Improved forecasts of tax revenue via the permanent income hypothesis

During the Costello era, Australian Budgets under-estimated tax receipts for the upcoming fiscal year on 11 out of 12 occasions. The Swan–Hockey era saw over-estimates of tax receipts for eight fiscal years in a row. In this way, the last two decades have seen substantial serial correlation in the errors of Budget revenue forecasts, revealing an inefficient forecasting process. We improve the efficiency and accuracy of Budget forecasts of tax revenue by incorporating National Accounts data on household saving behaviour. In particular, the adjusted R²-statistic is substantially higher. Household saving behaviour also helps to predict nominal gross domestic product growth.