Growth forecasts are the foundation of fiscal planning. Risk management in fiscal planning therefore requires an appreciation of the uncertainty associated with the underlying growth forecasts. This paper estimates such uncertainty by examining medium-term government and private-sector forecasts for Québec as well as private sector forecasts for Canada. It shows the distribution of forecast errors for both real and potential output forecasts by forecast horizon. It also examines a variety of decompositions to better understand key sources of forecast uncertainty.
The results indicate that forecast uncertainty increases linearly with forecast horizon. Five-year ahead forecast errors for real output of ±5% are common, while those for potential output are roughly half the size, suggesting that the cumulative impact of cyclical factors play an important role. Of the two forecasts for Québec, the private sector forecast showed larger mean forecast errors while the government forecast had somewhat higher mean-squared forecast errors. The latter also tended to have offsetting mean errors in its forecasts of output gaps and trend productivity growth. Productivity growth together with labour force participation rates were a key contributor to most forecast errors while population growth tended to play a significant secondary role at longer horizons and variations in employments were generally minor.
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