economy around the key macroeconomic and administrative data sources and the forecasting and monitoring processes of users, typically the ministries of finance and central banks. GDP is a (the?) key variable in FP frameworks. 3 of 17
Sectors and variables GDP by production, expenditure and income Government sector including public debt Balance of payments GDP deflator Consumer prices Import and export prices 4 of 17
Nominal vs real Nominal GDP is a function of quantities and prices. Real GDP is income or output or value added in real terms (at constant prices) taking into account the effects of price changes. People and firms make decisions based on real variables. As policy advisors we generally care about real outcomes. Most efforts go into forecasting real GDP. 5 of 17
Nominal vs real Nominal GDP matters for tax and balance of payments forecasting. We will talk about the balance of payments tomorrow. Tax is collected on nominal income and expenditure. Tax revenue rises because of increased economic activity (quantities) or higher prices. 6 of 17
Tax forecasting The tax rate relates the amount of tax payable to the tax base. The tax base for a given tax is the event or condition that gives rise to taxation. It is defined in the law and in most cases is some economic event or condition, e.g. receipt of wages, sale of goods and services. The law defines at what rate the event or condition is taxed, what items may be deducted in calculating the tax, whether any exemptions are allowed, the deadline for paying, the fines that apply to late payment, etc. 7 of 17
Effective tax rate approach Tax revenues can be forecast using an effective tax rate approach. Effective tax rate = Tax collected x 100 / Proxy tax base A proxy tax base is a variable that is closely related to the actual tax base. E.g. Value added tax (VAT) applies to the final consumption of goods and services in a country (actual tax base), i.e. household and tourist spending on food, internet, transport, clothes, entertainment, etc. 8 of 17
Effective tax rate approach Household consumption and exports of services are a proxy tax base for VAT. Example: VAT effective tax rate in 2014 VAT effective tax rate = Actual VAT collected Household consumption + exports of services x 100 7.1% = VT5,775m x 100 VT81,146m From the Ministry of Finance and Economic Management From the Vanuatu National Statistics Office The effective tax rate is different from the statutory rate because the proxy tax base is a proxy only, e.g. not all businesses are VAT registered. 9 of 17
Proxy tax bases GDP and components of GDP provide proxy tax bases to forecast tax collection. Production Expenditure Inc ome Household consumption Compensation of employees GDP Value added by industries Government consumption Investment Operating surplus Consumption of fixed capital Exports Indirect taxes less: Imports less: Subsidies 10 of 17
Proxy tax bases Tax type Personal income tax (Pay As You Earn, PAYE) Corporate income tax VAT / VAGST / Consumption tax Excise tax Other taxes on goods and services Taxes on international trade and transactions Tax base Compensation of employees, GDP(I) Operating surplus, GDP(I) Household consumption plus exports of services, GDP(E) Household consumption plus exports of services, GDP(E) Total GDP Imports of goods, GDP(E) 11 of 17
GDP deflator The GDP deflator can be calculated as nominal GDP divided by real GDP. It is the weighted sum of the components of GDP. GDP(P): Value added by industries GDP(E): Household consumption (C) + Government consumption (G) + Investment (I) + Exports (X) Imports (M) 12 of 17
Forecasting the GDP deflator Household consumption (C) and exports of services: Consumer price index Government consumption (G): Salaries and wages information from the Government s budget? Investment (I): World Bank unit value index of manufacture exports by main world exporting countries; New Zealand import prices; wood price index? Exports (X) and imports of goods: World (commodity) prices forecasts from the IMF or World Bank 13 of 17
Expenditure GDP GDP(E) is very useful for forecasting and telling a story. Tourism is an important sector in the region. GDP(P): Tourism affects lots of different industries, transport, accommodation and food services, communication, finance, recreation, GDP(E): Part of exports of services Investment gives an indication of future growth. 14 of 17
Debt sustainability analysis GDP measures the income generated by a country. It is used by lenders as an indicator of a country s ability to repay its debt. It can determine how much and at what terms countries can borrow to finance essential infrastructure for economic development and ultimately improving people s lives. Accurate estimates of GDP are crucial. 15 of 17
Medium-term and long-term forecasts Central banks and ministries of finance closely monitor GDP. They usually produce detailed sectoral level forecasts for the next 2-3 years. Long-run forecasts, which are needed for sustainability analysis, generally assume a gradual return to long-run, historical trends. So having time series data is important. 16 of 17
In summary GDP is probably the most important macroeconomic variable. Nominal GDP(E) and GDP(I) are useful for forecasting revenue collection and the balance of payments. People make decisions based on real variables and so real GDP matters for measuring wellbeing. Both real GDP(P) and GDP(E) are useful for telling a story. For forecasting time series are needed. 17 of 17