Ruairi Quinn (Dublin South East, Labour)
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Question 139: To ask the Minister for Finance if the report of the tax forecasting methodology group has been revisited or updated since the original report was published; and if he will make a statement on the matter. [20244/06]

Brian Cowen (Laois-Offaly, Fianna Fail)
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The report of the Tax Forecasting Methodology Review Group was published by my Department in 1998 and is available on the Department's website. The findings and recommendations of the report were taken on board by my Department, including the key recommendation that the process whereby taxes are forecast on an individual tax head basis should be supplemented by a top-down macroeconomic test by which the forecast growth in nominal GDP is compared with the forecast growth in aggregate tax revenues.

There has been no formal updating of the Review Group's report. However, my Department continually reviews its methodologies for forecasting tax revenues. As part of this ongoing review process, an informal working group was set up in 2002 made up of officials of the Department of Finance and the Revenue Commissioners, with occasional input from other Departments and State Agencies. The purpose of this informal working group is to examine issues which may have an impact on tax yield with a view to improving our tax forecasting methodologies on an ongoing basis rather than as a once-off exercise.

Ruairi Quinn (Dublin South East, Labour)
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Question 140: To ask the Minister for Finance the elasticities with respect to GNP or GDP that are currently being applied by his Department in forecasting tax returns for budgetary purposes; and if he will make a statement on the matter. [20245/06]

Brian Cowen (Laois-Offaly, Fianna Fail)
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Tax revenues are forecast by my Department on an individual tax head basis using, among other things, relevant macro-economic indicators and elasticity factors, where appropriate. For example, forecasts of PAYE revenues are constructed using projected increases in non-agricultural earnings and employment together with estimated elasticity factors for both (elasticity factors in this instance represent the relationship between the estimated percentage increases in PAYE tax likely to arise from average increases of 1% in earnings and employment, respectively). The current elasticity factor of PAYE tax with respect to earnings is 2.1 while the elasticity factor for new employment is 0.7. These factors can change over time.

As a top-down check on the validity of the aggregate tax revenue forecast constructed on an individual tax head basis, a comparison is made with the forecast increase in the level of nominal GDP. This is known as the elasticity of tax revenue growth with respect to economic growth. In general, a long-run one to one relationship between the percentage change in nominal GDP and the percentage change in tax revenues is likely to be observed. However, this one to one relationship need not hold from year to year and can be influenced by factors such as the composition of economic growth and the impact of Budget changes.

In Budget 2006, tax revenues were forecast to increase by 7.3% on an underlying basis (when one-off and similar effects were removed) as compared with a projected increase of 7.9% in nominal GDP. This represents an estimated elasticity of tax revenue growth with respect to economic growth of 0.92 which was a reasonable reflection at that time of what the relationship between tax growth and economic growth might be expected to be in 2006, having regard to the factors which can influence the observed long-run relationship from one year to the next.