1. Topic 4: Budgeting – Overview, Borrowing and Deficits 1.Goals of Fiscal Policy 2.Overview of budgeting in SA 3.Types of deficit classifications – actual deficits, cyclical and structural deficits and primary deficits 4.What should be the emphasis of fiscal policy

2. 1.Goals Fiscal Policy Certain theories have bee developed to explain how goals of policy makers are determined Public Choice / Political Business Cycle Theory – Where policy makers are assumed to be trying to minimise their own loss function and get votes to keep themselves in office rather than do what is optimal for society as a whole Political economy / Partisan Theories – Where conflicts over the distribution of resources underlie the policy choices and goal of policy makers

3. Political Business Cycle Theory There are a number of conditions under which vote maximising conduct by policy makers (in their own narrow interests) conduct deviate from social welfare maximising behaviour, such as where: – Voters are myopic i.e. they are heavily influence by the state of the economy just before the election being more influenced by higher current growth and less concerned about likely future inflation, resulting in a political business cycle where aggregate demand is overly stimulated in the pre-election period – Unemployment is more likely to result in vote loss than is inflation because politicians are more readily blamed for unemployment resulting in an inflationary bias in fiscal policy – A deficit bias exists in the budget process as politicians enjoy spending, but they do not enjoy taxing

4. Policy prescription of public choice school of thought Optimal fiscal policy is not about counter-cyclical stabilisation of the macro-economy (in the Keynesian tradition) Optimal policy is about the imposition of rules on policy makers (such as balanced budget rules) which eliminate the destabilising effects of deficit spending which is motivated by myopic, inflationary and narrow political objectives

5. The Political Economy or Partisan theory Policy makers do not optimise for society as a whole, rather they are motivated by specific constituency interests and ideologies. Typically, – Conservative party favours price stability, low inflation and high real interest rates (associated with the interests of the wealthy) – Labour party favours full employment and income and asset redistribution (associated with the interests of the poor and working class) Fiscal Policy is predicted to follow party cycles: – Labour party in power – govt spending increases, until inflation arises and makes the conservatives more popular… – Conservative party in power – govt spending gets cut, inflation is combated leading to rising unemployment and recession, fertile seeds for relection of labour / liberal party….

6. Note on the “Fiscal Cliff” dispute in the US The Republican Party in the US (1) does not want taxes to rise (2) does want spending to be cut (3) does want to place a ceiling on the size of the national debt There is stand-off between the Republicans and Democrats in Congress that might result in taxes rising (as temporary tax relief will not be extended) and spending programmes will not be approved) –What is the key problem? Spending down, taxes up and limited borrowing will effectively end the US govt’s fiscal stimulus of the economy Going over the “cliff” (Ben Bernanke’s characterisation) in this way would be suicidal (like a lemming?) as it would tighten up demand and lead to a loss of growth and a rise in unemployment at the very time when the US economy is trying to recover from recession See J Bradford Long’s article on the issue

7. 2. Overview of SA Budget

8. Overview of Budget Consolidated government deficit improved from a high of 6.5% in 2009/10 to an estimate of 4.6% in 2012/13 and is expected to further improve to 3.0% in 2014/15 Improvement driven by a recovery (although remaining weak) in revenue in line with expected slower economic growth both domestically and globally a stabilisation in non-interest spending – average annual real growth of 2.6 per cent over the MTEF

9. Recap on Some budget terminology Revenue: Total consolidated revenue received by government (e.g. tax revenue like VAT, personal and corporate income tax as well as departmental revenue), plus non-tax revenues such as social security fund contributions, provincial own- revenue (e.g. gambling taxes), income of public entities (e.g. water sales revenue of the Water Boards) and departmental revenue. Transfers to SACU partners are a deduction from revenue. Expenditure: Total expenditure of national government, provinces, social security funds and extra-budgetary institutions. Total expenditure is split into non-interest expenditure and interest costs. Non-interest expenditure: All expenditure excluding interest repayments on national debt. Interest cost: Interest repayments and other costs associated with servicing national debt as well as interest cost of all other institutions included in the consolidation. Budget balance: Difference between total revenue and total expenditure. This is the most common measure of government’s fiscal stance. Primary balance: Difference between total revenue and non-interest expenditure. The primary balance is a key driver of government’s debt stock. In general, when the primary balance is in deficit, the debt-to-GDP ratio can be expected to rise. When the primary balance is in surplus, the debt-to-GDP ratio can be expected to fall.

