(Forecast) Horizons in North Dakota

I testified in front of the state legislature forecast committee at the end of July and gave my feedback on proper process improvement North Dakota could, and should, make. Each of the items I mentioned could be an entire discussion on its own which makes testimony under a time limit a bit of an issue. And then I realized, I have a blog, so I can extend my thoughts as needed. The first point to discuss further is forecast horizon.

The forecast horizon is an important part of the overall process and perhaps one that can best build trust in that process. North Dakota currently forecasts revenues for the current biennium only. As a result there is little thought given to intermediate and long run impacts of legislative changes, or economic changes, on the future of the broader economy or revenue generation for the state. This is a significant limitation.

Why is this a problem? Actions taken today, tax changes for example, exert impacts beyond the current biennium, even if they are only temporary changes. You should be prepared to read about this more as the Congress and White House start to push tax reform, or tax change. They cannot seem to decide which they are going for so as soon as they know, I guess we will know. Even temporary changes matter as people make decisions in time and may change consumption or investment decisions based on changes in tax policy. It is really quite complex. A forecast over the time span of the current biennium is fine as a start, but good fiscal stewards should give some indications of likely outcomes after that biennium, understanding that the further into the future you push the forecast the less accuracy you expect.

I would expect a forecast spanning multiple biennia, between say three and five. That would mean we look at a six to ten year time frame for items like tax revenues, and in so doing gain significant insight into the expected path of the economy over time. You want to attract business and industry to North Dakota? Understand how the economy and the revenue are evolving over the course of the next decade and make a pitch based on those expectations.

In this type of approach the legislature learns both the short run and the long run implications of policy change along with the important dynamics between policy and economic agents like businesses and consumers. We all make decisions that span multiple time frames, having children, going to school, taking a job, investing, buying a house, the real question is why should we artificially limit the horizon of the forecasts our legislative representatives use when making the policy decisions that arguably impact each and every one of the decisions mentioned?

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