The accuracy of fiscal projections in South Africa

Forecasting accuracy is important for fiscal policy credibility. Three questions are posed. Firstly, are the forecasts by South Africa’s National Treasury good, compared to those of non-government economists? The paper compares Treasury’s forecasts to non-government projections and to those of other countries and over time. With reference to the mean absolute error and the root mean square error (van der Watt, 2013), it is concluded that nongovernment economists do not necessarily forecast GDP and inflation better than Treasury. Secondly, have the forecasts by National Treasury been good, over time and compared to those of other countries? The forecast error (the final figure minus the budget estimate) is calculated, using data for 2000/01-2010/11. This is most relevant because retrospectively the outcome of fiscal policy is analysed and judged with reference to final figures. National Treasury’s budget forecast errors are found to be significant. Margins of error in forecasting revenue, expenditure and GDP have partially neutralised each other in terms of their impact on the budget balance as a percentage of GDP. Except towards the end of the period, the fiscal balance was better than budgeted. On average and calculated as a percentage of GDP, revenue forecasting inaccuracies made the biggest contribution to inaccurate estimates of the budget balance, but this is largely explained by GDP forecasting inaccuracies. SA fiscal forecasts show a smaller forecast error than that of 14 member countries of the European Union. Thirdly, has the forecasting ability of National Treasury improved over time? A trend line shows higher Treasury forecast errors towards the end of the period and an underestimation bias for GDP and revenue forecasts. A simple example of the dynamics of fiscal politics is presented to demonstrate that a persistent underestimation of revenue could also erode fiscal credibility.