10. 3. Types of deficits: actual, cyclical, structural and primary Actual Deficit (or Budget Balance) = Total Revenue – Total Spending Cyclical Deficit = the component of the deficit that is due to the ups and down of the business cycle Structural deficit = the deficit as it would be if the economy was performing at full potential (not above or below) Primary Deficit = Total Revenue – non-interest expenditure

11. SA’s recent Budget Balance (actual deficit and surplus)

12. Automatic Fiscal Stabilisers As economic growth increases (as in 2004 to 2007): – Fiscal policy will restrict i.e. budget deficit is reduced, or there is a surplus, because of the positive association between economic growth and tax revenues – This will have effect of dampen growth (i.e. stabilising the economy) As economic growth slows (as in 2008 to 2012) – Fiscal policy will expand i.e. budget deficit increases, because of the negative impact which contraction has on tax revenues – This has the effect of stimulating growth (i.e. stabilising the economy)

13. Cyclical vs Structural Deficits Cyclical deficits – portion of the deficit resulting from a low level of economic activity (as part of the working of the automatic fiscal stabiliser) Structural deficits – portion of the deficit that would exist even if the economy were at its highest potential level of output (i.e. not due to behaviour of the economy, but due to policy decisions such as tax and spending policies)

14. Example of structural and cyclical deficits Actual deficit = R30-billion If economic output was at full potential then tax would increase by R10-billion and transfer payments would fall by R3-billion Therefore, the structural deficit (deficit at potential output) = R30bn – R10bn – R3bn = R17bn Therefore, the cyclical deficit = R30bn – R17bn = R13bn

15. Estimate of SA Cyclical and Structural Balance circa 2004 See Fig giving an Estimate of SA Cyclical and Structural Balances circa 2004 -eg in 2000/01 when the economy was assumed to be operating slightly below full potential the actual deficit was around -2% of GDP but once cyclical factors (too little tax, etc.) were taken into account and removed then the structural deficit was close to -1.5% of GDP -See how spectacularly wrong projections of the future can be - look at the projections for the actual budget surpluses in what turned out to be the global recession

16. In recession and expansion During recession periods – actual deficits tend to rise sharply above the structural deficit (as cyclical deficits rise due to the workings of the automatic fiscal stabiliser) During expansionary periods – actual deficits tend to trend downwards reflecting a decline both in structural and cyclical deficits [Notes: 1. Economic growth seems better for balancing the budget than any ideological/legislative intervention. 2. Structural deficits are pushed up by policy decision to cut taxes and/or increase spending 3. Keynesians would oppose structural deficits associated with overly expansionary and unsustainable fiscal policy, but firmly believe in the important role of cyclical deficits/fiscal stabiliser when the economy is in recession and operating below its potential output]

17. Primary Balance or Primary deficit Primary balance is the difference between total revenue and non- interest expenditure. The primary balance is a key driver of government’s debt stock. In general, when the primary balance is in deficit, the debt-to-GDP ratio can be expected to rise. When the primary balance is in surplus, the debt-to-GDP ratio can be expected to fall. Technically: the debt dynamic equation shows that: Debt-to-GDP(t+1) = Debt-to-GDP(t)*(real interest rate/real growth rate) – primary balance i.e. your future debt will be increased if: interest rates rise growth slows there is a primary deficit (tax revenues fall short of non-interest spending) (with a primary surplus tax revenues are greater than non- interest spending so future debt is reduced as some tax revenues are used to pay off the debt)

