THE Minister of Finance, Mr. Tendai Biti, presented the 2010 National Budget to Parliament yesterday.

Understandably, expectations were high as the budget serves two major economic functions. Firstly, it is a device by which the government can set national priorities, allocating national output among private and public consumption and investment, and secondly provides incentives to increase or reduce output in particular sectors.

From a macroeconomic point of view, it is through fiscal policy that the National Budget affects the key macroeconomic goals - (a) high growth, (b) high employment, (c) stable prices and (d) satisfactory balance of payments. Here in lies the catch -- the commonality of objectives of fiscal policy which the Finance Minister unveiled yesterday and those of monetary policy which under normal circumstances should be unveiled by the Reserve Bank Governor.

Given that the macroeconomic objectives of fiscal policy are the same as those of monetary policy, an important question is: can these objectives be achieved by employing fiscal policy alone given that monetary policy went with the Zimbabwe dollar.

In other words are fiscal and monetary policies mutually exclusive events that can achieve their objectives independent of each other. The answer is a definite no! The two are complementary! But fiscal policy through the National Budget although it is also a demand-side policy cannot work like its peer (monetary policy) as they use totally different tools.

In his fiscal policy the Finance Minister has done wonders with the tools at his disposal - government spending, transfer payments and taxes. But the issue of pricing of financial products which the productive sectors rely on for their expansion and working capital requirements is something that has been left alone because they are not fiscal policy tools.

At best the Minister did wonders by reading the riot act to banks telling them to lend to productive sectors otherwise "powers vested in him" will visit and force them (banks) to play ball. Maybe that's complementarity between fiscal and monetary policies at work as that moral suasion can be said by both the Finance Minister and RBZ Governor.

However, be that as it may, let me hasten to say that not I am calling for an immediate use of monetary policy to complement fiscal policy. I am very much aware that monetary policy will remain jobless for some time because the conduit through which it is supposed to function (transmission mechanism), lacks an important ingredient -- Zimbabwe dollar, as it became moribund.

The reasons are well documented and do not need to be repeated here. What I am saying is that we should not expect everything from the National Budget because its tools to achieve macroeconomic objectives are just not enough to do the job! Those of monetary policy cannot be used as they went with the Zimbabwe dollar. As a result, we are going to remain stuck with passive monetary policies from countries whose currencies we are using especially the United States of America.

Furthermore, we should reduce our expectations from the National Budget because fiscal policy together with its departed friend monetary policy, are only part of the national macroeconomic policy arsenal to achieve the said objectives. This is because these policies work on the demand side of the economy's markets.

There are also policies that work on the supply side of the economy that need to be looked at which are currently not being put to optimum use due to a number of challenges some of which border on politics.

Supply-side policies influence total output that the private sector can, and will, produce. A reduction in the rates of personal income taxes may result in an increase in the amount of work people wish to do. The resultant increase in the supply of labour may increase the economy's full employment output.

Furthermore, large tax exemptions for research and development may cause an increase in research and development. This then may increase economic growth as it tends to increase total national product.

Although I did not hear the Minister say a word on tax incentives related to research and development, I am not sure whether the increase in the tax-free income from US$150 to US$160 will do the trick. However, the Minister did a wonderful job of reducing the corporate tax to 25 percent as the resultant effect on profitability will definitely increase tax revenue. But an important supply-side policy that the Inclusive Government is still to develop 'chemistry' with is the land reform programme.

Given that we are an agricultural economy, this programme is supposed to breathe life into other productive sectors of the economy as depend on agriculture sector for their inputs. For instance, agriculture output accounts for 63 percent of manufacturing inputs.

Even all supply-side policies were firing from all cylinders they cannot achieve all the macroeconomic objectives on their own they need demand-side policies, and you know the story there!

Indeed the Finance Minister's options are limited, hence the need to have reasonable expectations. Given this limited policy arsenal the Minister will not be able to shake off some of the structural defects that characterised all budgets that were presented before him. One such traditional defect concerns the proportion between recurrent and capital expenditures.

An expenditure ratio of 75 percent recurrent and 25 percent capital or better in favour of the capital budget is better.

Previous budgets have failed to meet this target with the best of the budgets scratching ratios of around 90 percent recurrent and 10 percent capital as large chunks of the recurrent expenditures had increasingly become absorbed into non-discretionary expenditures such as salaries, interest on debt as economic performance progressively slowed down. Now the 2009 Budget did worse.

Having planned to raise the capital budget to at least 18 percent, the 2009 Budget has produced a laughable figure of 5percent, which means 95 percent went to recurrent expenditure. The 2010 Budget plans to raise the capital budget to 8 percent. I am not impressed.

A capital budget that is continuously being squeezed by the recurrent expenditure budget does not promote national investment through gross fixed capital formation (GFCF). The budget ceases to be growth promoting and the consequent fiscal policies will definitely fail!