‘Bad forecasting’ puts grade ratings at risk

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SA’s fiscal position, which has already deteriorated so much that the country faces the possibility of losing its remaining investment-grade rating, might be worse, the Treasury says.
Tax policy leader for PwC – one of the world’s largest auditing firms – Kyle Mandy, said growth and revenue projections underpinning the government’s predictions where debt would peak might not be credible as the Treasury had consistently missed its forecasts since the 2015 fiscal year.
This raised the risk of a higher budget deficit, which would be of concern to credit ratings agencies, Mandy said in a presentation to parliament’s two finance committees on Wednesday.
Finance minister Tito Mboweni said in his budget speech a weaker economy and the need to bail out crisis-hit state owned enterprises would lead to higher-than-forecast deficits and that the debt-to-GDP ratio would stabilise at 60% in 20232024, slightly higher than what he projected in October.
The ratio was 35% in 2010. University of the Witwatersrand economics professor Jannie Rossouw said the Treasury’s forecasts were really bad and they made weather forecasters look good.
The Treasury defended its forecasts, with acting head of the budget office, Ian Stuart, saying there was a persistent overestimation of growth globally which fed through to SA.
The Treasury has estimated GDP growth of 1.5% in 2019.
“We are very careful to ensure that our estimates are reflective of a wide range of other credible bodies and other forecasters working in SA,” Stuart said.
Mandy indicated revenue had fallen short of budget forecasts by a total of R141bn between 2014/2015 and 2018/ 2019.
“The consistently significant shortfalls against forecast have in our view now resulted in a credibility concern with regard to the accuracy of revenue forecasting.
“We are concerned that there is a significant risk that the revenue forecast for 2019/2020 could once again be overestimated,” he said.
SA has also run out of space for further tax increases to fund its expenditure demands and to reduce the budget deficit, expected to grow to 4.7% of GDP by 2019/2020, Mandy said.
He also dealt with the question of tax buoyancy, which expresses the rate at which tax revenue increases relative to the economic growth rate.
Where there is equivalence, tax buoyancy is at 1.
When the growth in tax revenue is higher than economic growth, the tax buoyancy is higher than 1, and when it is lower, it is less than 1.
Mandy said he believes that tax buoyancy constituted a significant fiscal risk for the next fiscal year, noting that the Treasury had used a tax buoyancy ratio of 1.31 in forecasting its revenue for 2019/2020.
“Should a tax buoyancy of only 1 be achieved for 2019/ 2020, this would result in a tax shortfall of R29bn, or 0.5% of GDP, and would see the deficit increase to 5% of GDP, holding GDP and expenditure stable,” Mandy said. –

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