Projecting tax revenue
There are shortcomings in the way in which the Ministry of Finance estimates future tax revenue
To a certain extent, the spending cuts imposed by the Dutch government in recent years have been the result of lower than projected tax revenue. But how exactly does the government estimate its tax revenue? And why are the projections so hard to interpret?
Conclusions
Parliament cannot properly scrutinise the government’s tax plans if it cannot keep track of them, their budgetary implications and the implementation of the budget step by step. In order to do this, however, the various budgetary memoranda issued by the government containing the annual projections of its tax revenue, i.e. the Coalition Agreement, the Initial Memorandum and the National Budget, must be fully consistent with each other. Unfortunately, this is not the case.
The problem is that the annual budgetary memoranda present the government’s tax revenue projections from a variety of perspectives, often without any explanation. For example, it is often impossible to work out the assumptions underlying a given projection or the year or period to which the projection relates. Also, the memorandum often fails to make clear whether the projection relates exclusively to new government policy or also covers policies introduced by previous governments. It is also unclear whether the projection has factored in the behavioural effects of a rise in taxes: if the excise duty on a particular product is raised and consumers subsequently buy fewer quantities of it, this may have an adverse effect on government revenue.
One of the main reasons for the variety of perspectives on which the revenue projections are based is the wide variety of purposes for which the memoranda themselves are compiled. In this light, it is entirely understandable that discrepancies should arise. Nevertheless, they make it difficult for the members of the Dutch House of Representatives to compare the figures in the various government memoranda with each other.
Recommendations
We urge the Minister of Finance to review, in collaboration with the House of Representatives, the way in which the House is informed about government tax revenue. Based on the outcome of this review, the Minister should reorganise the procedures for informing the house about tax revenue. Once the House has a clearer picture of the (budgetary and other) consequences of the government’s tax plans, it will be in a better position to analyse the policy options available to the government.
We also recommend that the Minister clearly explain which projections of the revenue generated by individual tax measures take account of the behavioural effects that the measures in question are capable of causing.
Finally, we urge the Minister to explain, in Initial Memorandum issued by a new government, how the individual tax plans in the Coalition Agreement have been incorporated in the budget.
We recommend that the House of Representatives ensure, whenever future governments are formed, that it has a clear picture of the assumptions underlying the projections of the budgetary effects of the tax measures contained in the Coalition Agreement. The government can then report consistently on these effects in future government policy documents.
Response
Response of the minister of Finance
In his response to our audit, the Minister of Finance undertook to clarify, in relation to various points raised in our audit report, the information presented to the House of Representatives about the government’s tax revenue. He also undertook to improve the consistency between the Coalition Agreement, the Initial Memorandum and the budget documents.
In our afterword, we reiterated our recommendation that the Minister should review, in collaboration with the House of Representatives, the way in which the House is informed about future tax revenue.