Revenue Forecasting Practices: Differences across Countries and ...

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Though we include several European countries, the index does not take account of the fiscal surveillance by the European Union institutions. Since 1999 due to the Stability and Growth Pact (SGP), EU member states are required to submit budgetary projections including revenue forecasts every year to the European Commission and the Ecofin Council. The forecasts also play a role in the Excessive Deficit Procedure, which defines sanctions for member states that continuously violate the agreed fiscal rules. It should be noted, however, that the purpose of corresponding revenue forecasts is different: they are not issued to set up and justify the budget plan. Rather these projections provide the European Commission and the Ecofin Council with necessary information for purposes of surveillance of budgetary positions and economic policies. Nevertheless, the existence of a supra-national body discussing and standardizing revenue forecasts of the member states might well have implications for the national governments’ revenue forecasts. By including indicators for EU countries in the time period starting in 1999, the empirical analysis below tests for a possible impact on the performance of revenue forecasts. 5 Determinants of Forecasting Performance Having outlined differences in the forecasting conditions and practices let us finally turn to the question as to what extent these are associated with the large differences in forecasting performance noted above. In a first step we consider the level of the revenue forecast error and test for the presence of forecast biases. Table 4 provides the results. Column (1) indicates that the overall mean or average forecast error is not significantly different from zero. The specification in Column (2) takes account of the panel structure of the data and 17
Table 4: Determinants of Forecast Error (1) (2) (3) (4) (5) (6) Constant -.486 -.441 .171 2.65 (.517) (.463) (4.02) (3.62) GDP forecast error 1.89 ⋆⋆ 1.99 ⋆⋆ 1.92 ⋆⋆ (.316) (.323) (.322) Time span .091 .000 (.167) (.150) log No. of taxes -.166 -.879 for 50% of revenue (1.12) (1.01) Independence -.308 .326 (2.29) (2.06) Germany 1.31 .743 (1.81) (1.60) Austria -.037 .380 (1.98) (1.75) Netherlands -3.40 -3.90 (2.80) (2.47) Belgium -.432 -.576 (1.73) (1.53) France -1.15 -1.52 (1.98) (1.75) Italy -2.30 -3.33 ⋆⋆ (1.88) (1.67) United Kingdom -.213 .869 (1.88) (1.67) Ireland -.536 .234 (1.88) (1.67) USA-CBO .807 1.36 (1.80) (1.60) USA-OMB -.472 0.84 (1.80) (1.60) Canada -2.71 -2.94 ⋆ (1.73) (1.53) New Zealand -1.54 -.871 (1.88) (1.67) Japan 2.58 1.80 (1.80) (1.60) R 2 0.000 0.067 0.202 0.279 0.003 0.207 Observations 143 143 143 143 143 143 Dependent variable: One-year-ahead forecast error for total tax revenues. Standard errors in parentheses. One star denotes significance at the 10 % level, two stars at 5% level. 18
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