**5. Forecasting UK tax revenues**

An extensive literature exists concerning political bias in budgetary and tax revenue forecasting. Bischoff and Gohout [2] found some evidence of upward bias in tax projections in West German states. 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. Brogan [5] in a study of US states found evidence of systematic under forecasting of tax revenues. Brück and Stephan [6] studied budget deficit forecasts for a sample of Eurozone countries. They found evidence of an association between politics and systematic over or under forecasting with, of course, some countries performing worse than others in this respect. Perhaps one of the most extensive and systematic studies of political influence on budget (and tax revenue) forecasting was provided by Frankel [7]. This found evidence of systematic bias in official forecasts.

Another closely related strand of the literature addresses how political influence on tax revenue forecasting might be reduced. Concern with politically influenced government revenue forecasting has led some authors such as Auerbach [8] to advocate budget rules, combined with better forecasting techniques. Frankel [7] finds budget rules not to be particularly effective but instead found the use of independent expert panels to reduce forecast bias. Frankel and


**Table 3.** Specimen OBR revenue forecast evaluation.

Schreger [9] studied government revenue and budget forecasts in Eurozone countries, finding lower bias in those countries that have adopted budget rules. Leal et al. [10] argue in favour of transparent methods in revenue forecasting combined with clear procedures. Jonung and Larch [11] analysed the link between policy and forecasts and considered how the policy framework might be reformed to reduce influence on revenue forecasts. They argue strongly that revenue forecasts should be conducted by an independent authority to reduce potential political bias.

In the UK precisely such an independent authority exists. The *Office for Budget Responsibility* (OBR) was established by government in 2010. Its function is to provide independent analysis of public finance. Specifically it has five main roles:


Taken overall, the figures for individual taxes and for overall tax revenues all share more or less common trends. That is, tax revenues in constant prices terms have tended to be stable over longer periods of time (the trend) but volatile between 1 month and another. The trend

An extensive literature exists concerning political bias in budgetary and tax revenue forecasting. Bischoff and Gohout [2] found some evidence of upward bias in tax projections in West German states. 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. Brogan [5] in a study of US states found evidence of systematic under forecasting of tax revenues. Brück and Stephan [6] studied budget deficit forecasts for a sample of Eurozone countries. They found evidence of an association between politics and systematic over or under forecasting with, of course, some countries performing worse than others in this respect. Perhaps one of the most extensive and systematic studies of political influence on budget (and tax revenue) forecasting was provided by Frankel [7]. This found evidence of

Another closely related strand of the literature addresses how political influence on tax revenue forecasting might be reduced. Concern with politically influenced government revenue forecasting has led some authors such as Auerbach [8] to advocate budget rules, combined with better forecasting techniques. Frankel [7] finds budget rules not to be particularly effective but instead found the use of independent expert panels to reduce forecast bias. Frankel and

is for the real value of tax revenues to grow slowly and slightly i.

**5. Forecasting UK tax revenues**

**Figure 7.** Total monthly tax revenues (in constant prices).

92 Taxes and Taxation Trends

systematic bias in official forecasts.

• Scrutiny of the costing of government tax and welfare measures

The OBR produces forecasts for overall revenues and also on a tax by tax basis. They use a variety of different modelling and forecasting techniques. A crude generalization would be that those taxes most closely related to economic behaviour such as personal income tax, NICs and VAT tend to be forecasted using a detailed structural of the economy. Other, smaller taxes, less obviously related to the business cycle are sometimes forecast by time series methods.

OBR reports do not just provide forecasts but also an evaluation of errors in past forecasts. A specimen of such an evaluation from the OBR's October 2016 report [12] is reproduced below (**Table 3**).
