Fiscal Planning Under Uncertainty – The Implications of Economic and Fiscal Uncertainty for Budget Forecasts
36 Pages Posted: 14 Feb 2012
Date Written: March 29, 2007
This paper presents an analysis of the uncertainty in projections of the federal budget balance arising due to uncertainty in economic, and government revenue and spending projections. Budget projections frequently differ from actual results due to an unavoidable level of uncertainty contained in the underlying economic projections as well as a relationship between economic inputs and fiscal projections that is often volatile. Using a stochastic simulation model that includes a detailed specification for the economy and federal government finances and random variables to proxy uncertainty in these variables, a probability distribution for the budget balance is generated and the probability of achieving a surplus is estimated given various assumptions for fiscal prudence.
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