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The impact of forecast errors on fiscal planning and debt accumulation

Martin Ademmer and Jens Boysen-Hogrefe ()

No 2123, Kiel Working Papers from Kiel Institute for the World Economy (IfW)

Abstract: 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, the accuracy of medium run forecasts considerably affects the sustainability of public finances. Our calculations suggest that a significant share of total debt of German states results from revenue forecasts that were too optimistic.

Keywords: fiscal policy; fiscal planning; medium run forecasting; budget balance; public debt (search for similar items in EconPapers)
JEL-codes: E62 H61 H68 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-bec, nep-eec, nep-for, nep-mac and nep-ore
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