Pre-Budget Presentation: Leftward Liaisons Presented by: Dawie Roodt 6 February 2008

Pre-Budget Presentation: Leftward Liaisons

Presented by: Dawie Roodt

6 February 2008

Chairman and Chief EconomistEfficient Group81 Dely Road

Hazelwood0081

Tel: (012) 460-9580Cell: 082 456 0204

Email: dawie@efgroup.co.za

Dawie Roodt

Intro

To Stay or Not to Stay...??

Total Self Declared Emigrants ('000)

6.5

9.0

11.5

14.0

16.5

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Th

ou

san

ds

Year

Source: Documented Migration Publication, StatsSA

To Stay or Not to Stay...??UK Australia Canada South Africa

Average Destination of Emigrates (%)

33% 15% 3%

Eco Indicators

Real Eco Growth (GDP, Q3)

2.4% 4.3% 2.9% 4.7%

Inflation (CPI, avg. 2008) 2.1% 3.2% 1.9% 7.2%

Currency p US$ £0.51 $1.14 CAN$1.02 R7.10

Marginal Tax Rate 40% 48.5% 29% 40%

Socio Indicators

Life Expectancy at birth 79.0 80.9 80.3 43.0

Adult Literacy rate (>15yr,%)

99.0 99.0 99.0 82.4

UN HDI Rank 16th – 0.853 4th – 0.961 3rd - 0.962 121th– 0.674

Murders p capita, rank (100 000)

46th – 1.4 43th – 1.5 44th – 1.49 2nd – 49.6

Sources: Economic Indicators, Economist. UN HDI 2007/2008, 7 th UN Survey of Crime Trends 1998 – 2000

A Quick Eish’kom Calculation

Vision:"Together building the

powerbase for sustainable growth and development."

Load Shedding: The 3 Hour Effect

Average GDP per day:• GDP, 2007 (current): R1,973.4bn• Workdays: 240• GDP per day: R8.3bn

Average GDP per sector:• Allocate equal weights to GDP sectors: (3 out of 24)

– Loss per day: R1.1bn (13.3%)

Average GDP loss per sector:• Allocate weights to GDP sectors:

– Finance, real estate and business services (3 out of 8)– Mining and quarrying (3 out of 24),etc.– Loss per day: R1.9bn (22.8%)

Potential Job Losses

Case Study:

+/- 400 000 employees in Mining Sector

Mining production at 90% electricity – Lose 15% - 20%

1% loss in production = 1% reduction in workforce

Thus, potential reduction in mining workforce:

60 000 – 80 000 jobs lostSource: Thousands face job chop at GFI, 31 Jan 2008, Fin24

GDP Loss: Base Case Scenario

Revised Growth Estimate: 4.6% to 3.0%

Loss in real terms: R19.76bn

Potential Tax Revenue loss: R5.9bn

Extra Load Shed on Consumers

‘Alternative Energy’ Cost - Generator

Facility Generator Size (KVA)

Capital Cost p KVA

Total Capital Cost (excl. installation)

House 10 KVA R1250 – R5000

R12 500 – R50 000

Small/Medium Business

60 – 80 KVA

R1400 – R3000

R84 000 – R240 000

Supermarket/Butchery

130 – 140 KVA

R1300 – R2500

R169 000 – R350 000

Source: Efficient Research

‘Demand Side Management’

• Efficient Lighting Roll-Out Programme

– Compact fluorescent light fittings (CFL’s)

• Solar Water Heating Programme

– Government subsidise 20% – 30%

– Cost R7 000 – R20 000 (R25 000) per geyser

• Fuel Switching

– Liquefied Petroleum Gas used in cooking

BULL!

