Revenue Forecasting in Low-Income and Developing Countries: Biases and Potential Remedies
This chapter surveys the revenue forecasting landscape in middle- and low-income countries, with a focus on examining the existence of forecast bias and potential remedial reforms. After reviewing the scarce literature on revenue forecast bias, we construct a new dataset of ex-ante revenue forecasts and ex-post realizations for 26 countries using the information from the Public Expenditure and Financial Accountability (PEFA) reports. An analysis of forecast errors reveals that most of these countries tend to overestimate their revenues. Also, the magnitude of forecast errors is significantly large and appears to be correlated with the measures of income and administrative capacity. The chapter then reviews the experience of two institutional innovations for improving the budget process and forecasts: semi-autonomous revenue authorities (SARAs) and independent fiscal councils. The evidence on the effectiveness of the former in increasing tax-to-GDP ratios remains mixed, whereas the latter is a relatively new institution whose future trajectory is still unknown in most of the low-income countries. Although neither of these institutions has been explicitly tasked with providing independent revenue forecasts that could address the bias observed in our sample, both of them could directly and indirectly contribute. Lastly, the chapter highlights the lack of research and data on revenue forecasting in low- and middle-income countries and identifies avenues for future research.
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