Enhancing the credibility of fiscal forecasts in South Africa: Is a fiscal council the only way?

The paper investigates whether fiscal credibility in South Africa (SA) would be enhanced by following the international trend of establishing a fiscal council. Given that fiscal councils and numerical fiscal rules are increasingly seen as complementary aspects of fiscal policymaking frameworks, we survey evidence on fiscal councils, with reference to empirical studies and country experience – Chile in particular. Whilst earlier studies generated inconclusive results of earlier attempts about the link between fiscal councils and good fiscal performance, more recent studies found that the involvement of fiscal councils has contributed to more accurate macroeconomic and budgetary forecasts. In the light of this evidence – in particular, the increasingly recognised need for flexibility in fiscal rules, respect for the country’s political environment in considering the appropriateness of fiscal councils and the importance of transparency in any fiscal regime – we discuss lessons for SA, and the mechanics of our proposal. SA’s fiscal performance and regime are assessed, with reference to the literature’s finding of historical fiscal sustainability and macro fiscal forecasting accuracy and various measures characterising the current transparency-enhancing regime of fiscal discretion. It is recognised that SA does not have numerical fiscal rules and that the National Treasury has not been outperformed by nongovernment economists in forecasting key variables used in drafting the annual budget. Projections nevertheless become increasingly inaccurate over three-year periods. On average, budget deficit forecasting errors have during the previous decade been lower than in European Union countries. The case for a fiscal council on the basis of better short-term forecasting accuracy alone is not strong. Instead of a fiscal council, an institutional innovation is proposed, namely structured bi-annual discussions of government’s macroeconomic budget forecasts in public parliamentary hearings, integrated into the budget process. This avoids drainage of scarce resources from Treasury and political pitfalls encountered elsewhere and might strengthen credibility of medium-term projections.