Background Submission is made in terms of Section 4 (4c) of the Money Bills Amendment Procedure and Related Matters Act (Act 9 of 2009) 2010 first year in which the budget is processed in terms of the new Act The briefing should therefore be viewed as the starting of a learning experience for both the FFC, executive and legislature The commission submission covers the following areas: Description of the fiscal framework Macro-Economic outlook underlying 2010 budget Revenue and tax proposals Transparency and credibility of the system

Fiscal framework Constitution is the supreme law upon which the underpinnings of the fiscal framework are enshrined The Money Bills Amendment Procedures and Related Matters Act defines the Fiscal framework to include: Estimates of all revenue and expenditure, budgetary Estimates of borrowing Estimates of interest debt Indication of contingency reserve With the acceptance of MTEF process in 1998 the fiscal framework forms part of the three year budgeting cycle The MTEF intended to improve Allocation of resources to priority Improve transparency Stable planning environment for government, firms and households

Fiscal framework and fiscal policy Fiscal framework complements monetary policy in consolidating commitment to medium term objectives Over the past years government adopted discretionary expantionary fiscal policy Budget deficit was contained below 0,6 percent of GDP Experience from recession suggest that government may wish to commit itself to explicit tighter fiscal rules in the future Setting deficit cap Modelling Impacts of Public Spending in Education Sector on Growth and Poverty Reduction

Macroeconomic outlook 2010 budget was set under unfavourable economic conditions Government is optimistic about the general economic outlook FFC agrees with current policy stance and support its formalisation through fiscal or stability pact The figure depicts three growth scenario where BAU (Business As Usual) is the growth trend the economy would have followed had it not been of recession. MOD (moderate) represents growth trend with a moderate recession and SEV shows severe recession. In a severe scenario, the trend depicts that even if the economy recovers, it will take time to return to the levels which it would have been to without recession i.e. BAU

Macroeconomic outlook With recession revenue is expected decrease All level of government will experience widening shortfalls For a stable fiscal environment all spheres will have to: Reduce or defer spending Improve efficiencies Cautiously raise taxes

Macroeconomic outlook The commission notes increase debt service cost and public sector wage bill Large amounts debt driven by current consumption compromises economic growth If debts service cost is driven by personnel costs, this trend should be reversed in the medium term.

Fiscal risks Fiscally rigid expenditures such personnel costs and tranfers to individuals increased considerably in recent years. Increased revenue volatility moght worsen fiscal risks leading to negative credit rating for the country This requires prudent approach to balancing public service expansion (vacancies) and personnel costs increases and expectations

Revenue proposals Commission supports the proposed taxes welcomes the tax relief for the poor under the negative economic environment Welfare effects of differential sin taxes Spending increases and tax cuts in a recession ordinarily perpetuates deficits To avoid long term fiscal gap, a forward looking policy that meets the long run fiscal needs of the country must be specified Such as reduction in spending or taxes increases following economic recovery

Transparency and contingent liabilities Assumptions underlying the fiscal or macro economic framework be subjected to independent scrutiny Increasing contingent liabilities and guarantees to parastatals are a concern If not managed properly contingent liabilities can spiral into future losses Recapitalisation of the DBSA at the expense of growing private borrowing market poses a risk Modelling Impacts of Public Spending in Education Sector on Growth and Poverty Reduction

End