PI-3. REVENUE OUTTURN
ABOUT THE INDICATOR
This indicator measures the change in revenue between the original approved budget and endof-year outturn. It contains the following two dimensions and uses the M2 (AV) method for aggregating dimension scores:
- Dimension 3.1. Aggregate revenue outturn
- Dimension 3.2. Revenue composition outturn
IMPACT ON BUDGETARY OUTCOMES
Accurate revenue forecasts are a key input to the preparation of a credible budget. Revenues allow the government to finance expenditures and deliver services to its citizens. Overly optimistic revenue forecasts can lead to unjustifiably large expenditure allocations that will eventually require either a potentially disruptive in-year reduction in spending or an unplanned increase in borrowing to sustain the spending level. On the other hand, undue pessimism in the forecast can result in the proceeds of an overrealization of revenue being used for spending that has not been subjected to the scrutiny of the budget process. As the consequences of revenue underrealization may be more severe, especially in the short term, the criteria used to score this indicator allow comparatively more flexibility when assessing an over-realization.
INDICATOR MEASUREMENT GUIDANCE
3:1. Government revenue usually falls into four categories: (i) compulsory levies in the form of taxes and certain types of social contributions; (ii) property income derived from ownership of assets; (iii) sales of goods and services; and (iv) other transfers receivable from other units. The indicator focuses on both domestic and external revenue, which comprises taxes, social contributions, grants, and other revenues including those from natural resources, which may include transfers from a revenue stabilization fund or a sovereign wealth fund where these are included in the budget. External financing through borrowing is not included in the assessment of this indicator. This means that grants from development partners will be
included in the revenue data used for the indicator rating but borrowing on concessionary terms from development partners will not.
3:2. Revenue outturn can deviate from the originally approved budget for reasons unrelated to the accuracy of forecasts, such as a major macroeconomic shock. For this reason, the scoring calibration allows for one outlier year to be excluded. The focus is on significant deviations from the forecast that occur in two or more of the three years covered by the assessment.
3:3. Accurate revenue forecasts are a key input in the preparation of a credible budget. National governments forecast revenues from different sources in the course of budget preparation. Revenue forecasts may be revised on one or more occasions over a budget period. Generally, the first step in revenue forecasting is to prepare a macroeconomic forecast. In many countries, this will cover macro-economic parameters such as GDP, inflation, exchange rate, important commodity prices, consumer spending, etc. The results of the macroeconomic forecast will be crucial inputs to the forecast of revenues. Revenue forecasting may thus be seen as a two-stage process consisting of: (i) a macroeconomic forecast; and (ii) forecast of the main sources of revenues, i.e. tax revenue forecast, that is conditional on the results of that macro forecast (see PI-14).
3:4. The narrative for this indicator should describe the sources of data used and note any concerns about their suitability, reliability, and accuracy. The PEFA report should provide background information on the institutional arrangements for forecasting revenue and on any special factor that may affect the revenue forecast and performance, such as dependence on revenue from natural resources, sources of economic and revenue volatility, significant tax policy and administrative reforms, unanticipated macroeconomic developments, and ‘windfall’ incomes (including revenues from privatization). The narrative for PI-19 and PI-20 should cross-reference this indicator with respect to entities collecting government revenue.
Pillar One: Budget Reliability