MEDIUM RANGE FORECAST 1986–87 TO 1990–91
Appendix C
Background
A number of computer based models are used to derive forecasts of Government's finances for a five year period. In essence these models reflect a wide range of assumptions about the factors determining each of the components of revenue and expenditure. These assumptions are supported by studies of historic and expected trends.
2 Eight broad parameters are also used which serve to define either general economic assumptions or deliberate budgetary strategy. Two are basic economic assumptions having a significant impact on the Government's financial performance. Six are specific to Government's finances and therefore subject to direct control.
General Economic Assumptions
3 Growth in Gross Domestic Product (GDP)—There is a clear link between many of Government's major revenue sources and economic growth. For planning purposes and in the light of recent performance the medium range assumption as to annual GDP growth has been revised upwards from 41% to 5% in real terms. This is close to the average performance of the last 5 years.
4 Inflation This has fallen rapidly in 1985 and 1986 but, in recent months, has begun to edge upwards. Over the forecast period an average year on year rate of 41% is assumed.
Specific Budget Assumptions
5 Total cash flow surplus/deficit-As a general aim, a cash flow balance is sought, although erring on the side of surplus to ensure that total balances in General Revenue Account and in the Funds gradually increase to maintain their real value.
6 Total expenditure growth-It is intended that the trend should not exceed the growth in GDP in real terms. For planning purposes trend expenditure growth is held to slightly below GDP growth to provide room for manoeuvre in the face of unforeseen circumstances.
7 Capital expenditure growth-By its nature some fluctuations in the level of capital expenditure are to be expected. Taking one year with another the aim is to halt the decline of recent years and some increase is now planned. Allowance is made for a number of major projects due to start in the forecast period. At the same time, regard is had to the recurrent consequences of capital works in terms of staffing etc.
8 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.
9 Operating surplus/deficit-With the reduction in importance of capital revenue from land sales it is assumed that a continuing substantial element of capital expenditure must now be financed from a surplus on operating account. A broad target of at least 50% is adopted.
10 Size of the civil service-This is a major determinant of the trend of Government's expenditure. An average annual growth of around 24% p.a. in civil service numbers is implicit in these forecasts.
Detailed Assumptions
11 There are many assumptions which underlie those already mentioned. These deal, for example, with expected completion dates of individual capital projects and their recurrent consequences in the form of staffing and projected growth in the demand for individual services. It is not, however, intended to spell them out here as they are not essential to consideration of the strategy implied.
12 Each year, the computer models are updated. This year's forecasts, for instance, reflect the higher economic growth rate assumption and consequential improvements in the revenue base for future years.
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