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Two Economists On The Enormous Discrepancy In Calculations Of GDP Growth And What The Consequences Will Be

According to calculations, under the Janša government, Slovenia’s GDP growth had been the highest in the last ten years, but today it has fallen even below the European average. The variations from one calculation to another are not unusual, but this time, the huge deviation of three percentage points is striking. In its response to our question, the Statistical Office of the Republic of Slovenia did not give any concrete reason for this large deviation, but according to economist Dr Igor Masten, the “error” will have a major impact on future analyses by institutions that need the data for further forecasts.

Even the left-leaning mainstream media, which have so far been praising the current government, believe that the difference in calculations is enormous and that the Statistical Office should have sounded the alarms by now. Although differences in calculations are not uncommon, this time, the difference measured is as much as three percentage points. From the 5.4 percentage points measured in February, this time, the latest calculations put GDP growth at 2.5%, bringing Slovenia’s growth below the European Union average. The Statistical Office did not explain where things went wrong, but the discrepancy will certainly have implications for both fiscal and social policy.

“This “revision” to the GDP for last year is bizarre, to say the least. How is this possible, @government of Slovenia, @Statistical Office, @Bank of Slovenia? What impact will this have on budget planning?” the leader of the Slovenian Democratic Party (Slovenska demokratska stranka – SDS), Janez Janša, wrote.

Last year’s GDP growth was thus significantly lower than initially estimated and also much slower than the post-Covid-19-crisis 8.2% growth forecast for 2021. Under the government of Robert Golob, Slovenia is doing much worse economically than under the previous Janša government, when GDP was growing, according to all calculations. Slovenia’s GDP per capita has reached 90 percent of the average for European countries, and “in 2021, Slovenia had thus reached the highest value of this indicator in the last ten years,” wrote the Statistical Office at the time, which today should be sounding all the alarms after the new GDP growth calculation, as the latter is an obvious predictor that Slovenia is in steep decline.

“Clearly there has been an unusually large error or revision, and this unusually large error relates both to time and space,” said economist Dr Igor Masten, referring in particular to the “unusually large error” compared to other revisions in other countries that have also survived the epidemic. According to him, the large discrepancy is due to inaccuracies that have arisen in taking inflation into account, or underestimating it, and to an allegedly inaccurate methodology, although, he argues, “this is a matter for the Statistical Office itself.” “Such large audits are really unusual, because they cause extremely big problems in the work of many institutions such as the Institute of Macroeconomic Analysis and Development, and the Bank of Slovenia, which use information such as this to further their forecasts; we are talking in particular about the preparation of the assumptions of the budget,” said Masten, who believes that the case has no political background. However, Masten also believes that this is not the last audit, he believes it is primarily a methodological problem, and now they have to double-check everything.

The Statistical Office says this was not a mistake

We also contacted the Statistical Office directly to find out why the deviation occurred, but they did not explain the specific reasons for the large deviation. In an email, they said that “there was no error in the calculation and publication of last week’s GDP data. We carry out audits of national accounts on a regular basis (they are required by European regulations), and we have carried out a regular audit this time, too. The original estimate of last year’s economic growth in February 2023 was made by aggregating quarterly data based on the data sources available at the time, but we have now also taken into account the annual data subsequently obtained, which are completer and more detailed than the data sources for the quarterly estimates. It is an eternal trade-off between greater speed of publication (based on quarterly data sources) and greater reliability of estimates (based on subsequent annual data sources),” they explained.

Economist Dr Anže Burger says that the discrepancy was precisely due to the incompleteness of the data, but that it is also due to the large jumps in consumer prices and price changes in general since 2021. “The important thing is that we now have a clear picture that inflation has a huge cost not only for consumers but also for economic policy makers, if politicians and the public sector have such wrong information, more than double overestimates of economic growth, it can be a problem for fiscal and social policy,” explained Burger.