18. SA’s Primary Balance from 2002 to 2012 – current problem of a primary deficit

19. Interest payments now fastest growing component of spending

20. But, this has resulted in some years of borrowing to pay interest costs

21. Need to re-create fiscal space Sharp increase in financing requirement means interest is now the fastest growing area of spending over the MTEF This eventually leads to a decline in government resources as rising interest costs crowd out more productive expenditure As it would be prudent to create fiscal space in time for the next crisis Fiscal space created by lowering debt ratio

22. Attempt to slow debt as a % of GDP (capped at 40%)

23. Comparative Fiscal response to the global crisis Change in the budget balance, 2007 - 2011Change in debt-to-GDP, 2007 - 2014  Compared to other ‘emerging markets’ South Africa’s fiscal response to the global crisis has been strong and robust.  Brazil, India and China all reduced debt levels over the last few years.  In South Africa’s case R1 trillion will be added to the stock of debt, once it stabilises at around 40% of GDP in 2015.  Over the next five years there will be significant rescheduling of debt in addition new debt issuance and rising debt service costs

24. 4. What should be the emphasis of Fiscal Policy? As stated by National Treasury, South Africa’s fiscal stance is based on three pillars: -Countercyclicality supports the economic recovery and assists the return to long-run sustainability and the creation of fiscal space for future crises -Long-term debt sustainability: Spending levels must ensure that debt and interest costs do not rise indefinitely -Inter-generational equity: the long-term costs of spending programmes should be considered. But, fiscal space gained in the previous period has been used up so it would be important to return back to a primary surplus so that the level of debt (as % of GDP) can be reduced, this can be done by incresing tax revenues (this needs growth) or contianing growth in expenditure (or both)

25. Some key fiscal issues As stated by Treasury, the quality of spending (i.e. structure, composition and effectiveness) is the key concern. This arises from: – Large increase in the stock of debt, diverting resources to interest payments. – Some of the increased debt is being used to finance government consumption – Escalation of the wage bill faster than improvements in service delivery – Rising levels of under spending on capital projects – Growing perception that poor service delivery, waste and corruption constrain economic growth. The budget and the broader public sector balance sheet: – All public institutions draw from the same pool of domestic savings – Public enterprise borrowing will accelerate significantly from 2015; the budget borrowing shouldn’t crowd out other public sector institutions. Similalry, public enterprises such as Eskom and Sanral cannot be subsidised by the fiscus as this would crowd out social spending

26. Questions 1.Do you think SA could afford to get deeper into debt in order to stimulate the economy? 2.Do you think it would have been wiser to have funded infrastructure expansion like Eskom power station build and Gauteng’s highways from out of the budget? 3.Do you think that there is sufficient understanding about why South Africa should avoid rising its national debt further?

27. Topic 5: Budgeting - expenditure 1.Expenditure trends 2.Classifications of Expenditure 3.Policy trade-offs 4.Understanding the redistributive character of state spending

28. 1. Expenditure trends Govt spending has been growing significantly in real terms over the past ten years, But given the fiscal constrains now being faced real growth is now being projected to slow down in the years ahead Average real growth in non-interest spending of 11% p.a between 2002/03 - 2008/09 Over the MTEF – growth will exceed inflation by 2.6%

29. Real growth in non-interest expenditure

30. Expenditure growth more modest in future

31. 2. Classification of Expenditure In the budget, government spending is classified in two ways: – Functional classification: by government department e.g. education, health, defence, etc. – Economic classification: by type of spending e.g. Current spending – salaries, subsidies, welfare transfers Capital spending – infrastructure, roads maintenance, buildings, etc

32. Economic Classification

33. Real growth of expenditure components

34. 3. Policy trade-offs Should we spend more on personnel? – Government has serious capacity problems – In some areas, we need to hire more people, in others we may need better pay Should we spend more on infrastructure? – Capital spending provides highest economic returns, but capacity constraints limit progress – Social infrastructure is good for equity – Economic infrastructure lowers production costs, crowds in private investment

35. Policy tradeoffs Should we spend more on welfare transfers? – Social security well targeted towards poor – Alleviates worst effects of poverty – Better nutrition may lower costs in health, education – Do we increase child support grant in value or do we give more people the grant? – How do we create jobs, avoid a dependency culture?

