KEVIN LINGS: GDP revision will help ease fiscal concerns

Measuring the size of the economy and the rate at which it is growing is a complex but vital exercise, providing policy authorities, businesses, households and investors with critical information to make informed decisions. In fact, a lack of regular and reliable updates of a country’s economic performance severely limits its ability to attract sustained foreign investment. 

Unfortunately, most measures of economic performance have limitations. This certainly applies to GDP, which is calculated by Stats SA each quarter and endeavours to estimate the total value of goods and services produced in the country.

For example, while GDP provides an estimate of the total value of consumer spending each quarter, or the amount of money spent by the private sector on fixed investment, it provides little direct insight into quality of life, or the distribution of income and wealth.

Fortunately, most countries have devised other economic statistics to answer those types of questions. Consequently, GDP remains the most widely accepted and internationally comparable measure of a country’s economic performance.

It is also important that data on a country’s economic performance is updated as timeously as possible. However, this requirement must be balanced against the need to provide an accurate and comprehensive measure. The net result is that estimates of GDP, both in SA and around the world, are subject to revision as more information becomes available. Ironically, periodic revisions of key economic performance data, such as GDP, is a sign of a vibrant and progressive statistical department.

In some instances this updated information can date back many years, requiring that every five or 10 years the country’s GDP performance is extensively revised, which is what Stats SA released last week. These revisions provide an opportunity for the inclusion of data on newly emerging industries that would previously not have been captured in the GDP estimate, such as the emergence of the cellphone industry many years ago. There is also a persistent effort to expand the measurement of SA’s informal sector.

The net result of Stats SA’s recent GDP revision is that in 2020 the SA economy was 11% larger than initially estimated. The last time SA experienced such a large GDP revision was in 1999, when GDP ended up 13.5% larger than initially measured.

While the revision had only a modest impact on previous estimates of SA’s GDP growth performance — though the growth estimate for 2020 was revised better from -7% to -6.4% — the upward revision to the size of the economy has resulted in an adjustment to a handful of important economic ratios. Many of these ratios relate directly to government finances, which is obviously critical given SA’s fiscal deterioration over the past 10 years, and the subsequent credit rating downgrades.

First, we have revised our estimate of SA’s 2021/2022 budget deficit from an initial -9.3% of GDP at the time of the February 2021 national budget to about -7% of GDP. While -7% is still troubling it is substantially better than what was envisaged just six months ago. This revision is due to both the adjustment to GDP and improved tax revenue collection.

Second, and probably more importantly, at the time of the February 2021 national budget government debt was projected at 81.9% of GDP in 2021/2022, up from 56.6% of GDP as recently as 2018/2019. The better tax collection coupled with an increase in the size of GDP suggests this ratio could fall to about 72%.

While these improvements in the government’s financial ratios might appear “artificial” or “convenient” and don’t alter the concerns surrounding the sustainability of government finances, they are used extensively by investment analysts and credit ratings agencies to gauge the attractiveness and risk of investing in SA. These agencies and analysts accept that countries undertake periodic revisions to GDP and will see the latest revision of SA’s GDP as a legitimate process.

At a minimum, the revision reduces the risk of any further credit rating downgrades, as long as the National Treasury continues to adhere to a process of trying to restore fiscal discipline.

Most times, countries find themselves facing a “perfect storm” of negative events that combine to undermine economic conditions. However, there are rare occasions when a positive set of factors — in this instance sharply higher commodity prices, a windfall in tax collection and an upward revision to GDP — combine to hopefully provide a catalyst for sustained improvement in SA’s economic conditions.

• Lings is chief economist at Stanlib.