Presented by: Dawie Roodt 15 February 2007 Fiscal Efficiency and Budget Prospects

Presented by: Dawie Roodt15 February 2007

Fiscal Efficiency and Budget Prospects

Chairman and Chief EconomistEfficient Group81 Dely Road

Hazelwood0081

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

Email: dawie@efgroup.co.za

Dawie Roodt

Through the Eyes of the World

Source: The Economist

January 20-26, 2007

Full page advertisements

The Oppositionp. 15

The Home Teamp. 17

Missing Something?

Macedonia South Africa

Taxes Efficiency Competitive labour Access to markets Stability Infrastructure Property rights -

But why say it?

2007:Economic Overview

2006 2007

M3 (end of year) 21.9% 14.1%

PSCE (adj. end of year) 27.6% 17.1%

CPIX (average) 4.6% 4.4%

Prime (full year) 12.5% 12.5%

Current Account: GDP -6.4% -4.9%

R/$ (end of year) 7.04 7.03

GDP (full year) 5.0% 5.0%

Economic Overview

Background

Individual & Corporate Credit Demand

5

10

15

20

25

30

35

Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07

%

Individual Non - Individuals

Consumption Expenditure by Households

Consumption Expenditure by Households to GDP

50

52

54

56

58

60

62

64

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

% GDP

Inflation

CPI & CPIX

0

3

6

9

12

15

18

21

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

%

Interest Rate

Prime Interest Rate

8

10

12

14

16

18

20

22

24

26

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

%

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

%

Fiscal Overview

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

%

Trevor’s reign!

Gold

Background

Deficit:GDP

-8

-7

-6

-5

-4

-3

-2

-1

0

1

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

%

Background

State Debt:GDP

25

30

35

40

45

50

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

%

Good/Stable

Debt Trap Recovery

FISCAL 2006/07…

Revenue

Revenue Sources (1994)

39%

13% 26%

5%

8%

9%

Individual Tax

Company Tax

VAT

Excise Duties

Fuel Levy

Other

Revenue Sources (Est. 2006/07)

29%

25%28%

4%

4%

10%

Individual Tax

Company Tax

VAT

Excise Duties

Fuel Levy

Other

Contribution to Fiscus

2006/07 in Review:Revenue

R bn Budget ’06 MTBPS ’06 Expected Diff. (%)

Income Tax 245.8 269.9 274.1 28.3 (11.5%)

Individual 132.5 138.8 140.0 7.5 (5.7%)

Company 95.2 115.9 115.0 19.8 (20.8%)

STC 13.9 12.9* 16.0 2.1 (15.1%)

Other 4.3 2.4* 3.1 -1.2 (-27.9%)

VAT 131.2 132.9 133.6 2.4 (1.8%)

Excise Duty 16.6 16.6 16.9 0.3 (1.8%)

Fuel Levy 21.8 21.8 21.2 -0.6 (-2.8%)

Other 49.1 40.6 52.6 3.5 (7.1%)

Total 446.4 466.6 479.5 33.1 (7.4%)

* Estimated

Quick Tax Burden Calculation

Trevor Manuel appointed as Minister of Finance in April 1996 1996: Revenue (22.5% GDP) 2005: GDP (fiscal): R1,417bn 22.5% of GDP = Revenue (2005): R319bn Actual Revenue: R348bn Difference: R29bn

‘…(w)e have announced over R72bn in tax cuts since 1994…’ - 2004 Budget Speech

Where are the tax cuts?

