Tilak Abeysinghe () (Department of Economics, National University of Singapore) Ananda Jayawickrama () (Department of Economics, National University of Singapore)
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Aided by strong economic growth the Singapore government has been able to keep both the tax rate and the government expenditure rate low and yet generate healthy budget surpluses year after year. Although the gap between the tax rate and the government expenditure rate is the obvious source of the surplus, this paper shows the presence of another subtle source, a surplus generated by conservative growth forecasts that lay the base for revenue projections. An omitted variable bias in a model based on the tax smoothing hypothesis led us to consider the role played by the growth forecast error in predicting the budget surplus. Our computations show that on average the underprediction of the tax base (GDP) must have contributed about $376 million per year to the realized budget surplus over the period 1990-2005. This appears to be simply a byproduct of the Government’s philosophy of “fiscal prudence”.
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Find related papers by JEL classification: H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
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