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An Analysis of Tax Revenue Forecast Errors - WP 07/02

5  Data

Tax forecast data have been taken from the various Budget Update and December/Half-Year Update publications produced by the Treasury since the 1994 Budget. The data were collected from spreadsheets stored on Treasury computers and cover all of the tax types forecast by the Treasury, the Ministry of Transport (road user charges and motor vehicle licensing fees) and the Ministry of Economic Development (energy/exhaustible resource levies).

The Treasury has maintained a database of forecasts of macroeconomic variables ever since the 2001 Budget and this database was used as a primary source. Forecasts of macroeconomic variables prior to the 2001 Budget were collected from macroeconomic and tax forecasting spreadsheets stored on Treasury computers. The data collected were restricted to the primary nominal macroeconomic variables used in the Treasury’s tax forecasting models such as GDP, compensation of employees, consumption, operating surplus and entrepreneurial income.

Up until the end of 1999, the Treasury produced tax and macroeconomic forecasts for the current year and the following three years. From 2000 onwards, this was extended to include a fourth year. Although data across all these forecast horizons were collected, the analysis undertaken focuses on one-year-ahead forecasts, since these are the forecasts against which tax outcomes are measured by the New Zealand Parliament.

Actual tax outcomes are calculated by the Treasury each month and published on the Treasury's website. The macroeconomic data outcomes used in the analysis were the latest available from Statistics New Zealand.

5.1  Data issues

The historical tax and macroeconomic data analysed were, for the most part, final outcomes rather than unrevised estimates. However, the corresponding forecasts were often based on unrevised data available at the time or, in some cases, were prepared in advance of significant policy changes. To correct for these and other such effects, a number of prior adjustments were made to the forecasts. Details are given below.

Policy changes

Tax forecast data have been adjusted for policy changes that affected the final outcomes, but which were not known about at the time the forecast was made. This is to ensure that the forecasts, and the actual tax outcomes they are being compared with, were prepared on the same policy basis.

For example, PAYE forecasts prepared for the 1995 Budget have been adjusted for the personal income tax rate reductions of July 1996 and July 1997 that were announced in December 1995. In the 1997 Budget, the July 1997 personal income tax rate reductions were deferred until July 1998, so forecasts prior to that have also been adjusted for this deferral.

The adjustments used are the actual policy costings that were available at the time the new policy was announced. We have decided to use these adjustments, rather than recalculate the actual effect of the policy change, as these adjustments are the closest we can get to the actual adjustments that the Treasury’s tax forecasters would have made had the new policy been known about at the time of forecasting.

Macroeconomic data imputation

As previously mentioned, some of the earlier forecasts of macroeconomic variables were collected from macroeconomic and tax forecasting spreadsheets.  Although we cannot be absolutely sure that these were the final published macroeconomic forecasts, in all cases the tax forecasts in these spreadsheets matched the final tax forecasts made and so it seems reasonable to assume that these spreadsheets also contained the final macroeconomic forecasts.

Some of the forecasts of macroeconomic variables were stored as growth rates rather than as levels. We have converted these forecast growth rates into forecast levels using base level outcomes that were known at the time, but have no way of knowing how close these reconstructed forecasts are to the actual final macroeconomic forecasts of levels. Nevertheless, any discrepancies introduced are likely to be small.

Data revisions

Macroeconomic data available from Statistics New Zealand are subject to revision. For example, initial estimates of nominal GDP for the year to June 1999 were around $100 billion, whereas the latest estimate is some 5% higher than this at around $105 billion. For the most part, revisions to nominal GDP in the period under examination have been upward, although this is not necessarily so for all of the components of GDP.

The Treasury's macroeconomic forecasts typically apply forecast growth rates to the historical macroeconomic data available at the time, the most recent of which will often be an unrevised or partially-revised estimate. To ensure that the analysis is not unduly influenced by such data revisions, each macroeconomic forecast was multiplied by the ratio of the most recent macroeconomic estimate to the unrevised or partially-revised estimate available at the time of making the forecast. This simple correction factor is based on the assumption that the macroeconomic forecast is, at least approximately, the product of the last available value of the macroeconomic variable and a forecast growth factor.

Adjusting the macroeconomic forecasts by scaling in this way is less than perfect since the forecasts may not be scale-invariant. For example, the composition of nominal GDP has been revised over the intervening period, something that scaling does not necessarily account for. Perhaps the best way to adjust the economic forecasts for subsequent data revisions would be to repeat each forecast using the latest data. This would mean using the same forecasting models, the same forecasters and replicating the judgmental processes that were used at the time. Such a task would be time-consuming and costly and may not lead to better adjustments. Scaling has the advantages of being quick, simple and transparent.

Tax revenues are not subject to revision and so their forecasts did not have to be adjusted. However, the forecasts of the tax ratios Rt were implicitly adjusted since they are based on (13) which is the ratio of the tax revenue forecast to the adjusted forecast of its associated macroeconomic variable or tax-base proxy.

Data mis-alignment

The Crown's accounts are prepared on a Budget year, ie June year, basis. Thus tax revenues are reported as June year totals and tax revenue forecasts are prepared accordingly. However, some macroeconomic variables are forecast solely in March years. In these cases, the March year forecasts and actual outcomes have been used in the analysis and no attempt has been made to correct for any temporal mis-alignment.

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