Quick Calculation

Tax YearRevenue exceeding

22.5%:GDP

(Rbn)

PIT Relieve according to Budget (Rbn)

Total Tax Relieve according to

Budget

(Rbn)

1997 3.5 2.8

1998 5.9 3.7

1999 13.6 3.0

2000 9.8 9.9

2001 1.5 8.3

2002 12.5 15.0

2003 9.9 13.0

2004 12.1 4.0 72.0 (Budget speech)

2005 29.0 6.8

2006 55.6 12.1 19.1 (One year)

Total 153.4 78.6

Revenue Categories

Personal Income Tax Strong wage increases

Company Tax Commodity cycle Strong demand

VAT Strong demand Credit extension

Total Overrun Mostly company tax

Expenditure

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

2006/07 in Review:Expenditure

R bn Budget ’06 MTBPS ’06 Expected Diff. (%)

Voted Amounts 263.1* 252.8 265.2 5.2 (2.0%)

Central Gov. 34.9 30.4 -4.4 (-12.6%)

Fin. & Admin. 18.1 20.1 2.1 (11.6%)

Social Services 90.6 98.6 8.0 (8.8%)

Justice & Protect. 73.4 71.7 -1.6 (2.2%)

Eco. & Infrastruc. 43.1 44.4 1.2 (2.8%)

State Debt Cost 52.0 52.6 50.5 -1.5 (2.9%)

Transfer Provinces 150.8 150.8 150.8 0.0 (0.0%)

Other 6.8 7.0 6.7 -0.1 (-1.5%)

Total 472.7 474.2 473.3 0.6 (0.8%)

* Includes: Contingency Reserve (R3.1bn)

Funding

2006/07: Funding

R bn Budget ’06 Expected Diff.

Extraordinary 1.7 -0.2 -1.9

TB’s 5.8 3.5 -2.3

Bonds 8.7 4.0 -4.7

Foreign Loans 2.4 3.3 -0.9

Use of balances 7.8 -16.4 24.2

Total Funding 26.4 -5.9 -32.2

2006/07: Summary

Strong Revenue Continues increase in Expenditure Lower Deficit or surplus Lower Debt Support Consumption Expenditure

Summary 2006/07

R bn Budget ’06 MTBPS ’06 Expected Difference

Revenue 446.4 466.6 479.5 33.1

Expenditure 472.7 474.2 473.3 0.6

Deficit/Surplus -26.4 -7.6 6.2 32.5

% of GDP -1.5% -0.4% 0.3%

Redistribution

Rand In : Rand Out Ratio 2006/07

32 222 16.96

74 000 3.45

115 000 1.45

155 000 0.73

195 000 0.49

270 000 0.29

1 000 000 0.05

Expansion vs. Contraction

Deficit: Changes in deficit – Contr. Level – Contr.

Debt Changes in Debt – Contr. Level – Contr.

Mix of expenditure and revenue – Very Exp.

2006 Budget Highlights:

Individuals: Pit brackets adjustment Primary rebate up to R7.2k Donation tax exemption up to R50k Forex limits R2m Estate Duty exemption up to R2.5m Deemed private kilometres up to 18k. Threshold tax-deductible medical expenses up to 7.5% of income. Property transfer duty exemption

To R500k (2nd R1m)

2006 Budget Highlights

Companies: RSC scrapped (R7.0bn) FDI threshold in Africa to 25% Other: SARB Sterilises Treasury cash balance (R36bn) Retirement fund tax 9% SMME’s: further tax relief, amnesty

Turnover increased to R14m RAF levy raised by 5c to 36.5c p/l VAT threshold for small farmers up to R1.2m

Fiscal Efficiency:An Expenditure Comparison

Close-up on South Africa

Category 2004 2006

Total population (000) 46.6mil 47.4mil

Annual population growth rate (%) 1.1% -0.4% ?

Population 0-14 years(%) 33% 32%

Rural population (%) 41

Total fertility rate (births per woman) 2.8 2.7

Infant mortality rate (1,000) 53 60

Life expectancy at birth (years) 46 42

HIV rate (%) in adults (15-49 years) 15.6 20.0%

Poverty (% of pop. on less than $2 a day) 34

GDP per capita (PPP) US$ 11 192 12 760

GDP growth rate (%) 4.5% 5.0%

Children of primary school-age who are out-of-school (%) 7

Source: Unesco and World Bank Development Indicators

Where does the money go?

