On the political economy of national tax revenue forecasts: evidence from OECD countries

Abstract

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Political budget cycles, incumbency advantage, and propaganda

“…In contrast, Boylan () finds biases in forecasts for an array of U.S. state budget variables from 1982 to 2005 and attributes them to both economic and political factors. This is confirmed by Jochimsen and Lehmann () for a sample of 18 OECD countries. They find that left‐wing and less fragmented governments produce more optimistic tax revenue forecasts; they do, however, not find any evidence for political budget cycles.…”

The macroeconomic projections of the German government: A comparison to an independent forecasting institution

“…In the budgetary planning process more positive economic forecasts lead to overestimated tax revenues, generating a potential spending leeway for the politicians. Higher tax revenue forecasts therefore either lead to higher expenditures by keeping the ex-ante deficit constant or to a reduction of the ex-ante deficit by keeping expenditures at its former level (see Jochimsen and Lehmann, 2017). In the context of our stylized model we assume that the government has an incentive − at time − to systematically deviate from the optimal unbiased forecast and to produce over-optimistic forecasts ( − > 0).…”

“…Initially this result seems to be puzzling. But it becomes less so if we take a closer look at the fiscal forecasting literature (see Goeminne et al, 2008;Jochimsen and Lehmann, 2017), which gives three reasons for a higher degree of fractionalization leading to less optimistic or more pessimistic forecasts. First, the more parties are part of the parliament the higher is the representation of interest groups from the population.…”

“…In their set-up, however, they are not able to investigate political economy motives for the GDP forecast errors, as they are not those of the institution that is responsible for the fiscal projections, but those of the German Council of Economic Expert (in German: "Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung"), and hence an institution which is not involved at all in the countries' processes of tax revenue projections. The same limitation applies to Jochimsen and Lehmann (2017), who extend the multi-country data set of Büttner and Kauder (2010) to 18 OECD countries over the period from 1996 to 2012 and who use the macroeconomic projections of the OECD to evaluate the link between tax revenue forecast errors and GDP forecast errors. While they find empirical evidence for political biases in the tax revenue forecasts, they are however unable to investigate whether the political biases either stem from the macroeconomic input or are produced as markups on an unbiased forecast.…”

UK Taxes and Tax Revenues: Composition and Trends

“…Buettner and Kauder [3], also working with data from Germany, found that Federal tax revenue forecasts were typically unbiased but still influenced by government. Jochimsen and Lehmann [4] examined national tax revenue forecasts for a sample of 18 OECD countries. They find strong support for a politically partisan effect on national forecasts of tax revenues.…”