Elements of Budget Forecasting

Budgeting is about the future—future revenues and future expenditures. For a government to be able to function effectively, in particular to be able to carry out its activities in a planned and organized manner, it has to have a sound knowledge of future revenues and expenditures. Forecasting provides that knowledge by producing a set of estimates of revenues and expenditures based on past and current information to indicate whether the government will have sufficient revenue to effectively carry out those activities. Without good and reliable forecasts, a government will not only find it difficult to plan its activities, but also find it difficult to cope with the increasingly complex economic and political environment in which it has to operate. This notion of forecasting is more appropriate at the sub-national level where the state and local governments are required by law to balance their budgets, especially the operating budget, which means that the projected revenues must balance the projected expenditures for a government to be able to run its everyday operations without incurring a deficit or running a budget shortfall. This does not mean that the government will not have a budget deficit; in all likelihood, it will, but without good and reliable forecasts it will be difficult to determine the measures that will be necessary to balance the budget. This chapter provides a broad overview of budget forecasting, in particular some of the commonly used methods in forecasting government revenues and expenditures.