This mini stress test demonstration addresses the risk of running a budget deficit. You enter your revenue forecast, including estimates of the potential error in your forecast. No forecast will ever be exactly right and can sometimes be quite wrong – the potential error in the forecast presents a risk that revenues will be insufficient to cover planned spending. You can estimate the potential error by looking at the difference between past forecasts and what actually happened. You could also apply your professional judgment to estimate the range of possible outcomes. Given the potential error in your forecast, the model tells you:
- The chance you will run a deficit or a surplus
- The average size of the deficit or surplus you can expect
- If you are unhappy with your chance of a deficit, given your spending plan, the model tells you the size of the budget you can have in order to incur a level of risk you are comfortable with
- Publication date: March 2023