Revenue forecasting The Belgian Experience. Christian VALENDUC Studies Department, Federal Ministry of Finance, University of Louvain

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1 The Belgian Experience Christian VALENDUC Studies Department, Federal Ministry of Finance, University of Louvain

2 The budget process Facts Evaluation The macro method for Revenue forecasting under unchanged fiscal policy PIT CIT VAT Excise duties Registration duties

3 The budget process - Facts Economic forecasting Responsibility of the National Accounts Institute (Federal planning office, Central banks and others) N.A.I issues short term macroeconomic forecasting on request of the federal government This forecasting serves as the basis for revenue forecasting Federal planning office responsible for medium term economic forecasting Revenue forecasting Responsibility of the Ministry of Finance Studies Department Expenditure side Responsibility of the Budget Office

4 The budget process - Facts Timing Budget for year «t» prepared in October «t-1» Provisional estimate of tax revenue for year «t-1» Macroeconomic forecasting for year «t» An adjustement HAS to be made in Feb-March, Year t Final figures tax revenue, «t-1» Macroeconomic forecasting for year «t» Plans to have a more closed monitoring

5 The budget process - Evaluation Paper from BUETTNER and KAUDER, Revenue forecasting: differences across countries and consequences for forecasting performance, IFS, Fiscal Studies, 21, 3 Institutional conditions: what about the independence of revenue forecasting? Q1: is it the responsability of the government () or of a research institute (+1) Q2: if, are external experts consulted (+1) or is it just governmental experts (-1)? Q3: independence of economic forecasting (1) or not ()?

6 The budget process - Evaluation Institutional characteristics and independence of revenue forecasting from BUETTNER e.a (21) US CBO US OMB UK F G It Jap B NL Ö NZ Q Q Q3 1 1 Add

7 Macroeconomic method Personal income tax Corporate income tax VAT Excise duties Registration duties

8 Macroeconomic method - PIT Main features Tax on global income, but separate taxation of financial income (quasi dual income tax) Progressive tax schedule (rates range from 25% to 5%) Zero-rate band Yearly automatic indexation (one year lag) Significant and growing number of tax expenditures Withheld at source, tax expenditures not included in the withholding tax WT > PIT liability in many cases, so that the PIT«on assessment» is a negative amount for the federal budget

9 Macroeconomic method - PIT Macroeconomic modelling GI = Income from wages, self-employment, and social transfers subject to tax; net of social security contributions Complementary cash incidence of discretionary tax measures (DTM) Dependent variable: cash revenue from PIT in year «t»

10 Macroeconomic method - PIT Macroeconomic modelling GR PIT = a + b GR GI + DTM Estimated elasticity: Inflation adjustment included in DTM GR PIT,t = a + b 1 (GR GIT -GR cp,t-1 ) + b 2 c cp,t + DTM b 1 = 1,67, b 2 = 1 Does the structure of GI growth have an effect on the growth of PIT revenue? Unconclusive What about tax expenditures? Growth rate = Growth rate of GI during the estimation period ( ) Does not hold for the period May be included in DTM Work in progress to include forecasting of the revenue forgone

11 Macroeconomic method - PIT Ex post evaluation of the forecasting method - PIT Where does the forecasting error come from? Forecasting error 4% 2% % -2% -4% 26 -Ini 26 - Adj 27 - Ini 27 - Adj 28 - Ini Tax revenue t-1 DTM Macroeconomic forecasting Forecasting method

12 Macroeconomic method - CIT Main features of the Begian CIT system Gross tax base : distributed and retained profits But Exemption of capital gains on shares Dividends from subsidiaries subject to CIT: exemption method Losses carried forward Reduced rates for SME s Coordination centre Regime, up to 25 Allowance for Corporate equity introduced in 26 Any macroeconomic variable will be a proxy

13 Macroeconomic method - CIT The main problems NOS = net of profits and losses, but losses are carried forward: CIT may be counter-cyclical Lack of macroeconomic variables that might be used for the modelling of tax deductions CIT paid by advanced payments and on assessment Modelling 1st approach: CIT = f(nos, Ltir Ltir : Long term interest rates, past 5 years average 2d approach: Idem + allowances carried forward 3rd approach: primary income of the corporate sector and profitability.