Main Budget Expenditure:

Functional, National by Vote

Rand (Rbn)

(2006/07 est.)

Percentage (%)

Central Government Admin 34.9 7.4%

Financial and Admin Services 18.1 3.8%

Social Services 90.6 19.2%

Justice and Protection Services 73.4 15.5%

Economic Services and Infrastructure 43.1 9.1%

State Debt Costs 52.1 11.0%

Provincial Equitable Share 150.8 31.9%

Other 9.7 2.1%

Main Budget Expenditure 472.7 100.0%

Social Services Expenditure

Social Services Expenditure

Budget 2006/07

Functional allocation R260.9bn

% of Total Expenditure 59.2%

% of GDP 14.6%

Expected Overrun R8.0bn

Social Services Expenditure as % of Total Expenditure

Social Services Expenditure

40

44

48

52

56

60

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% Expenditure

Source: Various Budgets and own calculation

Human Poverty Index (HPI): Developing Countries (HPI-1),2004

Human Poverty Index, Developing Countries (High value = High Poverty)

0

10

20

30

40

50

60

70

0 20 40 60 80 100Countries

Value

South Africa

Cuba

Mali

Average: 30

Median: 27

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

South Africa(1998)

South Africans (0-14) with One or Both Parents Dead

South Africans (0-14) Orphaned by One or Both Parents

12

13

14

15

16

17

1995 1996 1997 1998 2001 2002 2003 2004 2005

% Pop

Source: StatsSA: Trends in the percentage of children who are orphaned in South Africa: 1995–2005

Grants

2001/02 to 2005/06 fiscal years: Foster care grants increase from R364m to R2,044m (5.6 times) All social grants increase 2.5 times

April 2001 to April 2005: Recipients of foster care grants from 86k to 256k (3 times)

(Source: SA, Department of Treasury) 2009/10: Foster care grant recipients to 472k

(Source: SA, Department of Social Development)

Summary

Average (developing) level of poverty Appear to deteriorate Assist almost 30% of population! 11m receive some form of social assistance (2006)

7m children (child support grant) 2m old age pension

Increasing number of orphans Aggravated by health problem (HIV/Tuberculosis) Contributes to lawlessness

Increasing dependency on state

Edducayshion

Bas(e)ing the Outcome…

Budget 2006/07

Functional allocation R92.0bn

% of Total Expenditure 19.5%

% of GDP 5.2%

Expected Overrun R2.6bn

Education Spending as % GDP

Education : GDP

4

5

6

7

8

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% GDP

Source: Various Budgets

Pass Rate of SCE and Education Spending

Pass Rate and Education Spending

40

45

50

55

60

65

70

75

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

%

5

6

7

8

% GDP

Pass Rates Education Spending

Source: HSRC

Learners and Educators in Ordinary Schools

Learners and Educators

11.6

11.8

12.0

12.2

12.4

2001 2002 2003 2004 2005

Number (mil)

350

360

370

380

390Number ('000)

Learners Educators

Source: 2001-2005 SNAP Survey (www.education.gov.za)

Number of Schools and Educators in Ordinary Schools

Number of Schools and Educators

26.0

26.5

27.0

27.5

28.0

2001 2002 2003 2004 2005

Number ('000)

350

360

370

380

390

Number('000)

Schools Educators

Source: 2001-2005 SNAP Survey (www.education.gov.za)

