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Choosing the Nation’s Fiscal Future Appendix G International Experience with Long-Term Budgeting1 Long-term fiscal projections provide a basis for assessing the sustainability of current public policies over an extended period (10 years or more) using select summary fiscal indicators.2 They do so by modeling future government expenditures and revenues on the basis of explicit demographic, macroeconomic, microeconomic, and other assumptions. RECENT INTERNATIONAL PRACTICE Over the past decade, fiscal projections have become increasingly common in the countries of the Organisation for Economic Co-operation and Development (OECD). In the mid-1990s, projections were prepared in only two countries, New Zealand and the United States; in 2009, 19 countries report that they prepare them; see Table G-1. The time horizon of fiscal projections varies among countries, from 25 years in Korea to approximately 100 years in the Netherlands. The majority of these countries prepare fiscal projections on an annual basis, while six countries prepare them on a regular periodic basis (every 3 to 5 years), and two prepare them on an ad hoc basis. In parallel with these developments, attention to fiscal projections and fiscal sustainability has become more prominent in the monitoring and surveillance work of international organizations, including the European Commission, the International Monetary Fund, and the OECD. This appendix focuses on the experiences of 12 OECD and other industrialized countries in using fiscal projections: Australia, Canada, Denmark, Germany, Korea, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States. For the most part,
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Choosing the Nation’s Fiscal Future TABLE G-1 Fiscal Projections in OECD Countriesa Frequency fiscal projections are prepared? How many years do fiscal projections cover? 21−30 31−40 41−50 51−60 61+ Total Annually Belgium, Finland, France,* Hungary, Poland, Portugal, Sweden,* United Kingdom* Czech Republic* Denmark, United States 11 Regularly (every 3-5years) Australia, New Zealand Germany,* Ireland, Switzerland 5 Ad hoc basis Koreab Japan,c Norway Netherlands 4 Total 1 2 13 1 3 aAustria, Canada, Greece, Iceland, Mexico, and Turkey responded that they did not prepare fiscal projections of 10 years or more. Austria, Belgium, France, Ireland, Slovak Republic, and Spain responded that they prepare fiscal projections primarily for European Commission Stability and Convergence reporting. bKorea: Vision 2030 was prepared in 2030 and included projection of expenditures to meet the government’s proposed policy goals. cJapan: fiscal projections were prepared in 2007 by the Council on Economic and Fiscal Policy until 2025 and the Financial Systems Council within the Ministry of Finance until 2050. *Countries also present fiscal projections over an infinite time horizon. SOURCE: Anderson and Shepherd (2010). these countries were selected on the basis of their responses to the 2007 OECD Budget Practices and Procedures Survey, particularly the question on the frequency of their projections and the length of time covered. Countries integrate projections with other budget practices and procedures in various ways. Examples include the use of long-term projections when evaluating existing and new government initiatives, such as entitlement spending, and linking the analysis of projections through budget triggers. Budget triggers are a signal for budget restraint based on indicator of solvency (e.g., actuarial projections) or a sustainability factor (e.g,. dependency ratio). Triggers may be hard or soft. Hard triggers usually involve automatic cuts to program spending, changes in eligibility criteria or benefit formulas of mandatory spending, or tax increases. Soft triggers often involve result in further proposals to change the path of fiscal policy but are not guaranteed to produce changes (Government Accountability Office, 2008). An overview of the fiscal futures reports from the 12 countries surveyed is presented in Table G-2.
