Revenue Forecasting Practices: Differences across Countries and ...

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Larch (2006) discuss political biases of the output forecasts, Pina and Vedes (2007) are concerned with institutional and political determinants of forecast errors of budget balance. With regard to the more narrow issue of revenue forecasting, international comparisons of the practice and performance are mainly concerned with developing countries (e.g., Kyobe and Danninger, 2005), where institutions relevant for revenue forecasting are underdeveloped (Danninger, 2005). Against this background this paper provides an analysis of the performance of official revenue forecasts and its determinants among twelve OECD countries. The selection of countries aims at cap- turing the seven largest OECD economies (United States, Japan, Germany, Italy, UK, France, and Canada). Some further countries were added where detailed information about revenue forecasting was available. This includes selected countries in Western Europe (Austria, Belgium, Ireland, Netherlands) and New Zealand. What turns out is that the cross-country differences in the performance of revenue forecasting are first of all associated with the uncertainty about the macroeconomic fundamentals. To some extent they are also driven by country characteristics such as the importance of corporate and (personal) income taxes. Also differences in the timing of the forecasts prove important. However, controlling for these differences we find that the accuracy of revenue forecasting increases with the independence of forecasts from possible government manipulation. The following section presents descriptive statistics on the performance of revenue forecasting among our sample of OECD countries. Section 3 provides an overview on the different conditions that forecasters face in these countries. Section 4 discusses institutional aspects of the forecasting task among the selected OECD countries and sets up a simple indicator of the independence of revenue 3
forecasting from possible government manipulation. Section 5 presents empirical evidence on the determinants of forecasting performance. Section 6 provides a short summary. 2 Forecasting Performance A common way to assess the quality of revenue forecasts is to consider the forecast error defined as the percentage difference between forecasted and realized revenues. A smaller forecast error is then usually regarded as a better forecast quality. However, it should be noted that official revenue forecasts are basically used to indicate the revenue constraint that needs to be taken into account in the preparation of the public budget. Often, the budget will include expenditures that have a direct or indirect effect on tax revenues. While foreseeing these effects might result in a smaller forecast error, it is not clear whether this constitutes an improvement of a forecast that basically aims at providing the policy maker with information about the revenue constraint before actions are taken. In the discussion of the revisions of US revenue forecasts, therefore, policy changes are distinguished from (macro-)economic and so-called technical sources (Auerbach, 1999) of forecast errors, where the latter may refer to tax administration or evasion, for instance. However, for most countries a decomposition is not available. Therefore, the quantitative analysis presented below is based on the overall forecast error associated with the revenue forecast. We focus on the official tax-revenue forecasts used for setting up the budgets, i.e. we deal with revenue forecasts for the next fiscal year. In most cases this implies that we consider a one-year- ahead forecast error for tax revenues. In some cases, in particular, if the fiscal year differs from the calendar year, the forecast is sometimes issued in the same year where the fiscal year begins. 4
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