36. 4.Understanding the redistributive character of state spending In developmental state seeking to bring greateer equality and changes the structure of opportunity clearly patterns of pro-poor expenditure should prevail Gains should not be eroded – e.g. suggestion that nominal value of the SOAP be maintained which would have seen a decline in real terms The ‘ take-up rate ’ of social services must be taken into account – e.g. where people have the right to access certain services such as welfare grants, but the state ’ s administrative capacity means only a small % of those with the right are in a position to exercise it

37. Pro-poor spending The redistributive effect of govt. spending must be monitored to ensure pro-poor spending Key question: how much of government spending on a particular service gets to poor households A study of 2006 data by Servaas vd Berg identifies the following: – Strong redistributors – Social assistance such as State Old Aged Pensions (SOAP) (70% to poorest 40% of households), child maintenance (62%), disability grants (59%) and public clinics (57%) – Weak redistributors – spending on school education (49%) and public hospitals (45%) – Non-redistributor – spending on tertiary education (4%) and housing (24%) benefits better-off households more than it benefits the poorest

38. Degree to which spending targets the poor – Servaas vd Berg study

39. Rising social wage over time

40. Social wage rising Social spending (social assistance, education, health, housing, recreation and community amenities) accounts for 58% of government expenditure, up from 49% a decade ago. Number of social grant beneficiaries to reach 15.6 million by March 2012.

41. The Budget also impacts on income inequality ( important with SA’s high Gini coefficient)

42. Questions? 1.What it the correct balance for the developmental state, should it emphasize: – (1) changing the structure of opportunity through investing in the skills, health and surroundings of the poor, or – (2) changing the structure of the economy – investing in infrastrustructure, incentivising investment in line with industrial policy priorities 2.Is South Africa spending too much on welfare?

43. Topic 6: Budgeting - taxation 1.Types of taxes and sources of revenue 2.Progressive and regressive taxes 3.Tax incentives and supply-side theory

44. 1. Types of taxes Types of tax – – Direct taxes are levied against a particular person (natural or jurisitic based on their level of income, gain or profit, etc) – Indirect taxes are levied against specific occurences, events or transactions, etc.

45. Classification of taxes Direct taxesIndirect taxes Income taxProperty taxCommodotiy taxes Personal income tax Death dutyValue added tax (VAT) Corporations taxDonations tax Customs duty Capital gains tax Property rates / Wealth tax * Import tariffs

46. Assessment of direct taxes Merits – Certainty: tax payer know ho mush to pay and state can estimate its revenue – Equity: direct taxes can be designed to fall more heavily on the rich based on the principle of the ability to pay – Elasticity: govt ’ s revenue increases with increase in tax rate or increase in incomes of the people (fiscal drag) Demerits – Inconvenience: taxpayers must submit declaration of income – Evasion (illegal) prone: as taxpayer can falsify his or her records – Can create disincentive to work or save (e.g. if rate is too high on interest from savings)

47. Assessment of indirect taxes Merits: – Convenience: indirect taxes are usually paid in small amounts rather than as large lump-sum, is collected by manufacturers and importers and is included in the price of purchase – Evasion is difficult – Coverage is wide – Can be used to promote social welfare e.g. increased ‘ sin tax ’ on alcohol / cigarettes – Can target luxury goods with higher rates Demerits: – Regressive: indirect taxes usually fall more heavily on the poor than on the rich – Discourage saving: as price of essential commodities increases (unless zero- rated) – Uncertainty: authorities cannot accurately predict the total revenue form indirect taxes as demand for different goods is influenced by many factors