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Choosing the Nation’s Fiscal Future TABLE G-2 Overview of Fiscal Futures Reports Country Formal Reporting Obligations Most Recent Report Title Responsibility for Preparation and Release First/Most Recent Release Level of Analysis Most Recent Time Horizon Frequency Produced Australia Charter of Budget Honesty (1998) Intergenerational Report 2 Department of Treasury 2002 / 2007 Central government 40 years Every 5 years Canada NA Working Papers Department of Finance 2000 / 2002 General government 40 years Ad hoc Denmark EC Convergence Program Convergence Reports Ministry of Finance 1997 / 2008 General government Until 2050 (fixed)a Every 5 years Germany EC Stability Program Report on the Sustainability of Public Finance Federal Finance Administration 2005 / 2008 General government Until 2050 (fixed)a Every 4 years Korea NA Vision 2030 Ministry of Planning and Budgetb 2006 / 2006 Central government 25 years Ad hoc Netherlands EC Stability Program Aging and the Sustainability of Dutch Public Finances Central Planning Bureau 2000 / 2006 General government Until 2100c Ad hoc New Zealand Public Finance Act (1989 as amended)d New Zealand’s Long-term Fiscal Position New Zealand Treasury 1993 / 2006 Central governmente 40 years Every 4 years Norway NA Long-term Perspective for the Norwegian Economy Ministry of Finance 2006 / 2009 General governmentf 50 years Annually Sweden EC Convergence Program Sweden’s Economy (Budget Bill) Ministry of Finance 1999 / 2008 General government Until 2050 (fixed) Annuallya Switzerland NA Long-term Sustainability of Public Finances in Switzerland Federal Department of Finance 2008 / 2008 General government 50 years Every 4 years United Kingdom Code of Fiscal Stability (1998) Long-term Public Finance Report H.M. Treasury 1999 / 2008 General government 50 yearsa Annually
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Choosing the Nation’s Fiscal Future Country Formal Reporting Obligations Most Recent Report Title Responsibility for Preparation and Release First/Most Recent Release Level of Analysis Most Recent Time Horizon Frequency Produced United States NA Analytical Perspectives (Long-run budget outlook) OMB 1997 / 2008 Central governmentg 75 years Annually United States NA Long-term Budget Outlook CBO 1991 / 2007 Central government 75 years Every 2 years United States NA Long-term Fiscal Outlook GAO 1992 / 2008 Central government 75 years 3 times / year NOTE: NA = not applicable. aDenmark, Germany, Norway, Sweden, and UK: fiscal projections also prepared for an infinite time period. bKorea: Ministry of Planning and Budget was merged into the Ministry of Strategy and Finance in 2007. cNetherlands: time horizon spans until 2100 though report also separately discusses policies until 2040. dNew Zealand: legal obligations were first required under the Fiscal Responsibility Act, 1994, and subsequently integrated into the Public Finance Act, 1989, as amended in 2004. eNew Zealand: in 1993 and 1996 as pre-election report spanning approximately 50 years; since 2000 integrated in budget for 10 years; since 2006 as a standalone report for 40 years. fNorway: since 1954 the Cabinet’s “Long-term Programme” showed the Cabinet’s policies for the next 4 years. These are considered medium-term budget estimates in this report. gUnited States: 5-year budget projections prepared during the 1970s and 1980s were labeled “long-term” projections. These are considered medium-term budget estimates in this report. SOURCE: Anderson and Shepherd (2010).
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Choosing the Nation’s Fiscal Future PROJECTIONS OF SPECIFIC FUNDS Many countries also make long-term projections of specific budgetary funds, such as a public pensions and social security. A specific budgetary fund may be managed as a separate independent legal entity responsible for assets and contributions for an exclusive purpose. For example, fiscal projections of pension funds are undertaken in a number of OECD countries; see Box G-1. SUMMARY OF EXPERIENCE WITH FISCAL PROJECTIONS The experiences of the 12 countries considered can be summarized as follows: Most countries surveyed publish fiscal projections to assess the government’s fiscal future over a 40-50 year time horizon, and around half also over an infinite time horizon. Only half of all countries prepare their analyses annually. The practice remains relatively new in most countries, introduced in the past decade. Although many factors, such as the fiscal consequences of population aging, global climate change, and contingent liabilities pose risks to fiscal sustainability, most projections focus solely on population aging. A combination of projected fiscal aggregates and synthetic indicators are the most common measures of fiscal sustainability; generational accounting is prepared only in a couple of the countries surveyed. Few countries provide an assessment of how and why their fiscal futures have changed since the last projection. Although sensitivity analyses of demographic and macroeconomic assumptions are common in many country’s fiscal projections, sensitivity analysis of the microeconomic assumptions relating to the cost of government services is not common. Analysis is typically used to assess a country’s fiscal future rather than to highlight policy options. Although the methodology and assumptions underlying fiscal projections are disclosed in many reports, none clearly presents how assumptions have changed over time and the reasons underlying the changes.
