MEDIUM RANGE FORECAST
2002-03 TO 2007-08

INTRODUCTION

         The Medium Range Forecast (MRF) is a projection of expenditure and revenue for the forecast period based on the forecasting assumptions and budgetary criteria outlined in Section I of this Appendix.

2       The MRF is presented in three sections:

(I) Forecasting assumptions and budgetary criteria.

(II) The MRF for 2002-03 to 2007-08.

(III) Relationship between Government Expenditure, Public Expenditure and GDP in the MRF.

3       Government's contingent liabilities at 31 March 2002 and an estimate at 31 March 2003 and 31 March 2004 respectively are provided in Section IV of this Appendix as supplementary information to the MRF.

SECTION I - FORECASTING ASSUMPTIONS AND BUDGETARY CRITERIA

4      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 Government's activity (the detailed assumptions). These are supported by studies of historical and anticipated trends.

General Economic Assumptions
Real Gross Domestic Product (real GDP)

5       For planning purposes, the assumption on the trend growth rate in real terms of GDP for the medium-term period 2003 to 2007 is set at 3% per annum (comprising a 3% growth for 2003, and an average growth of also 3% per annum for the ensuing period 2004 to 2007).

Price change

6      Over the period 2003 to 2007, the trend rate of change in the GDP deflator, as measuring overall price change in the economy, is assumed at 0% per annum (comprising a decrease of 2% for 2003, and an average increase of 0.5% per annum for the ensuing period 2004 to 2007), and the trend rate of change in the Composite Consumer Price Index, as measuring price change in the consumer domain, is assumed at a 0.5% increase per annum (comprising a decrease of 1.5% for 2003, and an average increase of 1% per annum for the ensuing period 2004 to 2007).

Nominal Gross Domestic Product (nominal GDP)

7      Taking the assumptions on the trend rates of change in the real GDP and the GDP deflator together, the trend growth rate of nominal GDP is thus assumed at 3% for the period 2003 to 2007(comprising a 1% growth for 2003, and an average growth of 3.5% for the ensuing period 2004 to 2007).

Detailed Assumptions

8      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 of capital projects.

• forecast completion dates of these capital projects and their related recurrent consequences in terms of staffing and running costs.

• estimated cash flow arising from new commitments resulting from policy initiatives.

• the expected pattern of demand for individual services.

• the trend in yield from individual revenue sources.

• new revenue/expenditure measures in the 2003 Budget.

Budgetary Criteria

9      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 important budgetary criteria results in a review and adjustments, where necessary, of the expenditure and revenue projections.

10    The following are the more important budgetary criteria:

• Budget surplus/deficit

The Government aims to achieve balance in consolidated and operating accounts by 2006-07. In the longer term, the Government needs to achieve an operating surplus to partially finance capital expenditure.

• Total expenditure growth
  
  The general principle is that, over time, expenditure growth should not exceed the growth of the economy, taking into account both real and nominal terms. The Government aims to keep public expenditure at or below 20% of GDP by 2006-07.
  

• Capital expenditure growth

By its nature some fluctuations in the level of capital expenditure are to be expected. However, over a period the aim is to contain capital expenditure growth within overall expenditure guidelines.

• Revenue policy

  Account is taken of the need to maintain over time the real yield from fees and charges, fixed duties, etc. and to review periodically the various tax thresholds in the light of inflation.

• Fiscal reserves

  The Government in the long run aims to maintain the level of reserves at around 12 months of total government expenditure.

SECTION II - THE MRF FOR 2002-03 TO 2007-08

11     The current MRF (Note a) is summarised in the following three tables which indicate the forecast operating position, capital financing position and consolidated reserves position.

Notes on the Medium Range Forecast

Government Expenditure and Public Expenditure in the Context of the Economy