48. Sources of revenue in SA  Improvements in tax administration were the priority for many years. These improvements widened the tax base, a critical factor in the stability and sustainability of democratic state.  Personal income tax relief was strongly concentrated on the lower income brackets, benefiting the middle strata, while South Africa’s marginal tax rates are amongst the highest for comparable countries.  There as been a significant shift towards corporate taxes over the last decade. Unfortunately, 2008 showed us how pro-cyclical corporate taxes are.

49. Sources of Revenue

51. 2. Progressive and Regressive taxes Progressive rate of tax – The rate of taxation increases with an increase in the tax base – e.g. the rate of personal income tax in South Africa increases from around 30% for middle income earners to 42% for the highest earners Regressive rate of tax – A regressive tax places the same obligation on rich and poor alike e.g. VAT rate, poll-tax – Key point: A regressive tax takes a declining proportion of income as income rises – e.g. a poor household may pay 14% of it income to VAT (as it spends all of its income on VAT-able commodities) while a rich household will only pay say 7% of its income to VAT as not all of its income goes to VAT-able commodities, but also to savings, etc.

52. 3. Tax incentives and supply-side theory Basic propositions: – Growth in output is predominantly supply determined by rates of growth of capital and labour, as well as technological change (see Fig 20.1) – Growth of capital is primarily driven by incentives in the form of high after tax returns for savings and investment – Labour supply will grow in response to incentives, in the form of higher after tax real wages (or in the case of a wage subsidy a tax incentive is created which lowers the cost of employing new or in some cases younger employees) – Excessive government regulation discourages capital formation

53. Savings and Investment For Keynesians – high income (high capacity utilisation) leads to high investment For supply-side economists – the rate of return is key determinant of saving and investment, therefore capital formation depends on tax structure – Return on investment = pretax profit x (1 – tax on profits) – Return on saving = nominal interest rate x (1 – tax on interest) minus expected inflation rate {i.e. after tax real interest rate}

54. Example of interaction between inflation and tax system If tax system allows companies to depreciate their capital investments only at historic/original cost rather than at replacement value then during periods of high inflation corporate profits will be overstated This results in an effective increase in corporate tax rates, leading to a decrease in investment levels Note: SA introduced accelerated depreciations into its tax codes in the 1980 ’ s in order to stimulate some major capital investment

55. The curve that justified Reaganomics Laffer argued that a reduction in taxes would serve to stimulate supply in the US economy in the early 1980 ’ s Laffer argued that this would lead to increased output, which would see tax cuts associated with an increase rather than a decrease in tax revenues (see Laffer curve 20.5) Facts: US government suffered a significant deficit (partly due to increased spending) and criticism that tax cuts had effect of benefiting the rich at the expense of the poor

57. SA does offer extensive tax breaks and incentives From the following tables it is clear that SA loses about 13-14% of its possible tax revenue due to incentives and tax breaks Some are for reasons of assisting the poor and low income earners e.g. VAT zero rating costs the fiscus about R30-bn a year currently Others are to incentivise certain industries such as the motor industry and clothing and textiles and other industries (e.g. the film industry) and this costs the fiscus about R19-bn a year currently

58. Total “Tax Expenditures” lost tax due to incentives and exemptions R million2006/072007/082008/092009/10 Total tax expenditure 65 238 76 101 80 163 84 097 Tax expenditure as % of total gross tax revenue 13.2%13.3%12.8%14.0% Total gross tax revenue 495 549 572 815 625 100 598 705 Tax expenditure as % of GDP3.6%3.7%3.5%3.4%

