Why does the budget require a forecast of the economy? 

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The federal budget requires a forecast of how the economy will perform because the performance of the economy has so much to do with how much money the government will receive in revenues and how much it will need to pay out.  Without an estimate of economic performance, the government has no way of knowing what its revenues will be or (to some degree) how much it will have to spend.

Most government revenue, of course, comes from taxes.  The performance of the economy has a tremendous impact on tax revenues.  If the economy slumps, more people are out of work and are not paying payroll taxes.  They are not earning as much and so income tax revenues go down as well.  The same goes for business taxes and sales taxes. 

Many government expenditures are impacted by the economy.  If the economy slumps, for example, there will be more people collecting unemployment insurance.  There will be more people who need food stamps.  All of this costs money.

Therefore, the government has to try to predict how the economy will perform.  It needs to do this so that it can have an idea as to how much tax revenue it will take in and how much it will have to spend.  This is essential for the creation of a budget.

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