The International Monetary Fund has identified overly optimistic tax revenue projections, weak policy implementation and limited administrative capacity as major factors contributing to governments’ failure to meet revenue targets.
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, analysed tax revenue forecasts under IMF-supported programmes between 2015 and 2024.
The study found that the programmes projected a median increase of one percentage point in the tax revenue-to-GDP ratio by the third year.
However, the actual median increase was just 0.3 percentage point, highlighting a significant gap between projected and realised revenue gains.
According to the IMF, several factors explain the shortfall, including overestimated revenue from tax policy measures, unrealistic assumptions about tax buoyancy, errors in macroeconomic forecasts and expectations that governments would fully implement planned reforms.
“A key finding is that over-optimism in tax policy yield estimation, policy implementation expectations, and tax buoyancy assumptions plays a central role in explaining these forecast errors, alongside macroeconomic forecast errors and a residual optimism,” the organisation noted.
Tax policy yield estimates are crucial because they determine how much additional revenue governments expect to generate from new taxes or changes to existing tax rules. However, the study found that more than half of the revenue gains projected from tax policy measures often fail to materialise.
The study also highlighted the role of tax buoyancy assumptions in revenue forecasting. These estimates measure how tax collections respond to economic growth.
When economic performance or the relationship between growth and tax receipts differs from expectations, actual revenue may fall short of projections.
The researchers also identified persistent optimism in revenue forecasting, noting that errors in tax revenue projections cannot be fully explained by measurable economic conditions and policy-related 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,” IMF added.
The study identified tax administration capacity as a key factor in reducing revenue forecast errors. Governments with stronger administrative institutions are better equipped to implement tax policies effectively and translate planned reforms into actual revenue collections.
The findings suggest that introducing new taxes or increasing existing rates may not be enough to achieve projected revenue targets without effective implementation and strong tax administration systems.
The researchers also stressed the importance of designing effective tax measures, ensuring their full implementation and deepening structural reforms aimed at improving revenue mobilisation.
They recommended further research into how political factors, including elections and instability, influence tax revenue performance.
The study also highlighted the need to examine forecast errors across different tax types and bases, as well as the impact of tax evasion and compliance on actual revenue collections.
