1. 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

2. 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

3. 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

4. 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

5. 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

6. 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.

7. 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

8. 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

9. 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

10. End