Pass Rate of SCE and Matriculation Exemption

Pass Rate vs Matric Exemption

8.0 8.26.2 6.4 6.4

8.19.3

11.713.9 12.9 11.6

16.6

0

20

40

60

80

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

%

Pass Rates Matriculation Exemption

Source: HSRC

53.4 54.4

47.4 49.3 48.9

61.7

68.9 70.773.368.3

57.9

66.7

Learners Presenting For Standard and Higher Grade Exams

Subject Year SG HG HG as % Tot

Accounting 2002 100199 41216 29.1

2003 106621 39548 27.1

2004 112948 43442 27.7

2005 120129 42727 26.2

Biology2002 200608 98468 32.9

2003 199432 86813 30.3

2004 204073 96081 32.0

2005 219838 111619 33.6

English (Second language)2002 22408 362534 94.2

2003 18535 355965 95.1

Source: HSRCSource: HSRC / Department of Education

Learners Presenting For Standard and Higher Grade Exams

Subject Year SG HG HG as % Tot

Mathematics2002 226295 35518 13.6

2003 223156 35994 13.9

2004 236155 39939 14.5

2005 259099 44053 14.5

Physical Science2002 103044 51047 33.1

2003 100166 52215 34.3

2004 105245 55969 34.7

2005 119491 62337 34.3

Source: HSRC / Department of Education

Case Study: Flow of Pupils from Grade 1 to Grade 12

Flow Through for 1991 Pupils

100.0 99.095.5

88.8 89.4

80.678.0

85.8

75.9

69.3

58.8

40.3

30

40

50

60

70

80

90

100

1991Gr1

1992Gr2

1993Gr3

1994Gr4

1995Gr5

1996Gr6

1997Gr7

1998Gr8

1999Gr9

2000Gr10

2001Gr11

2002Gr12

Source: HSRC Note: Repeaters and drop outs not indicated

1 207 066 learners

486 786 learners

Home Schooling?

1995 to 2006: 31.7%31.7

Flow in Secondary Schools

Flow of Pupils in Secondary Schools

500

600

700

800

900

1000

1100

2002 (Gr 7) 2003 (Gr 8) 2004 (Gr 9) 2005 (Gr 10) 2006 (Gr 12)

Number ('000)

Source: Dept Education

1.3%

- 6.4% 17.0%

Repeaters?

- 49.3%

Grade 1 and Grade 2 Pupils

Grade 1 and Grade 2 Pupils

900

950

1000

1050

1100

1150

1200

1250

1300

2002 2003 2004 2005

Number ('000)

Grade 1 Grade 2

Source: Department of Education

- 9.4%- 15.1%- 13.1%- 21.3%

Education expenditure comparison (2002-2004 as available)

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

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

South Africa (2006/07)

Equatorial Guinea

Lesotho

Average: 4.7

Zimbabwe

Adult Literacy Rate (2005)

Adult Literacy Rate

10

20

30

40

50

60

70

80

90

100

0 20 40 60 80 100Countries

% o

f P

op

ula

tio

n

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

South Africa: 82.2

Mali

Estonia

Average: 79.5

Median: 87.4

South Africa (1991): 82.1

Pupils-Teacher Ratio in Primary Education (Newest data available)

Pupils-Teacher Ratio

0

10

20

30

40

50

60

70

80

0 20 40 60 80 100 120 140 160

Countries

Ave

rag

e n

um

ber

of

pu

pils

Source: UNESCO

South Africa

Central African Republic

Libya

Average: 26.7

Median: 23.0

South Africa (2006)

Home Schooling

1999: Between 6 000-10 000 parents giving home schooling 2001: 15 000 parents Reason:

• “Quality of education in public schools is low”• “Implementation of outcome based education”• “Marks ‘adjusted’ for better results“

Research conclusions: Gr.4 pupils in home schooling perform better than above average pupils in public schools

Source: Tydskrif vir Geestenswetenskappe

Higher Output

Research outputs at Wits: 1998: 1 100 2005: 700

Source: Dept Education

Summary

Above average spending on education Below average teacher : pupil ratio Ordinary schools, change between 2001-2005:

Learners: 4.1% Educators: 7.9% Schools: -3.2%

Weaker higher grade enrollment Low critical subject enrollment Obvious efficiency problem but improving

Health

Healthy Spending…?