Economic Overview:The Grazing Ground

2006 2007 2008

M3 (end of year) 23.1% 23.7% 19.8%

PSCE (adj. end of year) 27.6% 22.2% 18.3%

CPIX (average) 4.6% 6.5% 7.3%

Prime (end of year) 12.5% 14.5% 14.5%

Current Account: Nom -R111.0bn -R138.2bn -R144.2bn

Current Account: GDP -6.4% -7.0% -6.5%

R/$ (end of year) 7.04 6.84 7.61

GDP (full year) 5.4% 5.1% 3.6%

Economic Overview

Credit Demand

PSCE (Adj), Mortgages and Other (Credit Cards, Overdrafts)

10

15

20

25

30

35

40

Jan-05 Jan-06 Jan-07 Jan-08

%

Source: SARB and own calculations

Household debt to disposable income

Household debt to disposable income of households

40

45

50

55

60

65

70

75

1970 1975 1980 1985 1990 1995 2000 2005

%

Source: SARB and own calculations

44.5%

50.2%

56.9%

59.4%

Savings to disposable income of households

Ratio of saving by households to disposable income of households

-2

0

2

4

6

8

10

12

1970 1975 1980 1985 1990 1995 2000 2005

%

Source: SARB and own calculations

9.2%

5.4%

2.6%

0.5%

Is Tax Crowding Out Savings..?

-20000

30000

80000

130000

180000

230000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Tax Revenue:Comp&Indiv Corporate Savings Household Savings

Cro

wd

ing

Ou

t ?

Income Tax Revenue from Companies and Individuals vs Private Sector Savings

Inflation

Inflation bracket

CPI & CPIX

0

3

6

9

12

15

18

21

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

%

Source: StatsSA and own calculations

14.6%

10.0%

5.3%

Interest rates

Prime

9

11

13

15

17

19

21

23

25

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

%

De Kock (16.5%)

Stals (18.9%)

Mboweni (13.3%)

GDP at Market Prices

GDP market prices, q:q seasonal

-1

0

1

2

3

4

5

6

7

8

1994 1996 1998 2000 2002 2004 2006 2008

%

Source: StatsSA and own calculations

Fiscal Policy

Background

Revenue & Expenditure:GDP

20

21

22

23

24

25

26

27

28

29

30

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

%

Trevor’s reign!

Gold

Dissavin

g

Budget Sustainability

Source: Fiscal Policy, 2007 MTBPS

Main Budget and Structural Budget Balances, 2000/01 – 2010/11

FISCAL 2007/08…

Revenue: Fiscal 2007/08

Revenue Sources (1994)

39%

13% 26%

5%

8%

9%

Individual Tax

Company Tax

VAT

Excise Duties

Fuel Levy

Other

Revenue Sources (Est. 2007/08)

30%

26% 27%

3%

4%

10%

Individual Tax

Company Tax

VAT

Excise Duties

Fuel Levy

Other

Contribution to Fiscus

Registered Income Tax Payers

Individuals Companies Trusts Total

Registered Taxpayers

5.0 million 1.7 million 300 000 7 million

Source: Fin24, Sep 2007

Redistribution

Rand In : Rand Out Ratio 2007/08

Family 1* – very poor 8.61

Family 2 – poor, 1 tax payer 1.41

Family 3 – middle class, 2 tax payers, Low investments

0.53

Family 4 – upper middle class, 2 tax payers, medium investments

0.23

Family 5 – Affluent 0.02

*Average family consists of 4 people, aggregates taken per capita

Source: Efficient Research

Individual Tax Rate, per Country (2006)

Individual Marginal Tax Rates

10

20

30

40

50

60

0 10 20 30 40 50

Countries

%

Source: worldwide-tax.com

South Africa

Russia

Denmark

Average: 35.4%

Median: 36.0%

USA

Ireland

Company Tax Rate, per Country (2006)

Company Tax Rates

0

5

10

15

20

25

30

35

40

45

0 10 20 30 40 50 60

Countries

%

Source: worldwide-tax.com

South Africa

Bulgaria

Egypt

Average: 26.6%

Median: 29.0%

Ireland

USA

South Africa + STC (’06)

South Africa + STC (’07)

VAT Rate, per Country (2006)

VAT Rates

0

10

20

30

0 10 20 30 40 50

Countries

%

South Africa

Ireland

Denmark

Singapore

Source: worldwide-tax.com

Average: 16.7%

Median: 18.0%

2007/08 in Review:Revenue

R bn Budget ’07 MTBPS ’07 Expected Diff. (%)

