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Singapore’s Recurrent Budget Surplus The Role of Conservative Growth Forecasts

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  • Tilak Abeysinghe

    () (Department of Economics, National University of Singapore)

  • Ananda Jayawickrama

    () (Department of Economics, National University of Singapore)

Abstract

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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Bibliographic Info

Paper provided by National University of Singapore, Department of Economics, SCAPE in its series SCAPE Policy Research Working Paper Series with number 0704.

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Length: 18 pages
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:sca:scaewp:0704

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Web page: http://www.fas.nus.edu.sg/ecs/scape/index.html
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Keywords: Tax smoothing model; Reported and adjusted budget surplus; GDP forecast errors.;

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  1. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  2. Huang, Chao-Hsi & Lin, Kenneth S., 1993. "Deficits, government expenditures, and tax smoothing in the United States: 1929-1988," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 317-339, June.
  3. Robert J. Barro, 1981. "On the Predictability of Tax-Rate Changes," NBER Working Papers 0636, National Bureau of Economic Research, Inc.
  4. Barro, Robert J, 1986. " U.S. Deficits since World War I," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(1), pages 195-22.
  5. Cashin, Paul & Ul Haque, Nadeem & Olekalns, Nilss, 2003. "Tax smoothing, tax tilting and fiscal sustainability in Pakistan," Economic Modelling, Elsevier, vol. 20(1), pages 47-67, January.
  6. Olekalns, Nilss, 1997. "Australian Evidence on Tax Smoothing and the Optimal Budget Surplus," The Economic Record, The Economic Society of Australia, vol. 73(222), pages 248-57, September.
  7. Serletis, Apostolos & Schorn, Richard G, 1999. "International Evidence on the Tax- and Revenue-Smoothing Hypotheses," Oxford Economic Papers, Oxford University Press, vol. 51(2), pages 387-96, April.
  8. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
  9. Ghosh, Atish R, 1995. "Intertemporal Tax-Smoothing and the Government Budget Surplus: Canada and the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1033-45, November.
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  1. Le dollar Singapourien au plus haut face à l euro
    by Loïc Abadie in Contrepoints on 2012-04-23 12:00:00

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