Budget 2006/07

Functional allocation R53.5bn

% of Total Expenditure 12.1%

% of GDP 3.0%

Expected Overrun R0.01bn

Health Spending as % GDP

Health Spending from 1995

2

3

4

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% GDP

Source: Various Budgets

Public Expenditure on Health Comparison (2003-04)

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

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

South Africa (‘04&’06)

Myanmar

Iceland

Average: 3.5

Median: 3.0

CubaMalawi

Life Expectancy at Birth (years)Most Recent 2000-05

Life Expectancy at Birth

30

40

50

60

70

80

90

0 20 40 60 80 100 120 140 160Countries

Years

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

South Africa

Swaziland

Japan

Average: 65.5

Cuba

Malawi

Median: 70.1

South Africa (2006 est.)

Public Health Expenditure (2003) vs. Life Expectancy at Birth (2000-05)

Health Spending vs Life Expectancy

0

4.5

9

30 60 90

Life Expectancy (years)

Hea

lth E

xpen

ditu

re (%

GD

P)

Malawi

South Africa 2006)Cuba

Singapore

Namibia

South Africa

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

Physicians

Physicians 1990-2004

0

100

200

300

400

500

600

0 20 40 60 80 100 120 140 160 180

Countries

per 100,000

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

South Africa

Malawi

Average: 147.0

Cuba

Median: 109.0

South Africa(2001)

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

South Africa (2001)

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

Percentage of People ages 15-49 Infected with HIV, 2005

HIV Prevalence (% Ages 15-49)

0

5

10

15

20

25

30

35

0 20 40 60 80 100 120 140 160 180

Countries

%

Source: Human Development Report, 2006 (undp.org) from UNAIDS (Joint United Nations Programme on HIV/AIDS). 2006

South AfricaJapan

Swaziland

Average: 2.0

Zimbabwe

Number of HIV Positive and Cumulative HIV Deaths

Total HIV+ and Cumulative Aids Deaths

0

1

2

3

4

5

6

Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

Mil

Total HIV+ Cumulative Aids Deaths

Projection

Currently 250 000 on antiretrovirals- Shortfall 800 000! ( Economist)

Source: Centre for Actuarial Research and South African Medical Research Council, 2004

Estimated HIV Prevalence Amongst Antenatal Clinic Attendees, by Age

Age group (years)

2000 prevalence

%

2001 prevalence

%

2002 prevalence

%

2003 prevalence

%

2004 prevalence

%

2005 prevalence

%

<20 16.1 15.4 14.8 15.8 16.1 15.9

20-24 29.1 28.4 29.1 30.3 30.8 30.6

25-29 30.6 31.4 34.5 35.4 38.5 39.5

30-34 23.3 25.6 29.5 30.9 34.4 36.4

35-39 15.8 19.3 19.8 23.4 24.5 28.0

40+ 11.0 9.8 17.2 15.8 17.5 19.8

Source: Avert international AIDS charity

Tuberculosis Cases – Prevalence per 100 000 People, 2004

Tuberculosis Cases Reported

0

200

400

600

800

1000

1200

0 20 40 60 80 100 120 140 160 180

Countries

Per

100

,000

peo

ple

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

South Africa

Iceland

Djibouti

Average: 200

Zimbabwe

Median: 83

Summary

Low/average spending on health Very low life expectancy Lack/losing skilled medical personnel HIV and Tuberculosis:

Top prevalence rates in the world Appears to escalate Lack of commitment from Government (Department of Health)

Impact on economy

Serious competence and planning deficiency

PROBABLY THE WORST RUN DEPARTMENT!

Protection

Our Fine for Crime

Budget 2006/07

Functional allocation (Protection services)- Police

R79.4bnR34.3

% of Total Expenditure- Police

18.0%7.8%

% of GDP - Police

4.5%1.9%

Expected Under run (R2.1bn)

Foreign Bribery by Exporters Index

Bribery Index (Least probable = 10)

4

5

6

7

8

Ind

ex

Source: Transparency International

South Africa

Switzerland

India

Protection Services Spending as % GDP

Protection Services Spending

1.0

1.5

2.0

2.5

3.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% GDP

Defence and Intelligence Police

Source: Various Budgets and own calculation

Military

Military Expenditure, % of GDP (2004)

Military Expenditure per country

0

2

4

6

8

10

12

0 20 40 60 80 100 120Countries

% GDP

Source: SIPRI (Stockholm International Peace Research Institute). 2006c.