59. Personal income tax incentives R million2006/072007/082008/092009/10 Personal income tax Pension and retirement annuity 1 11 968 12 521 15 629 17 209 -pension contributions employees 4 379 4 579 5 799 6 470 -pension contributions employers 4 925 5 150 6 522 7 277 -retirement annuity 2 664 2 793 3 308 3 462 Medical 8 290 9 460 10 992 12 370 -medical contributions & deductions employees 4 145 4 597 5 701 6 497 -medical contributions - employers 2 4 145 4 863 5 291 5 874 Interest exemptions 1 715 2 283 3 033 3 529 Secondary rebate (65 years and older) 1 111 1 254 1 444 1 484 Donations 56 80 109 111 Capital gains tax (annual exclusion) 100 123 74 60 Total: Personal income tax 23 239 25 721 31 281 34 764

60. Corporate income tax incentives R million2006/072007/082008/092009/10 Small business corporation tax savings 627 747 675 732 Research and development (R&D) 449 358 537 432 Learnership allowances 224 424 397 421 Strategic Industrial Policy 281 228 61 25 Film incentive 194 297 20 1 Urban development zones (UDZ) 82 120 169 203 Total: Corporate income tax 1 857 2 174 1 860 1 813

61. VAT Zero rated supplies R million2006/072007/082008/092009/10 19 basic food items 3 11 376 13 107 13 907 14 606 Petrol 4 7 777 9 185 10 619 9 678 Diesel 4 730 938 1 269 872 Paraffin 4 446 505 507 520 Municipal property rates 2 711 3 081 3 122 3 673 Reduced inclusion rate for "commercial" accommodation 85 95 113 120 Subtotal: zero-rated supplies 23 125 26 912 29 537 29 469 Exempt supplies (public transport & education) 682 785 832 922

62. Customs and Excise R million2006/072007/082008/092009/10 Motor vehicles (MIDP, including IRCCs) 5 13 179 16 169 12 089 12 673 Textile and clothing (Duty credits - DCCs) 5 1 563 1 829 2 024 2 231 Furniture and fixtures 145 166 128 153 Other customs 6 636 1 141 1 231 787 Diesel refund (mining, agriculture and fishing) 811 1 205 1 181 1 286 Total customs and excise 16 335 20 509 16 653 17 129

63. Questions 1.Do you think some taxes should be raised to increase revenue for government programmes – if so, what taxes would you raise and what expenditures would you prioritise? 2.Should more tax incentives be offered to promote business and employment? 3.Should more items be VAT exempt?

64. Topic 7: Budgeting: Process and planning 1.Budget process 2.Impact of Census 2011 3.Long-term budget planning

65. 1. Budget process What is contained in govt ’ s budget? – Expenditure decisions How much to spend on what items? – Revenue decisions Who to tax and how much? – Overall macro-economic decisions How much debt should the state get into in order to stimulate the economy

66. The steps in the budget process? Setting policy priorities – Cabinet sets political priorities for the budget process Fiscal framework is established – Set revenue target and deficit target to establish the ‘ resource envelope ’ Division of revenue – Vertical : national | provincial | Local (approx. 47% | 44% | 9%) – Horizontal : - various departments Bidding process – Govt department approach Medium Term Expenditure Committee and bids for resource allocations – the value of requests is significantly larger than the amount available, also an incremental process not a zero-based one Cabinet and Cabinet Committee scrutnises the proposed allocations and approves Budget documentation is approved and presented on Budget Day

67. MTEF budget process time frames 67 April June July Aug Sept Oct Propose fiscal and budget framework, and division of resources Policy reviewDepartmental planning and budgeting Sector and focused budget hearings Review, evaluate and decide on new major policy proposals Departments prepare budget,including detailed spending plansfor new proposals Intergovernmental andtechnical forums Table Medium Term Budget Policy Statement Executive/s consider frameworks and division of resources

68. MTEF budget process time frames (cont) 68 Nov Jan Feb March National Budget tabled Policy reviewDepartmental planning and budgeting Departments revise medium term plans and finalise budget inputs Cabinet approves new MTEF allocations Provincial budgets are tabled (14 days after National budget is tabled)

