An Analysis of Tax Forecasting Errors in Ireland

This paper examines the tax revenue forecasting performance of the Department of Finance over the period 1997-2014. While the general forecasting framework used reflects standard international practice, forecasting errors are relatively large by international standards. In almost all cases, we find no evidence of bias in the forecasts when considering the major tax heads over various forecast horizons. A decomposition of the forecast errors reveals substantial contributions from sources other than errors in forecasting the macroeconomic environment or in estimating the previous year’s revenue outturn. This suggests that a formal review of specific procedures and assumptions by the Department could yield further improvements in forecasting performance. An innovative exercise examining the routine use of judgement by the Department to adjust the outcome of forecasting equations indicates that this practice often improved the quality of the forecasts