South AfricaMauritius

Oman

Average: 2.3

Median: 1.7

Police and Crime

Murders (per capita) by Country (1998-2000)

Total Recorded Homicides Completed

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0 10 20 30 40 50 60Countries

Per 1000

Source: UN Survey of Crime Trends and Operations of Criminal Justice Systems, 2000

South Africa

Colombia

Qatar

Jamaica

Venezuela

South Africa (2006)

Reported Crime Figures for the financial years 1994/95 to 2005/06

Crime Categories, per 100 000 population

0

50

100

150

200

250

300

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Rat

io p

er 1

00 0

00

Rape and attempted rape Murder Aggrevated Robbery

Source: Institute for Security Studies (issafrica.org) / saps.gov.za

Illegal Possession of Firearms and Ammunition Financial Years 1994/95 to 2002/03

Illegal Possesion of Firearms and Ammunition

10

11

12

13

14

15

16

17

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Number ('000)

Firearms and ammunition

Source: Institute for Security Studies (issafrica.org) / saps.gov.za

Burglary at Residential Premises for the Financial Years 1994/95 to 2002/03

Burglary at Residential Premises

200

220

240

260

280

300

320

340

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Number ('000)

Burglary

Source: Institute for Security Studies (issafrica.org) / saps.gov.za

Crime and Policing Facts:

2000: SA murder rate 3rd of 63 countries. (Behind Swaziland and Colombia) Murder rate per 100 000:

1994/05: 66.9 2005/06: 39.5 World average: 5.5

Policing Expenditure % GDP: 2.0% (1994), 1.8% (2003) % budget expenditure: 6.7% (1994), 7.9% (2003), 7.8% (2007 est)

Security personnel outnumber police officers 3:1 2006: Almost 300 000 security officers (1996: 100 000) 2006: SAPS employment complement 155 000, of which around (only) 105 000

officers

Source: Institute for Security Studies (issafrica.org) / SAPS Annual Report / own calculations /

UN Survey of crime trends and operations of criminal justice systems

Cost of Crime

Violent crime has affected 8 out of 10 businesses in South Africa (Survey of 200 companies)

Effects of crime on businesses: 88%: Increased costs for security 65%: Decreased productivity of staff 65%: Decrease in motivation 41%: Decrease in creativity and resourcefulness 32%: Loss of personnel 18%: Loss of clients

Source: Grant Thornton Accountants: International Business Report for 2007. Business Day 1 February 2007

Police (per capita) by country (2000)

Police (per capita) per Country

0

1

2

3

4

5

6

7

8

0 10 20 30 40 50Countries

Per

100

0 p

eop

le

Source: United Nations Office on Drugs and Crime, Centre for International Crime Prevention

South Africa

Costa Rica

Montserrat

Average: 2.9

Median: 2.6

Prisoners (per capita) by Country, 2003

Prisoners Per Capita

0

100

200

300

400

500

600

700

800

0 20 40 60 80 100 120 140Countries

Per 100,000

Source: International Centre for Prison Studies – World Prison Brief

Russia

United States

Burkina Faso

South Africa

Average: 157

Median: 111

South Africa (2006)

Summary

Average number of police officers Change in different crimes: 1994-2003 2003-2006

• Rape and attempted Rape: 17.2% 1.6%• Murder: -17.0% -16.7%• Robbery with aggravating circumstances: 49.7% -8.6%• Burglary at residential property: 38.3% -15.1%• Illegal possession of firearms and ammunition: 44.0% -18.0%

Security personnel outnumber police officers 3:1= (police efficiency?) 8 out of 10 businesses affected by crime Murders per 100 000 almost 8 times higher than world average! President Mbeki’s stance on crime?

Lack of commitment…Questionable statistics…Be scared, be very scared!