Income Tax 312.2 327.3 329.1 16.9 (5.4%)

Individual 155.3 167.0 166.9 11.6 (7.4%)

Company 138.5 140.1 143.6 5.1 (3.7%)

STC 16.0 18.0 18.3 2.3 (14.4%)

Other 2.3 2.2 0.3 -2.0 (-86.9%)

VAT 155.1 147.0 150.0 -5.1 (-3.3%)

Excise Duty 17.8 18.5 17.9 0.1 (0.5%)

Fuel Levy 23.9 23.2 24.3 0.4 (1.7%)

Other 54.0 57.4 53.4 -0.5 (-1.0%)

Total 544.6 553.2 556.2 11.5 (2.1%)

Expenditure: Fiscal 2007/08

Spending Priorities

Expenditure: Functional Classification (1994)

7%

17%

14%

17%2%

21%

8%

4%

10%

43%

Central Gov

Justice and Prot.

Eco. & Infra.

State Debt Cost

Other

Education

Social Dev.

Other Social Serv.

Health

Expenditure: Functional Classification (Est.)

7%

16%

13%

12%1%

18%

17%

5%

11%

50%

Central Gov

Justice and Prot.

Eco. & Infra.

State Debt Cost

Other

Education

Social Dev.

Other Social Serv.

Health

Social Spending

2007/08 in Review:Expenditure

R bn Budget ’07 MTBPS ’07 Expected Diff. (%)

Voted Amounts 299.2* 313.3 305.2 6.0 (2.1%)

Central Gov. 40.8 42.5 40.6 -0.2 (-0.5%)

Fin. & Admin. 21.7 21.9 21.1 -0.6 (-2.7%)

Social Services 102.7 105.4 104.4 1.7 (1.7%)

Justice & Protect. 79.9 81.7 80.9 0.9 (1.1%)

Eco. & Infrastruc. 54.0 61.7 59.5 5.4 (10.1%)

State Debt Cost 52.9 52.9 52.8 -0.1 (0.2%)

Transfer Provinces 171.3 172.9 172.8 1.6 (0.9%)

Other 7.5 8.3 7.8 0.3 (4.0%)

Total 533.8 540.4 539.9 6.1 (1.2%)

* Includes: Contingency Reserve (R3.0bn)

Expenditure Analysis:Money Well Spend?

Health

Public Expenditure on Health Comparison (2003-04)

Source: Human Development Report, 2006 (undp.org)

Public Health Expenditure as % GDP

0

1

2

3

4

5

6

7

8

9

0 20 40 60 80 100 120 140 160Countries

% GDP

South Africa (‘04&’06)

Myanmar

Iceland

Average: 3.5

Median: 3.0

CubaMalawi

South Africa (’07)

Core Health Care Indicators

Health Care Indicator Number (2004) Density per 1,000

SA vs. (Sample average)

Physicians 34,829 0.77 (1.45)

Nurses 184,459 4.08 (3.45)

Dentists 5,995 0.13 (0.32)

Pharmacists 12,521 0.28 (0.35)

Community health workers

14,306 0.32 (0.98)

Health management and support workers

22,859 0.51 (1.84)

Source: World Health Statistics 2007, WHO (www.who.int)

Public Health Expenditure (2003) vs. Physicians 2004)

Health Spending vs Physicians

0

4.5

9

0 300 600

Number of Physicians, per 100,000

Hea

lth E

xpen

ditu

re (%

GD

P)

Malawi

Cuba

Saint Lucia

Canada

South Africa 2004

South Africa (2001)

Source: Human Development Report, 2006 (undp.org)

Eddjucation

Education expenditure comparison (2002-2004 as available)

Source: Human Development Report, 2006 (undp.org)

Expenditure on education as % GDP

0

1

2

3

4

5

6

7

8

9

10

0 20 40 60 80 100 120

Countries

% G

DP

South Africa (’06 & ’07)