14 Macroeconomic method - CIT 1st approach CIT = a +b 1 (NOS t +NOS t-1 ) + b2 µ 5 Ltir Performed roughy well up to 26 The introduction of the ACE in 26 is a structural change Level effect on tax revenue (Highly disputed) Changes in the rate of the ACE CIT revenue is more sensible to the business cycle All these effects have to be included in DTM

15 Macroeconomic method - CIT Ex post evaluation of the forecasting method - CIT Where does the forecasting error come from? Forecasting error 15% 1% 5% % -5% -1% -15% 26 -Ini 26 - Adj 27 - Ini 27 - Adj 28 - Ini Tax revenue t-1 DTM Macroeconomic forecasting Forecasting method

16 Macroeconomic method - CIT Year Return on equity 1% 6% 8% Interest rate 4% 4% 4% CIT revenue, without the ACE -4% +33% CIT Revenue -66,7% +1% with the ACE

17 Macroeconomic method - CIT 2d approach : NOS, Ltir, carry-over of allowances In , it became clear that the carry-over of allowances had a strong negative effect on the growth rate of the CIT revenue Carry over of the ACE: 3,6 billions for 27, 38,7 billions for 28, 23 billions for 29

18 Macroeconomic method - CIT (a) (b) (c) Level Level Growth rate NOS «t»+«t-1».77***.82***.371* Ltir ** ** ** Carry over tax allow -.24** -.279** R² DW

19 Macroeconomic method - CIT 3rd approach: NOS, profitability CIT = a+b 1 PI CS + b2(pi CS /NVA CS ) + b 3 DTM The primary income of the corporate sector includes the net net financial income No need to include long term interest rates The «profitability» variable captures the countercyclical effect May improve the adjustement CIT = PI CS (PI CS /NVA CS ) +.82 DTM R² =.956

20 Macroeconomic method - CIT Forecasting error - ex post assessment 15% 1% 5% % -5% -1% -15% -2% d approach 3rd approach

21 Macroeconomic method - VAT Main features macroeconomic base = Final consumption of households Investment by households Part of public consumption Exports are not subject to VAT but VAT refunds are not immediate for exporters, so that their intermediate consumption generates VAT revenue on a transitory basis Progressive rate structure, but no effective progressivity

22 Macroeconomic method - VAT Modelling VAT = b 1 VATbase + b 2 X 1 + b 3 X 2 X1 = X q1,t + X q2,t + X q3,t + X q4,t + X q1,t+1 X2 = X q4,t-1 + X q2,t + X q3,t + X q4,t b 1 = 1 b 2 = +.51 b 3 = -.41

23 Macroeconomic method - VAT Ex post evaluation of the forecasting method - VAT Where does the forecasting error come from? Forecasting error 6% 4% 2% % -2% -4% 26 -Ini 26 - Adj 27 - Ini 27 - Adj 28 - Ini Tax revenue t-1 DTM Macroeconomic forecasting Forecasting method

24 Macroeconomic method Excise duties Main features Fixed rates per quantity macroeconomic modelling Real growth rate of final consumption Price effects and elasticy of demand Disaggregated approach (by product) unconclusive Cross-border consumption may affect the revenu of specific excise duties, but no strong effect on the growth rate of excise duties as a whole Elasticities Real growth rate, C: Price of Diesel: -.147

25 Macroeconomic method Excise duties Ex post evaluation of the forecasting method - Excise duties Where does the forecasting error come from? Forecastineg error 1% 5% % -5% 26 -Ini 26 - Adj 27 - Ini 27 - Adj 28 - Ini Tax revenue t-1 DTM Macroeconomic forecasting Forecasting method

26 Macroeconomic method Registration duties Most of the the revenue comes from the real estate market Inelasticity of supply Explanatory variables on the demand side GDP, NPV of tax incetives, Employment rate (t-1) and mortgage interest rate (t-1)

27 Macroeconomic method Registration duties (1) Bi log (2) Bi log (3) Bi log (4) Bi log (5) Bi log Constant ** ** ** -26.6** -2.67** GDP 2.185** 1.871** 2.5** 1.833** 1.36** Mortgage -.361** -.34** -.469** NPVTI.2152**.1387**.2387** ER 3.894** N R²

28 Macroeconomic method Registration duties Forecasting error - ex post assessment 6% 4% 2% % -2% -4% -6% -8% (4), Absµ = 3.1% (5), Absµ = 1.6%

29 Conclusions Paper from BUETTNER and KAUDER, Revenue forecasting: differences across countries and consequences for forecasting performance, IFS, Fiscal Studies, 21, 3 Differences in the performance of revenue forecasting are related to uncertainty about macroeconomic developments (GDP growth) It may explain up to 8% of the difference in forecasting precision are related to differences in the timing of forecasts Forecasting precision is lower for income and corporate income tax Most of these conclusions fit with our experience

30 Final comments Economic forecasting made by an independent body macroeconomic forecasting of tax revenue Quite robust Apart for CIT (A nightmare for econometricians) Does not leave much room for manipulation: transparency of the method in the budget memorandum