69. Division of revenue Local government 9% Provinces 44% National departments 47% Main factors : salary costs & infrastructure Mostly education, health, and cost of the increase in the public- sector wage bill Mostly to accommodate infrastructure investment

70. How the MTEF works Lets assume the police budget published in 2006 is as follows –R100 in 2006/07, R105 in 2007/08 and R110 in 2008/09 For the 2007 budget, the R105 and the R110 are the baseline figures for police To get the new third year, we increase the R110 by a factor related to inflation. Lets call it R116 in 2009/10 Now we have a baseline of R105 in 2007/08, R110 in 2008/09 and R116 in 2009/10 This is mostly guaranteed to police They then bid for changes to their baseline Let’s assume that we give them R5, R10 and R20, then their new budget is R110 in 2007/08, R120 in 2008/09 and R136 in 2009/10 In the speech, we say that we have added R35 of new money to police… …or we say that we have added R35 to the baseline for police In each budget, only a small part of total spending is subject to active decision making In 2009, only 7.3% of total spending was the subject of the budget process

71. Incremental Budgeting over the Medium Term According to Treausry, Over the 2013 MTEF, about R40 billion (between 4 to 5% of the budget) has been moved away from non-performing programmes or programmes that are not closely aligned to departments’ core mandates. Funds were also shifted away from programmes that are not expected to disburse funds as quickly as initially scheduled Main recipients of these reprioritised funds include:  Police – Expanded detective and forensic capacity  Defence – Maritime Security Strategy and military veterans  Department of Labour – To prepare for amended labour legislation  Education – Education infrastructure and community libraries  Transport – Roads and public transport  Social development – Social workers and grant infrastructure  Expanded public works – The non-state sector (NGOs)  Water Affairs: Water infrastructure upgrade and maintenance

72. 2. Impact of Census 2011 Census 2011 results will affect the division of revenue Impact on Provinces Equitable share formula (introduced in 2011 MTEF) to be updated for 2013 MTEF with latest available data (including results of Census 2011) Provincial populations and children of school-going age (5-17) per province – Provinces with above average increases in population and learners will benefit (based on the formula the money will follow the people) – Appropriate phase-in strategies will be considered to cushion impact on provinces adversely affected by data updates (major issues of resource allocation such as teachers, etc.)

73. Impact on local government Equitable share – Review of formula underway and will be introduced alongside data updates – Formula reforms include: improved targeting towards poorly resourced municipalities; catering for more regular data updates; and improved costing of municipal services – Appropriate phase-in strategies to be considered to cushion impact Conditional grants – Comprehensive review to commence in 2013 for implementation in 2014/15 – Census 2011 to help determine areas where backlogs are most prevalent and to help target grants at areas with the most urgent needs

74. 3. Long-term budget planning In the long run demographic factors need to be take into account in working out appropriate fiscal policies US – retirement of the baby boom generation as well as increasing life expectations will push up Social Security (from 4,3% of GDP in 2010 to 6,4% of GDP in 2040) and medicare costs from 2,9% to 6,6%) Initially, strong growth projections (which have proven incorrect) will allow for budget surpluses until 2020, but due to the demographic shifts a large deficit of 9,5% of GDP is projected for 2040

76. Projections for SA SA ’ s fiscal policy is affected by a number of factors: – Demographic shifts are also taking place which will put pressure on State Old Aged Pension system in long-run (as SA will have an ageing population) – Look at whether key areas of expenditure will be affordable in the long run such as social security grants, health care, education – Include high growth and low growth scenarios – Project the national debt and deficits into the future Treasury has announced that it will release a policy document outlining SA’s long term fiscal choices in the next month or so, this will assist in taking forward SA’s long term fiscal planning

77. Questions 1.How could social dialogue on the budget be increased? 2.Would Nedlac have a role in this process? 3.How will long-term planning impact on the budgeting process?