Equatorial Guinea

Lesotho

Average: 4.7

Zimbabwe

The Reading Literacy of Fourth Grade Students

Source: US Department of Education, PIRLS 2006

Progress in International Reading Literaycy Study (PIRLS)

250

300

350

400

450

500

550

600

0 5 10 15 20 25 30 35 40 45 50

Countries

Sco

re

High Intermediate Low None

Russian Federation(565)

United States (541)

Macedonia (439)

South Africa (302)

Breakdown: Population Education

Over 20's Population Education (%)

17.9

20.4

16

5.9

40.1

9.18.4

30.8

16

6.4

10.3

18.6

No Schooling

Some Primary

Completed Primary

Some Secondary

Grade 12

Higher

Census 01 CS 2007

Source: Community Survey 2007, StatsSA

SC HG Maths & Science Passes

Source: Dep of Education, Education Statistics in SA at a glance , SC Examination Results, 2006

Enrolment for SC HG Maths and Science as % of SC enrolment

Source: Dep. of Education, Education Statistics in SA at a glance , SC Examination Results, 2006

13.3%

9 %

Government Targets for SC HG Maths passes vs Actual passes

Achieved

Targets

Sources: Dep. of Education, Statistics in SA at a glance, 1999 – 2005; Senior Certificate Examination Results, 2006.

Pass Rates for SC, SC HG Maths & Science

Source: Dep of Education, Education Statistics in SA at a glance, SC Examination Results, 2006

53% HG Maths Passes – 4.8%

43% HG Science Passes – 5.7%

Senior Certificate Mathematics Results (2006)

11%

81%

Source: Department of Education, Senior Certificate Examination Results, 2006

71%

16%

Time Spent by Teachers on Different Activities

Time Spent by Teachers

41%

14%

12%

9%

7%

5%5% 3% 2%2%

Teaching

Preparation and Planning

Extra-Curriculat

Assessing/Evaluating

Managing/Supervising

Prof Dev

Record Keeping

Pastoral Care

Breaks

Guidance/counselling

Source: Educator workload in SA, Pretoria: Human Sciences Research Council, 2006

85% – Optimal Time Allocation

Alternative Solutions…?

SETA:– 5 Seta’s researched in 3 Sectors– Key Findings:

• Only 2% of employees benefit • SETA’s themselves define ‘scarce’ skills with their capacity

to address the priorities• Demands to provide foundational education vs occupational

skills • ‘Second Education’ instead of skills development

Source: Centre for Development and Enterprise

Leftward Proposals

Social Security and

Welfare

Correlation? Household Expenditure vs Social Grants

Consumption Expenditure on Food, Beverages and Alcohol vs Social Grants

0

50000

100000

150000

200000

250000

300000

1999

2000

2001

2002

2003

2004

2005

2006

0

15000

30000

45000

60000

75000

90000

HH Exp SocSec

Summary Social grant beneficiaries doubled between 2003 to 2007 Child support recipients tripled between 2003 to 2007 Child Support grant age doubled from 7 (1998) to 14 (2007) Constant sharp rise as percentage of economy (%GDP) 2007: 11,9m recipients (25.0% of SA population)

Important social responsibility; however rising by alarming rate…!

Accountability

Spilling the Milk…?

Qualified Audit Opinions: Department 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01

Independent Complaints Directorate

✓

Land Affairs ✓ ✓

Transport ✓ ✓

Labour ✓ ✓ ✓

Justice ✓ ✓ ✓ ✓

Parliament ✓ ✓ ✓

Health ✓ ✓ ✓ ✓

Defense ✓ ✓ ✓ ✓

Correctional Services ✓ ✓ ✓ ✓ ✓

Water Affairs & Forestry ✓ ✓ ✓ ✓ ✓

Home Affairs ✓ ✓ ✓ ✓ ✓ ✓

Source: General Report of the Auditor General on Audit Outcomes for the Financial Year 2005-06

Additional Facts

• All departments qualified in 2004-05 also received a qualified audit opinion in 2005-06.

