The Political Economy of Revenue-Forecasting Experience From Low-Income Countries

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper analyzes interference and timeliness in the revenue-forecasting process, using new data on revenue-forecasting practices in low-income countries. Interference is defined as the occurrence of a significant deviation from purely technical forecasts. A theoretical model explains forecasting interference through government corruption. The data broadly supports the model, and the results are robust to alternative explanations. The paper also constructs three indices-transparency, formality, and organizational simplicity-that characterize revenue-forecasting practices, and assesses their effectiveness in producing an upfront-that is, timely-budget envelope. More transparent and simple forecasting processes lead to early budget constraints, while formality has no measurable effect.

Enhancing the accuracy of fiscal projections in South Africa

“…This link was confirmed in a more recent study by Merola and Pérez (2013), who analysed forecasts of 15 Eurozone governments in the period 1999 to 2007. The findings of Danninger, Cangiano and Kyobe (2005) on official forecasts in 34 developing countries are consistent with the claim that policymakers sometimes adjust their revenue forecasts upwards to accommodate spending increases without weakening budgeted fiscal balances.…”

“…Empirical studies show substantial inaccuracy in many policymakers' forecasts of fiscal and macroeconomic aggregates (Danninger, Cangiano & Kyobe, 2005;Frankel, 2011b;Jonung & Larch, 2006). Such inaccuracy has at least two pernicious effects.…”

The effect of tax revenue budgeting errors on fiscal balance: evidence from the Swiss cantons

“…Indeed, politicians may be merely seeking to create a buffer in order to increase expenditure subsequently for re-election purposes (Bischoff and Gohout 2010;van der Ploeg 2010). Moreover, in some weak and corrupted institutional settings with poor checks and balances, underestimating tax revenue may even be a way for incumbent politicians and officers to conceal the extraction of resources from public budgets (Danninger 2005). Ideally, we would prefer to argue that the budgeted amount of tax revenue should equal tax revenue optimal forecast and explicit fiscal rules brought into law through a democratic process should be privileged in order to avoid deficits and to cope with economic uncertainty.…”

Cyclical asymmetry in fiscal variables in the EU

“…However, difficulties in assessing macroeconomic conditions cannot explain why procyclicality tends to be asymmetric. Moreover, the evidence of systematic bias towards optimism in official forecasts of output growth is at odds with the notion that overspending in good times arises from inadequate information about the state of the cycle (Danninger et al 2004).…”