Part 3: Preparation of the pre-election economic and fiscal outlook
Pre-election economic and fiscal outlook
The Secretaries of Treasury and Finance must jointly release a PEFO within 10 days of the issue of a writ for a general election. The PEFO is to include updated fiscal estimates for the Australian Government general government sector1 over the forward estimates period, as well as the economic and other assumptions that have been used in preparing these fiscal estimates. The information in the PEFO report is to take into account, to the fullest extent possible, all Government decisions made before the issue of the writ and all other circumstances that may have a material effect on the fiscal and economic outlook. The PEFO also includes sensitivity analysis and an updated statement of risks.
The procedures for updating the economic and fiscal forecasts are similar to those used by successive Governments to develop the Budget and the MYEFO, with the main differences being the more limited amount of time available to prepare the PEFO.
In recognition of this fact, the Charter provides that information which is unchanged from that provided in an earlier economic and fiscal report may be summarised in the PEFO. As the Parliamentary Budget Officer must use the economic forecasts and parameters and fiscal estimates contained in the most recent relevant report released under the Charter to undertake the PBO's functions — including costings — this section has been included as a useful guide to the procedures and conventions used in developing these documents.
Estimates updates
The Government employs a medium–term estimates framework made up of rolling estimates for the Budget year and the three subsequent years (collectively known as the forward years). The rolling four-year estimates are regularly reviewed and an extra 'out year' is added when the Budget is prepared.
Further information on particular aspects of estimates updates can be found at Appendix A.
Economic forecasts
Treasury generally has two major economic forecasting rounds in the year. One is used as the basis for the government's forecasts published in the Budget each May, and the other forms the basis for the revised forecasts published in the MYEFO. Two other rounds are also held, around June and December following the publication of the quarterly national accounts.
In years where a PEFO is being prepared outside of this cycle, an additional forecasting round will be held. Compared with typical forecasting rounds, a PEFO forecasting round will be more condensed, as the PEFO report must be released within a 10 day timeframe.
The major data inputs into the forecasting process are from the Australian Bureau of Statistics (ABS), supplemented by data from other providers, and business and consumer survey data. This quantitative information is tested against information from Treasury's business liaison program and other contacts. The quarterly national accounts are an integral part of the process, as the national accounts form the framework for the forecasting exercise.
At the start of a forecasting round, the technical assumptions about interest rates, exchange rates and oil prices are reset in the light of recent developments. The usual assumption is that exchange rates and oil prices will remain around recent average levels, and that interest rates will evolve in line with market expectations. These assumptions are not always applied mechanically — for example, if the path for interest rates implied by market yields is diverging from the forecasts made by market economists, then weight may be given to both sources of information in arriving at a technical assumption. The assumptions are revisited throughout the round if there are significant movements in any of the variables.
Treasury's forecasts are subject to an external quality test through the Joint Economic Forecasting Group (JEFG), which meets three times a year. At these meetings, the forecasts are discussed with representatives from the Reserve Bank of Australia, the Department of the Prime Minister and Cabinet, the Department of Finance and Deregulation and the ABS. The JEFG process also benefits from extensive input and consultation with other economic agencies through meetings of two JEFG sub-committees. These are: the Balance of Payments JEFG sub-committee (which includes officials from the RBA, ABS and the Bureau of Resources and Energy Economics) and the Public sector JEFG sub-committee (which includes the RBA, ABS and Department of Finance and Deregulation). Due to the time constraints during a PEFO forecasting round, there is no JEFG committee meeting although the Treasury conducts informal discussions with other JEFG partners as part of the forecasting process.
Forecasts are usually generated for the budget year and the next year, and projections for an extra two years. Forecasts take into account cyclical variation in economic activity, whereas projections are based on long-term average growth rates and assumptions (for example, the annual growth in the Consumer Price Index (CPI) is assumed to be 2½ per cent in the projection years, in line with the mid-point of the Reserve Bank's inflation target).
The forecasts and projections for the major economic parameters (such as real Gross Domestic Product growth, employment growth, and CPI growth) are published in the PEFO. These published macroeconomic aggregates are underpinned by the more detailed, disaggregated sectoral estimates, some of which are published in the Budget and MYEFO.
The forecasts and projections for the economic variables that influence the revenue, capital and expenses estimates are sent to the Commonwealth bodies that prepare these estimates. This process is discussed below.
Revenue estimates
Revenue estimates are underpinned by the economic forecasts developed by Treasury, as well as tax collections information from the Australian Taxation Office and the Australian Customs and Border Protection Service. Data relating to oil and gas production from the Department of Resources, Energy and Tourism are also incorporated. The forecasts also account for new policy, results of court cases, variations in the tax collection due dates from year to year and other relevant information.
Final revenue forecasts are entered into CBMS for consolidation into fiscal aggregates.
A reconciliation table is published in the relevant Budget documents, detailing how the revenue estimates have changed in the current round, abstracting from policy decisions.
Expense estimates
Expense estimates are also updated before publishing the PEFO report, as required under the Charter.
Expense estimates of the Commonwealth bodies which comprise the Australian Government general government sector are prepared and bodies enter any revised estimates into the Government's estimates system, the Central Budget Management System (CBMS).
These must reflect: government decisions or measures since the previous estimates update; approved movement of funds (changes of estimates between years without any overall increase in program costs); parameter updates (changes in economic parameters or program specific parameters); and up-to-date departmental and administered program estimates for all years. The estimates prepared by bodies are reviewed by Finance and validated in CBMS if agreed.
In a compressed PEFO update, Finance and Commonwealth bodies will first focus on incorporating any movements in the larger demand-driven programs in the estimates update. Further information on the processes for updating expense estimates is included in Appendix A.
1 The general government sector comprises of Government departments and agencies that provide non-market public services and are funded mainly through taxes (for example, the Australian Broadcasting Corporation).
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Part 4: Costing protocols and methods
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Part 2: The mandate and functions of the Parliamentary Budget Office
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