Appendix A-Contd
SECTION I-FORECASTING ASSUMPTIONS AND BUDGETARY CRITERIA î
3 A number of computer based models are used to derive the MRF. These models reflect a wide range of assumptions about the factors determining each of the components of Government's revenue and expenditure Some are economic in nature (the general economic assumptions) while others deal with specific areas of Govern ment's activity (the detailed assumptions). These are supported by studies of historic and anticipated trends.
General Economic Assumptions
Growth in Gross Domestic Product (GDP)
4 There is a clear link between many of Government's major revenue sources and economic growth. For planning purposes the medium range assumption as to annual GDP growth for the current MRF has been set at 54% in real terms.
Inflation
5 The inflation rate fell rapidly in 1985 and 1986 but, in recent months, has begun to edge upwards. Over the forecast period the average year on year assumption has been increased to 54% (from 44% in the previous Medium Range Forecast). It is emphasized that this is a trend assumption and the prospect in the short-term is that actual inflation will exceed this trend.
Detailed Assumptions
6 A wide range of detailed assumptions relating to developing expenditure and revenue patterns over the forecast period are taken into account. These include:
-estimated cash flow on capital projects.
-forecast completion dates of these capital projects and their related recurrent consequences in terms of
staffing and running costs.
-the expected pattern of demand for individual services.
-the trend in yield from individual revenue sources.
-changes in taxation rates and fees and charges.
Budgetary Criteria
7 In addition to the above forecasting assumptions there are a number of criteria against which the results of forecasts are tested for overall acceptability in terms of budgetary policy. Any significant breach of these parameters results in a review of the underlying programmes and adjustments as necessary.
8 The following are the more important budgetary criteria:
-Total cash flow surplus/deficit
As a general aim, a cash flow surplus is sought each year to ensure that total reserves in General Revenue Account and in the Funds maintain their value in real terms. On the basis of the current level of reserves an annual surplus of around $2.0 billion is necessary to achieve this objective.
---Operating surplus/deficit
With the reduction in importance of capital revenue from land sales a continuing substantial element of capital expenditure must now be financed from a surplus on operating account (recurrent revenue in relation to recurrent expenditure). A broad target of at least a 50% funding of capital expenditure from the operating surplus is adopted.
-Total expenditure growth
It is intended that expenditure growth should not exceed the trend assumption as to growth in GDP taking one year with another.
--Capital expenditure growth
By its nature some fluctuations in the level of capital expenditure are to be expected. However, taking one year with another the aim is to contain capital expenditure growth within overall expenditure guidelines, i.e. within the trend assumption as to GDP growth. Allowance is made for a number of major projects due to start in the forecast period. In planning the size of the capital programme regard is also had to the recurrent consequences of capital works (staffing, maintenance, etc.).
-Size of the civil service
This is a significant determinant of the growth rate of Government's expenditure. A target average annual growth of no more than 24% in the size of the civil service is adopted. -Taxation policy
The projections reflect the taxation measures introduced in this year's budget. Thereafter, no major shifts in the tax burden are assumed. Account is taken, however, of the need to maintain the real yield from fees and charges, fixed duties etc. and to review periodically the various tax thresholds in the light of inflation.
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