Sources of error in state revenue forecasts or how can the forecast possibly be so far off

Sources of error in state revenue forecasts or how can the forecast possibly be so far off

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Article ID: iaor20072676
Country: United States
Volume: 18
Issue: 1
Start Page Number: 100
End Page Number: 126
Publication Date: Jan 2005
Journal: Journal of Public Budgeting, Accounting and Financial Management
Authors:
Keywords: management, government, time series & forecasting methods, forecasting: applications
Abstract:

State and federal revenues fell well short of projections in 2002. While revenues normally turn down in a recession, those revenue shortfalls were much greater than would have been expected given how mild the 2001 recession turned out to be. This paper examines some of the reasons for the large forecast variances observed in recent years using specific examples from forecasts made for the state of Minnesota. Key factors include inaccurate forecast for U.S. economic growth; inadequate, untimely and inaccurate data; imperfect models; and unrecognized changes in the structure of the economy. These factors came together and reinforced each other, ultimately producing a larger reduction in state revenues than could have been anticipated in advance.

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