• 78% of all issues are in respect of only five departments, namely:• Correctional Services (21 issues )• Home Affairs (13 issues)• Defence (10 issues)• Independent Complaints Directorate (8 issues)• Water Affairs and Forestry (7 issues)

• Only four departments received clean audit reports – 12%– Public Enterprise– Public Services Commission– Presidency – Trade and Industry

Spilling the Beans…

Corruption:

Number of Alleged Corruption Cases Received

Percentage of Total

Feedback Percentage Feedback

1125 49% 359 32%

Financial Disclosure:

Number of sms members

Number of forms received

Number of forms outstanding

% Received

3619 2025 1594 56%

Source: 2007 State of the Public Service Report, PSC

National Departments

Vacancies in National Departments

• Average Vacancy (National and Provincial):

• Senior Management Vacancies: 35%

2006 2005 2004

24.3% 23.4% 25.1%

Unqualified Reports for Public Entities

Percentage Unqualified Audit Reports

5055606570758085

Year

% Total

• 76% Public Entities Unqualified• Primary Areas of Public Entity Qualifications: Income and Receivables – 26% Asset Management – 25% Non-Personnel Expenditure - 14%

Source: General Report of the Auditor General on Audit Outcomes for the Financial Year 2005-06

Public Sentiment: State Service DeliveryDelivery Area 2006 2007 Change

Transparency and Accountability

67% 39% -28%

Reducing the Crime Rate 54% 33% -21%

Narrowing the Income Gap 65% 45% -20%

Fighting Corruption 63% 43% -20%

Retaining Skilled People 48% 28% -20%

Educational Needs 78% 65% -13%

Improving Basic Health Services

73% 64% -10%

Reducing Unemployment 40% 32% -8%

Welfare Payments 85% 80% -5%

Source: SA Reconciliation Barometer Survey Report 2007, IJR

Public Confidence in InstitutionsInstitution 2006 2007 Change

National Government 73% 63% -10%

Political Parties 48% 37% -10%

Provincial Government 66% 57% -9%

Presidency 77% 68% -9%

Parliament 69% 62% -8%

Local Government 50% 43% -7%

Legal Systems 61% 55% -6%

Big Companies 65% 60% -6%

Constitutional Court 66% 61% -5%

Religious Institutions 70% 69% -1%

Source: SA Reconciliation Barometer Survey Report 2007, IJR

Capital Expenditure

Capital Expenditure

First Picture of Cape Town’s New Stadium:

Capital Expenditure Institute

Time Horizon

Planned Capital Expenditure (Rbn)

Sasol 2013 62.0

Eskom 2017 204.0

World Cup 2010:

Gautrain

Acsa

Stadiums

2010

2011

2010

25.5

20.0

8.4

Transnet (Rail, Ports, Pipelines)

2012 78.0

State (National Budget)

2009 372.0

Funding

State’s Cash Coffer

Government Cash Balances (Exch. Acc)

0

10

20

30

40

50

60

70

80

90

100

110

R bn.

2007/08: Funding

R bn Budget ’07 Expected Diff.

Extraordinary 1.2 1.1 0.1

TB’s 5.7 5.6 0.1

Bonds -9.0 -9.9 -0.9

Foreign Loans -2.6 -4.2 -1.7

Use of balances -5.7 -8.3 -2.5

Total Funding -10.7 -16.2 -5.5

Summing Up: Fiscal 2007/08

Summary 2007/08

R bn Budget ’07 MTBPS ’07 Expected Difference

Revenue 544.6 553.2 556.2 11.5

Expenditure 533.9 542.4 539.9 6.1

(Deficit)/Surplus 10.7 10.8 16.2 -5.5

% of GDP 0.6% 0.7% 0.8%

Budget 2008

How Far can the Cash Cow be Pushed…?

