The International Monetary Fund has attributed persistent government revenue shortfalls to overly optimistic tax projections, weak policy execution, and limited administrative capacity.
A study titled Understanding Over-Optimism in Tax Revenue-to-GDP Forecasts under IMF-supported Programs, authored by Jean-Marc Atsebi, Qiaoe Chen, Nikolay Gueorguiev and Magali Pinat, reviewed tax revenue forecasts tied to IMF-supported programmes between 2015 and 2024.
The research showed that such programmes projected a median increase of 1 percentage point in the tax revenue-to-GDP ratio by the third year, whereas the actual median gain was only 0.3 percentage point.
The IMF identified several factors driving the gap, including overestimated yields from tax policy measures, unrealistic tax buoyancy assumptions, macroeconomic forecast errors, and expectations that governments would fully implement planned reforms.
Tax policy yield estimates are particularly significant because they determine how much additional revenue governments expect to collect from new taxes or changes to existing rules. The study found that more than half of projected tax policy yields frequently fail to materialise.
Tax buoyancy assumptions shape forecasts by estimating how tax collections respond to economic growth. When economic performance, or the relationship between growth and tax receipts, diverges from expectations, actual collections can fall short of projections.
The researchers also noted residual optimism in revenue forecasting, suggesting forecast errors cannot be fully explained by measurable economic and policy factors alone.
"When revenue measures are well-designed, fully implemented, and accompanied by high-depth revenue-related structural reforms, projected revenue gains materialize to a large extent. This implies that over-optimism emerges primarily when ambitious revenue targets are not supported by sufficiently deep and well-implemented reforms," the IMF stated.
The study highlights tax administration capacity as an important factor in reducing forecast errors. Governments with stronger administrative institutions are better placed to implement tax measures and convert policy changes into actual collections.
