Journal Article
The Impact of Forecast Errors on Fiscal Planning and Debt Accumulation
Authors
Publication Date
DOI
10.1515/jbnst-2020-0054
JEL Classification
Related Topics
Fiscal Policy & National Budgets
We investigate the impact of errors in medium run tax revenue forecasts on the final budget balance. Our analysis is based on fiscal data for the entirety of German states and takes advantage of revenue forecasts and respective errors that can be considered as exogenously given in the budgeting process. We find that forecast errors at various forecast horizons translate considerably into the final budget balance, indicating that expenditure plans get only marginally adjusted when revenue forecasts get revised. Consequently, errors in tax revenue forecasts may considerably affect the accumulation of public debt. Our calculations suggest that a significant share of total debt of German states results from forecasts that were too optimistic.
