Economic forecasts integral to budgeting

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Speaking at Reuters' economist of the year competition, on Tuesday, 1 July, the Minister said with the global economic picture, especially the slowdown in the Chinese economy having direct trade implications for South Africa, forecasting would become an integral part of the budgeting process despite several inaccuracies over the past five years.

"...As we move into an increasingly constrained fiscal environment, the credibility of forecasts becomes important, and the margin for error smaller. Indeed, many European Union countries are starting to adopt so-called 'structural balance rules'.

"Structural fiscal rules require policymakers to know the size of the output gap, and have a good sense of how the economic environment will evolve.

"As a result, despite their inaccuracy over the past five years, economic forecasts are likely to become an increasingly integral part of the budget process," he said.

The Minister's comments come shortly after the Reserve Bank's Monetary Planning Committee revised the economic outlook of the country for 2014 downward, from 2.6% to 2.1%, with foreign and domestic factors like the recently ended platinum mining strike cited as some of the reasons.

Minister Nene said the National Treasury started the budgeting process by undertaking an internal forecasting process. He said once a draft has been finalised, it is then compared to forecasts from the private sector - those done by Consensus, Reuters and Bloomberg.

"Our forecasts are often in line with those of the private sector.

"Where they differ significantly we interrogate the numbers to see what aspects need to be reconsidered, or what additional information we may have that was not taken into account in the private sector forecasts," he said.

Minister Nene is set to table the Medium Term Budget Policy Statement (MTBPS), dubbed the mini-budget, in October - his first as minister - where government usually announces interventions meant to bring about fiscal stability.

Last year, the then Finance Minister Pravin Gordhan announced several cost cutting measures for government officials in a bid to impose savings on hotel costs and a wide ban on government credit cards for officials.

Minister Nene said, meanwhile, that with the widest range of outcomes are particularly interesting, because they encourage government to think about what is driving the outlying numbers.

"Typically, private forecasters have a greater insight into the outlook of a particular sector.

"Although we only publish two economic forecasts, we update our forecasts four times a year and continuously track the changing direction of your estimates to inform our projections.

"Despite these precautions, the fiscal outlook has been put under increasing pressure by the weakening economic outlook. The introduction of the expenditure ceiling was partly a response to downward revisions to the growth and revenue outlook," he said.