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Unformatted text preview: Revenue Forecasting Practices: Differences across Countries and Consequences for Forecasting Performance Thiess Buettner (Ifo Institute and Ludwig Maximilian University, Munich) Bjoern Kauder (Ifo Institute) Revised Version, April 2010 Abstract: This paper reviews the practice and performance of revenue forecasting in selected OECD countries. 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 independence of revenue forecasting from possible government manipulation exerts a robust, significantly positive effect on the accuracy of revenue forecasts. Keywords : Revenue Forecasting, International Comparison, OECD countries, Forecast Error JEL Classification : H68, H11 The authors are grateful to Samuel Berlinski and two anonymous referees for helpful comments on an earlier draft. Many people also helped to collect information about revenue forecasting in different countries, in particular Sabatino Alimenti, Frits Bos, John Conlon, Carl Emmerson, Martin Keene, Maria Rosaria Marino, Toru Oe, Tim Pike, Anton Rainer, Mark Rider, Ken Shinohara, Christian Valenduc, and David Wildasin. However, the authors are fully responsible for any remaining errors. Address: Ifo Institute for Economic Research Poschingerstr. 5 D-81679 Munich Germany Phone: Fax: E-mail: +49 89 9224 1319 +49 89 907795 1319 email@example.com 1 Introduction When the financial crisis hit the economy of OECD countries in 2008 the fiscal outlook for most OECD countries deteriorated substantially. On the revenue side, tax receipts turned out to be much lower than officially predicted. In the US, for instance, the 2008 federal government revenues turned out to be 7.8 and 5.5 % below official revenue forecasts by the Congressional Budget Office from January 2007 and the Office of Management and Budget from February 2007. For Ireland, the 2008 revenue figure issued by the Department of Finance in June 2007 turned out be 15.4 % lower than was predicted a year earlier. It seems straightforward to relate these forecast errors to the severe recession that hardly anyone predicted in the first half of 2007 when these forecasts had been made. However, given that these forecasts play an important role in setting up the budget, it seems interesting to compare the forecasting performance across countries and to discuss its relationship with different forecasting practices....
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