Capital Expenditure

Capital Expenditure

General Government (Dis-) Saving

-30

-25

-20

-15

-10

-5

0

5

10

15

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

R bn

Summary

Improving trend Main “reason” for our low savings Improve mainly due to higher taxes (lower deficit) Planned capex welcomed ….lower current expenditure would be better

Too much emphasis on current expenditure

Financial Management

Auditor General: 12% of state departments received clean audit reports (2005/06) Qualified audit reports of state departments:

2005/06: 32% 2004/05: 21%

Large number of qualifications fell into level two: Lack of basic financial control

Generally deficient financial control, and deteriorating……..leading indicator of (more) corruption

Fiscal Efficiency: Summary

Social Spending: Increasing burden on state Education: Efficiency problem but improving Health Care: Serious efficiency problem and deteriorating

Safety and Security: Shocking figures, questionable statistics! Capital Expenditure: Glimpse of hope

Fiscal Efficiency:A Revenue Comparison

Revenue Sources (Est. 2006/07)

29%

25%28%

4%

4%

10%

Individual Tax

Company Tax

VAT

Excise Duties

Fuel Levy

Other

Contribution to Fiscus

Tax Compliance Time of Mid-Size Company, per Country (2006)

Tax Compliance Time

0

200

400

600

800

1000

1200

1400

0 20 40 60 80 100 120 140 160

Countries

Hours per year

Source: World Bank and PriceWaterhouseCoopers LLP 2006

South Africa

United Arab Emirates

Cameroon

International Ave

Median: 248

Budget Revenues (per $ GDP) by Country, 2006

Dollar Revenue per Dollar GDP

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0 20 40 60 80 100 120 140 160Countries

$

Source: Nationmaster: CIA, World Factbook

Libya

Kuwait

Afghanistan

South Africa

Average: 0.32

Median: 0.29

Collection cost: 1.3% of revenue; US 0.5%

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

Individual Tax Rate, per Country (2006)

Individual Marginal Tax Rates

10

20

30

40

50

60

0 10 20 30 40 50 60

Countries

%

Source: worldwide-tax.com

South Africa

Russia

Denmark

Average: 35.4%

Median: 36.0%

USA

Ireland

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%

Fiscal Efficiency: Revenue Summary

Average tax red tape Individual tax rate: above average (high marginal rate, low threshold) Company tax rate: above average VAT rate: below average

Urgent overhaul of tax regime required!

The 2007 Budget

Some Possible Changes to Taxes

Efficient’s Possible, Likely, Probable New Tax Table

2006/07 Efficient 2007/08

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

0 – 100 000 18% 0 – 110 000 18%

100 001 – 160 000 R18 000 + 25% 110 001 – 170 000 R19 800 + 25%

160 001 – 220 000 R33 000 + 30% 170 001 – 230 000 R34 800 + 30%

220 001 – 300 000 R51 000 + 35% 230 001 – 315 000 R52 800 + 35%

300 001 – 400 000 R79 000 + 38% 315 001 – 420 000 R82 550 + 38%

400 001 – R117 000 + 40% 420 001 – R122 450 + 40%

Rebates Rebates

Primary 7 200 Primary 7 632

Tax Threshold Tax Threshold

Below 65 40 000 Below 65 42 400

Effect of Adjustment

Income 2006/07 Tax 2007/08 Tax Difference

R100k R10 800 R10 368 R432 (4.0%)

R150k R23 300 R22 168 R1 132 (4.8%)

R200k R37 800 R36 168 R1 632 (4.3%)

R300k R71 800 R69 668 R2 132 (2.9%)

R400k R109 800 R107 218 R2 582 (2.3%)

R500k R149 800 R146 818 R2 982 (1.9%)

What to do with the “surplus”?

Actually app. R33bn Water under the bridge Pay off debt Balances currently R100bn! Reduce next year’s funding

Possible Changes to Energy Taxes

Fuel levy to be increased – 20c/l ? Originally intended to maintain road network (toll roads!)