2007 Budget Highlights:

Finance: 2006/07 fiscal year to report first surplus in SA’s history 2007/08 surplus budgeted for is 0.6% of GDP Individuals: Pit brackets adjustment Primary rebate up to R7,740 Donation tax annual exemption to R100k Donation to PBO’s to 10% Estate Duty exemption up to R3.5m Interest on dividends to R18k (R26 for 65+)

2007 Budget Highlights:

Companies: Dividend Tax (from 1 October):

STC reduced to 10% STC to be replace by dividend tax

Threshold for FDI outside Africa lowered to 25%

Other: Retirement fund tax scrap RAF and Fuel levies up by 5c each Wage subsidy and social security tax reform Commercial buildings write-off over 20 years

Possible Changes to Taxes

The Milk Machine…

Efficient’s Possible, Likely, Probable New Tax Table

2007/08 2008/09

Taxable Inc (R) Rates of Tax Taxable Inc (R) Rates of Tax

0 – 112 500 18% 0 – 125 000 18%

112 501 – 180 000 R20 250 + 25% 125 001 – 220 000 R22 500 + 25%

180 001 – 250 000 R37 125 + 30% 220 001 – 300 000 R46 250 + 30%

250 001 – 350 000 R58 125 + 35% 300 001 – 400 000 R70 250 + 35%

350 001 – 450 000 R93 125 + 38% 400 001 – 500 000 R105 250 + 38%

450 001 – R131 125 + 40% 500 001 – R143 250 + 40%

Rebates Rebates

Primary 7 740 Primary 8 280

Tax Threshold Tax Threshold

Below 65 43 000 Below 65 46 000

Effect of Adjustment

Income 2007/08 Tax 2008/09 Tax Difference

R100k R10 260 R9 720 R540 (5.3%)

R150k R21 885 R20 470 R1 415 (6.5%)

R200k R35 385 R32 970 R2 415 (6.8%)

R300k R67 885 R61 970 R5 915 (8.7%)

R400k R104 385 R96 970 R7 415 (7.1%)

R500k R143 385 R134 970 R8 415 (5.9%)

Income Tax: Companies

Type Tax Rate Possible changes

Companies 29% Down 1%

Small Business Corporations (SMEs)

R0 – R43 000 0% Bracket adjustment

(threshold to R46k)

R43 001 – R300 000 10% Bracket adjustment

R300 001 & above 29% Bracket adjustment

Employment Companies 34%

Foreign Resident Companies in SA 34%

STC to Dividend base 10% (1 Oct 07) More clarity on dividend tax

Possible Other

Tax breaks for science and research Transfer duties - threshold higher Donations tax - currently R100k of property donated exempt Further adjustments on deductions for medical aid contributions Mining Royalties? (Mines shocked from both sides) Sin taxes to be upped (as usual) Threshold for foreign direct investment (FDI) – lowered from 50% to

25%. Fuel levy – as if fuel price not high enough!

Environmental Structures

Depreciation on environmental capital structure (dams, tanks) currently allowed

Announcement surrounding costs related to solar water geysers? Die Geyser-kombers?

Taxes: A Wish List

Tax Category Wish

VAT Higher

STC Lower/Scrap

Company tax Lower

PIT (Mid/high income) Lower

Transfer duty Abolish

Customs Duties Lower/Scrap

Small comp. VAT returns Lower frequency/Higher threshold

Flat tax rate 22%

Expenditure

The Milky Way…

Expenditure Trends 2009 – Election Year! Surge in Social Spending More for Education and Health (good!) Service delivery to get more and more Capital spending

World Cup Housing Eish’kom?

Let’s hope; safety and security - World Cup

Higher revenue helps spending higher – danger!!

Social Security and Retirement Reform

• State Old Age Pension (SOAP) – introduced for all citizens upon reaching a certain age

• Government Sponsored Retirement Fund:– Mandatory National Retirement fund– Industries with own funds can opt out of the GSRF– Fund will be a Defined Benefit– Earning Ceiling for contributors: R75 000 p/a– Contribution rate: 10-12% of pre-tax earnings– Wage subsidy paid to employers for employees earning below

the tax threshold.

Summary 2008/09

MTBPS Budget ‘07 Efficient Difference

Revenue 615.9 591.2 612.4 21.2

Expenditure 590.2 594.2 597.5 3.3

Deficit/Surplus 25.7 -3.0 14.9 17.9

% of GDP 0.5% 0.6% 0.5%

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