The Institute of Macroeconomic Analysis and Development: “This is an unprecedented change”

The Institute of Macroeconomic Analysis and Development explained that “the publication of annual data always brings a change in the calculation (compared to the February publication based on quarterly data), due to the increased coverage of the data, but there has never been such a big change before, and it surprised us. Last year, the quarter-on-quarter GDP growth data surprised us on the upside, especially in the private consumption and construction segments. In certain aggregates, lower growth was therefore to be expected to some extent when the Statistical Office published its annual data, especially after the publication of the Agency of the Republic of Slovenia for Public Legal Records and Related Services data on corporate performance in 2022, but certainly not to this extent,” they wrote, adding that this also brought some substantive changes in the interpretation of past economic developments, especially in the aforementioned areas. The Institute is also preparing its regular autumn forecast, which is expected to be published in mid-September.

The Statistical Office went on to say that “this time, however, the revision of the economic growth estimate is larger than in previous years, helped by the situation of greater dynamism in price developments, since the quarterly estimate is based on so-called single deflation of value added, due to the limitations of data sources, while the annual estimate is based on deflation and an estimate of the growth in the volume of the more detailed components of value added. The revision of the GDP estimate has an impact on the presentation of indicators using GDP as the denominator of the fraction, e.g. the general government deficit-to-GDP ratio for 2022 was originally estimated at 3.0 % of GDP.

The Statistical Office went on to say that “the revision of the economic growth estimate is, however, larger this time than in previous years, helped by the situation of greater dynamism in price developments, as the quarterly estimate is based on the so-called single deflation of value added due to the limitations of the data sources, while the annual estimate is based on deflation and on the estimation of the growth in the volume of the more detailed components of value added, due to the limited data sources. The revision of the GDP estimate has an impact on the presentation of indicators using GDP as the denominator of the fraction, e.g., the general government deficit-to-GDP ratio for 2022 was originally estimated at 3.0% of GDP, but is now 3.1% of GDP, although the amount of the deficit has not changed.”

Tough times ahead

“It is interesting to see how the media portray a development catastrophe as a “mistake” when a left-wing government is in power. This means that all the calculations underlying the waste of taxpayers’ money by the Golob government were wrong. Tough times are coming – with inflation, higher taxes. A fiasco,” SDS MP Branko Grims responded to the so-called “miscalculation,” predicting tough times ahead.

GDP and GDP growth are indicators of the overall health of the economy. When GDP growth is high, the economy is considered to be doing well. When GDP contraction occurs, this has the opposite effect: businesses cut costs, some lay off their workers, and higher unemployment means lower overall consumption in the economy. This leads to a contraction in economic activity, and may even lead to negative growth. If negative GDP growth is present for two consecutive quarters, this is considered a recession.

The Fiscal Council has not yet commented on the matter

We have also contacted the Fiscal Council, which has not yet responded. It is worth noting that the Golob government has been criticised on several occasions, including by the Fiscal Council, precisely because of its unrealistic rebalances. Namely, in the first six months of this year, the state budget had a deficit of 413 million euros. In June, the deficit was 190 million euros. At 3.6% of gross domestic product (GDP), the general government deficit in the first quarter of this year was higher than in the same period last year and higher than the average for European Union countries.

In its July half-yearly publication, the Fiscal Council said that the cash-flow data suggest a continuation of similar trends in the rest of the first half of 2023, i.e., also in the second quarter. Indeed, the state budget deficit at the end of the half-year was around 300 million euros higher than in the same period last year. It is important to note here that under the current government, we have received a whole raft of new taxes, and the Janša income tax reform, which relieved the burden on wages, has also been repealed. In addition, excise duties are also higher than under the previous government. However, all this revenue has not been able to compensate for the excessive spending of the current government. It should be pointed out that most of the money has been spent precisely on the appetites of the government’s supporters and on other quasi-reforms that have been set up without any serious preparation.

Tanja Brkić

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