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Choosing the Nation’s Fiscal Future BOX G-1 Actuarial Projections of Pensions or Social Security Funds in Australia, Canada, Japan, Korea, the United Kingdom, and the United States The Australian Government Actuary, located within the Australian Treasury, prepares actuarial cost estimates of the Public Sector Superannuation Scheme (PSSS) and the Commonwealth Superannuation Scheme (CSS) every 3 years, most recently in 2006. The report identifies the projected actual Australian Government employer costs; the size of the Australian government’s unfunded superannuation liability; and the level of the notional employer contribution rates required to cover the costs of the schemes. Canada’s Office of the Chief Actuary, located in the Superintendent of Financial Institutions Canada, undertakes a review of the Canada Pension Plan as required by legislation. To date, 23 actuarial reports have been prepared since 1964, though their frequency and time horizons have varied over this period. Since 1997, actuarial projections have been standardized to cover a 75-year period and to be published every 3 years. Japan’s Chief Actuary of the Ministry of Welfare conducts a mandatory review of the financial status of the public pension system at least once every five years as required in legislation, most recently in February 2009. The reports update the underlying modeling assumptions and checks whether the replacement rate is on track to fall below its prescribed minimum level in the future. In Korea, an assessment of sustainability of the Korean National Pension Scheme is required by legislation every 5 years. The introduction of actuarial projections as of 2003 represents one of the major changes in the 1998 amendment to the National Pension Act. To date, two actuarial projections have been prepared: the first in 2003, the second in 2008. The United Kingdom Government Actuary’s Department prepares reviews every 5 years of the National Insurance Fund. The reviews provide a 60-year projection to estimate the contribution rates required to be paid to the National Insurance Fund in future years in order to meet expenditure on a pay-as-you-go basis. Projections, however, may be updated more frequently as necessary to illustrate the financial consequences of reform proposals and new draft legislation. An external peer review of the department’s projections is conducted periodically, most recently in 2002. In the United States, the Social Security Act was amended in 1968 to provide for the appointment of an advisory council every 4 years beginning in 1969. The council was to review the status of the Social Security and Medicare trust funds as well as the scope of coverage and adequacy of benefits under the Social Security and Medicare programs. The statute specifically authorized the council to engage the technical assistance necessary to carry out their functions. A technical advisory panel also reviews the methods and assumptions used in the annual projections for the Social Security trust funds.
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Choosing the Nation’s Fiscal Future NOTES 1. This appendix is drawn from a survey of international experience with long-term projections, analysis, and related practices conducted for the committee by Barry Anderson, head of the budgeting and public expenditures division, public governance and territorial development division, Organisation for Economic Co-operation and Development (OECD), with the support of his colleague James Sheppard. A full report on that survey was presented at the June 2009 meeting of OECD senior budget officials and has now been published; see Anderson and Sheppard (2009). 2. What constitutes “long term” is subject to much discussion. Logically, the long term is anything beyond the medium term, which itself varies between countries. Long term is typically associated with effects across generations. In industrialized countries, an average generation is 30-40 years. The time period of more than 10 years has been selected here, noting that a number of countries prepare medium-term fiscal frameworks spanning up to 8 years (e.g., Denmark and Sweden). REFERENCES Anderson, B., and Sheppard, J. (2010). Fiscal futures, institutional budget reforms, and their effects: What can be learned? OECD Journal on Budgeting, 2009(3). Government Accountability Office. (2006). Budget Process: Better Transparency, Controls, Triggers, and Default Mechanisms Would Help to Address Our Large and Growing Long-term Fiscal Challenge. GAO-06-761T, May 25. Washington, DC: U.S. Government Accountability Office.
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