Madam Deputy Speaker and hon members, it is indeed a fulfilling and very rewarding moment for me to see the democratisation of our budget process, which has evolved over the past decade. I wish to thank all those who have made it possible for us to be at this phase of our constitutional democratic order. A number of Members of Parliament played a huge role in actually seeing this legislation reach the stage where we are now. In keeping with the provisions and tenets of this legislation, it's also encouraging to note that Parliament has risen to the occasion and given full meaning to its oversight role. Speaker after speaker has come to the podium and spoken about this fiscal framework. It is encouraging to see how many of the speakers spoke in support of the fiscal framework in general. I, therefore, would not want to bore this House by going through each of the speakers' comments and trying to respond, as most of the members have supported it. I do, however, want to focus on four general issues with regard to the points that have been raised by some members.
If some of us believe that revenue needs to be higher than what we have estimated, this needs to be the result of three potential factors: Firstly, higher economic growth; secondly, faster recovery in corporate income tax; and thirdly, higher tax rates. Dr George, the Treasury's economic focus is based on the latest economic data, mainly the SA Reserve Bank's December quarterly bulletin. They have been interrogated, discussed and ultimately approved by the Ministers' Committee on the Budget and have also been presented to Cabinet for adoption.
As the Minister indicated, the budget we tabled on the 17th was a collective statement of government. I want to assure you that the Minister did not run away from the DA's shadow minister of finance. The acting Minister of Finance is Minister Pandor, because we act as a collective, and Minister Pandor is here to represent the Ministry and I'm delegated here by the very capable Minister. [Applause.] With those words I also want to indicate that we take this process quite seriously, since the Minister is abroad with the President on a state visit.
The focus is in line with consensus expectations and most commentators have noted that they effectively take account of the fragile nature of global recovery and associated risks. The recovery in corporate income tax is based, firstly, on the corporate income tax data up until January 2010 and, secondly, on our experience of the lags in corporate income tax over the past 15 years, as well as the analysis of the expected recovery in corporate profitability.
The corporate income tax data suggests a deeper decline in corporate income tax than we originally estimated in the Medium-Term Budget Policy Statement, MTBPS. While corporate profitability will recover somewhat, the pace of recovery is expected to remain muted as economic activity continues to remain subdued over the next two to three years. Even where corporates successfully return to profitable positions, assessed losses built up during the economic slump will mean that it may still be a few years until we start seeing income tax revenue from many corporates.
These factors are considered by the Revenue Analysis Working Committee, comprising Sars, the SA Reserve Bank and the National Treasury, and the revenue focus is debated and approved by the Ministers' Committee on the Budget. This is meant to just indicate what processes we follow in order to arrive at these figures. The October MTBPS contained a much more aggressive increase in tax revenue as a percentage of Gross Domestic Product, GDP, and this was partly based on the likelihood of a tax rate increase or introduction of new tax instruments to raise revenue to close the gap between expenditure and revenue.
Since October, higher nominal GDP has allowed us to close the financing gap at a similar rate to what was proposed in our MTBPS, but without such an aggressive increase in tax revenue as a percentage of GDP. This is an extremely positive development and should be welcomed as it allows the fiscus to continue to operate in a strongly countercyclical fashion, supporting development and contributing to demand in the economy whilst not compromising long-term sustainability. Higher tax rates too soon would have the likelihood of threatening the sustainability of the economic recovery and by implication would strongly undermine the long-term sustainability of the fiscus.
The next point is on the fiscus sustainability pact that members and the committee have raised as a recommendation. We welcome the idea of a fiscus sustainability pact and look forward to engaging with Parliament as to the likely purpose and form of such a pact. Any fiscal rule or pact must be countercyclical in nature and this is notoriously difficult to achieve, as illustrated by some of the bigger economies like the UK which, despite a cyclically adjusted sustainability rule, finds itself facing severe fiscal constraints and the likely burden of higher tax interest costs, lower expenditure and higher taxes in the future.
The Chilean experience also, however, points to what can be achieved if a fiscal policy can be disciplined and countercyclical. Successful fiscal management has enabled Chile to respond to the economic crisis with higher expenditure, which has placed them on an excellent path to economic recovery and has played an extremely important role in limiting volatility in the Chilean currency.
It is also important to note that the flip side of significant deficits, when the economy is underperforming, is substantially lower deficits and perhaps even surpluses when the economy is overperforming.
The third point is on the impact of the Eskom tariff increase - some people have even referred to it as double taxation. Let me say that in the 2010 Budget our economic outlook assumed a 35% increase in the electricity price. The impact of the awarded increase being closer to 25% is that real GDP growth will be marginally higher and inflation will be lower in the next three years. As a result, the impact of higher GDP growth would be offset by the lower inflation and nominal GDP is not expected to change very much as a result of the decision of the regulator. Therefore, the impact on tax revenue and the budget framework is expected to be broadly neutral.
The last point I want to refer to is the issue of how the fiscus will respond if the growth remains low and the deficit high, as some of the members raised this as a possible risk. The 2010 Budget clearly and boldly states that the objective of a sustainable fiscal framework remains the primary goal of fiscal planning. This is to be achieved through a stabilisation of growth in expenditure combined with rising budget revenue, thereby returning the fiscus to primary surplus, which allows us to sustainably finance expenditure in the long run.
The committee report correctly identifies the economic risks to this recovery. Should the economy fail to grow at the rates expected, it is likely that the fiscal position and the trajectories of revenue and expenditure will have to be re-evaluated. In this scenario we will be able to choose from a combination of three options: firstly, we can further reduce spending; secondly, we can meet our revenue targets through additional taxation; and thirdly, we will be able to consider borrowing additional resources.
While all three of these options entail both current and future costs, our first instinct would be to extract further savings and efficiency gains to government spending, as most members have alluded to, while attempting to continue to support the economy through continued borrowing. We would also seek to defer tax increases until the economy recovers, but we'll obviously have to balance this against the rising interest burden on the fiscus on future generations.
The level and extent to which we wish to provide this support will be a result of the outlook for the economy and the extent to which we expect the economy to recover. Clearly, the longer we continue to borrow, the greater the interest burden. With interest already the fastest-growing expenditure item on the budget, any decision to continue borrowing would not be taken lightly. It must also be recognised that while the economic outlook poses a risk in the fiscal trajectory, any additional expenditure requirements on the fiscus would also serve to undermine the sustainability and raise debt costs.
For anyone interested in how we are dealing with the debt sustainability and economic scenarios, let me refer you to the box in chapter four of our Budget Review, which shows the results of Treasury's modelling of various economic and fiscal paths over the five years.
With these few remarks I want to take this opportunity to thank the committees for having dealt with the fiscal framework in the manner that they have, did for the time that they have put into it, this being the first of these fiscal frameworks that we've tabled before you. We hope that we will be able to engage with the budget process going forward in a much more meaningful way as we have done, starting today. Thank you. [Applause.]
Debate concluded.