Budget accuracy in Czech municipalities and the determinants of tax revenue forecasting errors

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JEL classification

• Forecasts of Budgets, Deficits, and Debt
• State and Local Taxation, Subsidies, and Revenue

Keywords

Budget accuracy, determinants of forecasting errors, political budget cycle

Abstract

This paper evaluates the accuracy of municipal budgets and their major components and explores the factors influencing tax revenue forecasting errors in municipalities with extended scope between 2002 and 2011 using the generalised method of moments. Tax forecasting errors are influenced by the economic situation and structure of tax revenue. Higher underestimation is observed in municipalities with incremental revenue forecasting. The impact of political factors is quite strong: municipalities with more fragmented municipal councils approve more optimistic tax revenue forecasts and forecasts are more optimistic in election years.