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Treasury's economic growth forecasts are better than some other institutions, members of Parliament heard.
The Standing Committee on Finance on Friday held a briefing with officials from Treasury about matters raised by the public on the National Budget.
Earlier this week, both PwC and the Fiscal Cliff Study group queried the credibility of Treasury's forecasts for economic growth. According to Professor Jannie Rossouw of the Fiscal Cliff Study Group, Treasury's projections for economic growth were overstated, and so had implications for tax revenue collection projections and by extension debt-to-GDP ratios.
In response Treasury's acting deputy director general Duncan Pieterse provided a background on the assumptions Treasury considers in its projections and provided reasons for Treasury's seemingly optimistic forecasts.
"No one gets a forecast perfectly right, everyone gets it wrong," he told MPs. "Some get it closer to reality and some get it very far from reality. Treasury's performance is somewhere in the middle," he said.
Pieterse said that Treasury is not the only institution which has been optimistic in its forecasts. The International Monetary Fund, economists surveyed by Bloomberg, Reuters and Media24 have similarly been optimistic.
"There are a combination of reasons why [forecasts have been optimistic]."
Domestically, there were developments that impacted on growth numbers which could not have been anticipated, such as load shedding which had a direct impact on SA's growth, he explained.
Good forecast
Pieterse also explained the dangers in having a forecast which is too optimistic, versus one which is too conservative.
"We consider a credible forecast as one that is balanced. A good forecast is not too optimistic and not too conservative," Pieterse said.
If a forecast is too optimistic, government will plan for higher spending. If the projected economic growth does not materialise, then government would have to raise taxes because revenue collection will disappoint and may also need to increase borrowings. Both these actions will have an adverse effect on economic growth, Pieterse said.
If a forecast is too conservative, it means government will plan for weaker growth. This means the budget office will make lower allocations to departments. Lower allocations would harm service delivery and the developmental role of the budget, he explained.
Government may also have to introduce higher taxes and that will harm economic activity.
"If government signals a lower forecast, it can reduce business and consumer confidence." A lower forecast will show Treasury is not confident in the economy's ability to grow and will directly impact the consumer and business confidence he explained.
"We are cognizant of the fact that we have to keep improving the forecast, because of how important the forecast is for the fiscal framework and the budgeting process," Pieterse said.
Treasury has projected economic growth to be 1.5% for 2019.