Windfall tax on Sasol Possibly on back burner Likely to be linked to subsidy

Western Cape/Gauteng (and other provinces) fuel levy

Possible Other

Tax breaks for science and research Threshold for transfer duties upped Tax changes clubs Possible smallish adjustments on medical deductions What about a flow through share? Sin taxes to be upped A new land tax?

Taxes: A Wish List

Tax Category Wish

VAT Higher

STC Scrap/Lower

Company tax Lower

PIT (Mid/high income) Lower

Transfer duty Abolish

Customs Duties Lower/Scrap

Pension fund tax Scrap

Small comp. VAT returns Lower frequency/Higher threshold

Flat tax rate 22%

Possible Changes to Taxes

TAX Change (R bn)

Companies & STC Exemption R45k, Middle bracket up to R320k -0.4

Personal Income Tax Increase brackets by 10%, increase rebate R432 -8.0

Excise Duties +10% 1.0

Fuel Levy/RAF +10c/l each 2.0

VAT unchanged 0.0

Other -2.0

TOTAL -7.4

Expenditure

Main Expenditure Trends

More for Education and Health Service delivery to get more and more Capital spending

World Cup Housing

Let’s hope; safety and security - World Cup

Higher revenue helps spending higher – danger!!

Possible Changes to Social Grants

Grant Type 1 April 2003 2006 Expected

Old Age Grant R700 R820 R860

Disability Grant R700 R820 R860

War Veterans Grant R718 R838

Foster Care Grant R500 R590 R620

Care Dependency Grant (disabled) R700 R820

Child Support R160 (8) R190 (13) R200 (15?)

Grant in Aid (full-time attendance) R150 R180

BIG remains too Big

Cost R110 per beneficiary Population: 47.4m Cost: R62.6bn Vat Increase: 5.3% Workforce: 29.9m Cost: R39.4bn Vat Increase: 3.4% Unemployed: 17.4m Cost: R23.0bn Vat Increase: 2.0%

Unlikely now with SST

Possible Other Expenditures

HIV/AIDS chronic illness grant? Wage subsidy for low-wage employees (first time entrants)

Capital Expenditure

Even more for the World Cup And for general Infrastructure Spending

Other Announcements

Foreign Exchange Control

Can afford to scrap forex controls on individuals - unlikely Retirement funds – perhaps relaxed? Unit trusts – perhaps relaxed?

Pension Issues

Pension issues likely to be lumped together More on SST - to finance basic retirement savings, death, disability and

unemployment benefits Likely to be redistributional Reduction in pension fund tax (5%) possible Phase out/reduction lump sum pension payments Savings fund for irregularly employed Possible reduction in PIT countered by implementation of SST

Small Business Tax Amnesty

1 Aug 2006 – 31 May 2007 – extended? Penalty to be scrapped? Expected that 100 000 will apply Aprox. 8 000 business have applied

White Elephants

Dead Elephant #1: SAA Financial Results: Net profit (loss) for the year:

2002: R2.1bn 2005: R0.6bn 2003: (R5.9bn) 2006: R0.07bn 2004: (R8.6bn) 2007 (interim): (R0.6bn)

Bailout 1: 2004: R6bn from Transnet Bailout 2: 2007: Seeking between R2bn – R4bn? CE salary 2006: (including contributions and bonuses): R6.8m NO JUSTIFICATION FOR MANGO – IMMORAL!

White Elephants

Dead Elephant #2: Sentech Another bail out – needs R1bn! CEO spend R10m on golf sponsorship

Dead Elephant #3: Denel Another bail out?

Predatory Elephant: Telkom Telecoms cost major obstacle to GDP growth! Sate should consider selling 37% stake in the group!

Privatization

What happened to privatization? Telkom value – R52bn ACSA value – R50bn+

Summary 2007/08

MTBPS Efficient Difference

Revenue 543 545 2

Expenditure 534 536 2

Deficit/Surplus 9 9 0

% of GDP 0.5% 0.5%