Is Treasury still too optimistic about revenue?
27 March 2017, by Geoff Kingston and Lance Fisher

In 1651 the philosopher Thomas Hobbes warned that a nation’s sovereign needs a reliable stream of taxation revenue. Without properly funded law and order there would be “perpetuall warre [sic] of every man against his neighbour”. Updating Hobbes, the risk of our lives turning out to be economically difficult would be lessened if the Australian Treasury could lift its game in forecasting revenue.

During the Costello era (1996-2007), Australian budgets underestimated tax receipts for the upcoming fiscal year on eleven out of twelve occasions. More of a worry was the Swan-Hockey era (2007-2015), which saw tax receipts being overestimated for eight fiscal years in a row. For an illustration of this, see Chart 1 below.

Fortunately, help is at hand from information on the household saving ratio, which is household net saving as a percentage of household net disposable income. The relevant data can be found in the December-quarter national accounts, released a couple of months before each budget. In the December 2016 National Accounts, for example, the ratio came in at 5.2 per cent. Combined with existing budget forecasts, this information can be deployed to mitigate the chronic patterns of error in Treasury’s revenue forecasts.

Saving behaviour is intelligent and forward-looking, not mechanical or fixed. Households tend to save when they believe their current income is temporarily high, and dissave when they believe their current income is temporarily low.

By signalling the hopes and fears of households, the saving ratio becomes a useful input to budget forecasts.

The saving ratio impounds forward-looking information not only about the outlook for private-sector revenues from exports but important demographic changes, notably, the impending retirements of the three-quarters of baby boomers still at work. Along with weak commodity prices, these adverse demographics exert downward pressure on revenues.

Read the full article at Austaxpolicy blog.