CPB: Role and position in policy preparation in the Netherlands

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CPB Role and position in policy preparation in
the Netherlands

• Johan Verbruggen

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Content

• CPB in headlines
• Independency is crucial
• CPBs role in budgetary process
• Ideal position of forecasting authority?
• How to remain independent?

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Stylized facts about CPB

• Founded in 1945 (by Tinbergen)
• 150 employees (100 economists)
• Formally part of Ministry of Economic Affairs
  ......
• .... though completely independent
• Legal basis for making forecasts

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Illustrations of CPBs unique position

• All political parties ask CPB to analyse the
  economic effects of their election programmes
  (results are published before election)
• Consensus about taking CPBs short-term forecast
  as basis for
• 1) Budget Proposal 2) Wage negotiations

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Central Planning Bureau?

• No planning in strict sense
• Independent analyses relevant for economic
  policy
• Official name CPB Netherlands Bureau for
  Economic Policy Analysis
• Customers
• Government, ministries
• Parliament, political parties
• Trade unions, employers associations
• Public debate

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Tasks of CPB

• Short-term economic forecasting
• (4 times a year)
• Medium- and long-term economic scenarios
• Economic analysis of policy proposals (short-term
  long-term, CBA)
• Economic research (policy relevant)

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Position of CPB

• Part of Ministry of Economic Affairs
• Budget, personnel policy
• Outside requests need Ministers approval
• Insight in confidential reports and plans
• No political interference with models, methods
  and analyses
• No paid assignments from third parties
• (all publications free of charge)

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Most GDP forecasts are biased

• EC (2004) analysed forecasting errors of GDP
  growth in EU countries (Econ. Papers No 210)
• Conclusion optimism bias GDP growth projections
  used in budgetary process gt negative effect on
  fiscal performance
• Reason Ministries have incentives to paint a
  rosy picture (they appear successful down
  playing unpopular measures)

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Official GDP growth T1, projections, 1987 - 2004

• Average error RMSE
• Germany 0.61 1.91
• France 0.42 1.45
• Italy 0.76 1.39
• Belgium 0.30 1.23
• Austria ? 0.10 1.24
• Netherlands ? 0.18 1.41
• significantly different from 0 at 10
• source EC (2004), Economic Papers No 210

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Independent forecasts?

• 3 countries with unbiased GDP growth forecasts
  Netherlands, Belgium, Austria
• In these 3 countries independent institutes, in
  other countries forecasts made by ministries
• Advice forecasting in budgetary process done by
  independent authority

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IMF (2006) about CPB

• The CPB occupies a unique position in fiscal
  policy making in the Netherlands. (....) In such
  a situation, its independence and credibility are
  essential, and the IMF-mission fully supports the
  continuation of the current institutional set
  up. (ROSC Report, p. 9)

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Budget Plan and CPB forecast

• Budget Plan always published on 3rd Tuesday in
  September
• CPBs short-term forecast published on same day
• CPBs economic forecast includes Budget Plan
  Budget Plan includes CPBs economic forecast
• Only possible for forecast institute that is part
  of government

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Headlines of Budget process
prel. budget plan
MoF (May)
macro forecast
budget forecast
CPB (June)
adapted budget plan
MoF (Aug)
final macro forecast
final budget forecast
CPB (Sept)
final budget
MoF (Sept)
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Budget influenced by plans and economy

• Expenditures largely driven by policy
  measurespartly endogeneous (wages civil
  servants, unemployment benefits, ...)
• Taxes, premiums largely endogenous (econ.
  growth, wages ...)partly driven by policy
  measures

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Several budget forecasts

• EMU budget balance taxes -/- expenditures
• Structural budget balance taking account of
  business cycle
• Robust budget balance taking account of business
  cycle, temporary receipts (gas revenues) and net
  interest payments Long term perspective
  (ageing)

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Actual and robust budget balance
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Ideal position of forecasting authority

• Independent
  Ministry
• institute
• ------------------------------------------------
  ---------------------
• Public sector unbiased
  biased
• confidential info
  confidential info
• ------------------------------------------------
  ---------------------
• Private sector unbiased
  n.a.
• no confidential
• information
• ------------------------------------------------
  ---------------------

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How to remain independent?

• Scientific basis
• Total transparancy (results, assumptions,
  instruments)
• No revenues from clients
• Organise your own criticism (national and
  international visitations)
• Large risk of harming good reputation (organise
  internal checks and balances)

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More information?

• Look at www.cpb.nl