Budgetary Traffic Lights

In this paper, we develop a framework to assess and communicate short-term risks to the general government budget. The project is motivated by the need to keep budgetary developments under constant surveillance and to timely identify sources of fiscal stress, such that the government can mitigate or even eliminate these by taking appropriate measures. We consider a concept of fiscal risk defined in terms of the expected deviation of the budget balance from its fiscal target. Our framework consists of three parts. First, we collect data input from various sources and identify potential one-off effects. Second, we forecast end-of-year values for revenue and expenditure items of the budget. We design a forecasting method that combines a simple heuristic method of time series forecasting with expert assessments. Third, we use the forecasted output to evaluate and communicate the fiscal risk level for a current fiscal year. Specifically, we use a concept of traffic light colors to report expected deviations of fiscal outcomes from their budgeted targets.

Keywords: government budget balance, fiscal risk, budget forecast

JEL classification: C33, C53, H60, H68