Abstract
The Congressional Budget Office (CBO) serves as the forecasting agency for the United States Congress. Forecast accuracy is important because the fiscal projections set the parameters for deliberations over taxing and spending policies. Thus, it is necessary to assess the ability of the CBO to use information effectively to make quality projections. We do so by examining whether the CBO’s updated one-year ahead and five-year cumulative projections are more accurate than its initial projections for fiscal years 1978 through 2017. We find that the updated projections are generally more accurate, suggesting that the CBO is effectively using the new information it collects over a short period of time (generally 6–7 months) to improve the quality of its forecasts.
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Notes
- 1.
In the international context, establishing independent legislative budget offices is an important trend in the Organisation for Economic Co-operation and Development (OECD) countries, especially in the aftermath of the fiscal crises experienced by many countries (Chohan 2018; Kim 2015; Von Trapp et al. 2016). In existing comparative studies, the CBO is usually ranked first in terms of its independence and analytical capacities (Von Trapp et al. 2016; see also Kim 2015; Wehner 2006). In that light, the CBO can be viewed as the “most likely case” to provide accurate predictions; in other words, if the CBO has problems with accuracy, the other legislative budget offices in the world are likely to face even more severe challenges in forecasting.
- 2.
This is not surprising given that economists from the CBO, OMB, and Council of Economic Advisors work together to produce a consensus forecast for the economy and CBO “does not want to deviate far from the consensus” (Penner 2002: 8).
- 3.
An updated forecast for the current fiscal year (in this example, 2017) is also provided.
- 4.
Examples of technical changes include “modeling improvements, the incorporation of new demographic information, recent agency actions or judicial decisions, and updated data from federal agencies or other sources” (CBO2017: 3).
- 5.
Two studies have assessed updated one-year ahead forecasts in Europe. Carabotta (2014) found that autumn forecasts of Italy’s deficit are generally more accurate than the initial spring forecasts, and Pérez (2007) found that updated forecasts of deficits in Eurozone countries tend to outperform initial projections. Both authors attribute the improvements to better information being available at the time of the updated forecasts.
- 6.
Projection error = et = \( U(x)=\alpha +\beta x\;\mathrm{with}\;\beta >0 \); Mean error = \( \frac{1}{N}\sum \limits_{i=1}^NU\left({x}_i\right)=\frac{1}{N}\sum \limits_{i=1}^N\left(\alpha +\beta {x}_i\right)=\alpha +\frac{1}{N}\beta \sum \limits_{i=1}^N{x}_i \); MAE = \( \overline{X} \); RMSE = \( \overline{U}\left({x}_i\right)=\alpha +\beta \overline{X} \)
- 7.
The difference in the absolute errors = |initial et| − |update et|
The difference in the squared errors = (initial et)2 − (update et)2
- 8.
Deficits are recorded as negative numbers. Thus, if the projected deficit is −$100 billion and the actual deficit is −$110 billion, the error would be +$10 billion (−100 minus −110 = 10).
- 9.
Remember that positive errors signify that the deficit was larger than projected.
- 10.
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Douglas, J.W., Raudla, R. (2019). CBO Updated Forecasts: Do a Few Months Matter?. In: Williams, D., Calabrese, T. (eds) The Palgrave Handbook of Government Budget Forecasting. Palgrave Studies in Public Debt, Spending, and Revenue. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-18195-6_7
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DOI: https://doi.org/10.1007/978-3-030-18195-6_7
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