Presented by: Dawie Roodt23 January 2007

Time for Real Tax Cuts

Chairman and Chief EconomistEfficient Group81 Dely Road

Hazelwood0081

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

Email: dawie@efgroup.co.za

Dawie Roodt

Economic Overview

2006 2007

Prime (full year) 12.5% 12.5%

M3 (end of year) 22.8% 15.1%

PSCE (adj. end of year) 26.1% 18.8%

CPIX (average) 4.6% 4.6%

Current Account: GDP -6.4% -4.9%

R/$ (end of year) 6.98 7.04

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

%

Individual Non - Individuals

Background

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

%

Gold

Trevor’s reign!

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

…Contributed to

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

%

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

GDP at Market Prises

GDP market prices, q:q seasonal

-1

0

1

2

3

4

5

6

7

8

1994 1996 1998 2000 2002 2004 2006

%

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

Summary

Increase Revenue Decrease Expenditure Boast Supply Increase consumption expenditure Saving (government vs households)

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 245.8 269.9 272.6 26.8 (10.9%)

Individual 132.5 138.8 139.8 7.3 (5.5%)

Company 95.2 115.9 116.7 21.5 (22.6%)

STC 13.9 12.9* 13.2 -0.6 (-4.3%)

Other 4.3 2.4* 3.0 -1.3 (-30.2%)

VAT 131.2 132.9 134.4 3.2 (2.4%)

Excise Duty 16.6 16.6 17.0 0.4 (2.4%)

Fuel Levy 21.8 21.8 21.1 -0.7 (-3.2%)

Other 49.1 40.6 45.1 -4.7 (9.6%)

Total 446.4 466.6 473.3 26.9 (6.0%)

* Estimated

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%)

Quick Calculation

1995: Revenue (22.5% GDP) 2005: GDP (fiscal): R1,417bn 22.5% of GDP = Revenue (2005): R319bn Actual Revenue: R347bn Difference: R28bn

Where is the tax cuts?

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* 252.8 265.7 2.6

Central Gov. 34.9 35.7 0.8

Fin. & Admin. 18.1 19.6 1.5

Social Services 90.6 95.5 4.9

Justice & Protect. 73.4 71.8 -1.6

Eco. & Infrastruc. 43.1 43.2 0.1

State Debt Cost 52.0 52.6 48.5 -3.5

Transfer Provinces 150.8 150.8 150.8 0.0

Other 6.8 7.0 6.8 0.1

Total 472.7 474.2 471.9 -0.8

* Includes: Contingency Reserve (R3.1bn)

Main Expenditure trends

More for Education and Health Services 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!!

Close-up on South Africa (2004)

Total population (000) 47 208

Annual population growth rate (%) 1.1

Population 0-14 years(%) 33

Rural population (%) 41

Total fertility rate (births per woman) 2.8

Infant mortality rate (1,000) 53

Life expectancy at birth (years) 46

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

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

GDP per capita (PPP) US$ 10 346

GDP growth rate (%) 1.9

Total debt service as a % of GNI 2.8

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

Source: Unesco and World Bank Development Indicators

Education

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

Equatorial Guinea

Lesotho

Adult Literacy Rate (2004)

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

Mali

Estonia

Pass Rate of SCE and Matriculation Exemption

Pass Rate vs Matric Exemption

0

10

20

30

40

50

60

70

80

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

%

Pass Rates Matriculation Exemption

Source: HSRC

Pass Rate of SCE and Education Spending

Pass Rate vs Education Spending

40

45

50

55

60

65

70

75

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

%

5

6

7

8

% GDP

Pass Rates Education Spending

Source: HSRC

Learners Presenting For Standard and Higher Grade Exams

Subject Year SG HG HG as % Tot

Accounting2002 100199 41216 29.1

2003 106621 39548 27.1

Biology2002 200608 98468 32.9

2003 199432 86813 30.3

English (Second language)2002 22408 362534 94.2

2003 18535 355965 95.1

Mathematics2002 226295 35518 13.6

2003 223156 35994 13.9

Physical Science2002 103044 51047 33.1

2003 100166 52215 34.3

Source: HSRC

Case Study: Flow of Pupils from Grade 1(1991) to Grade 12 (2002)

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

40.340

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?

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

Weighted Average: 27.1

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, Beeld 30 November 2006

Health

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

Myanmar

Iceland

Health Spending as %GDP

Change in Health Spending

2.0

2.5

3.0

3.5

4.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

% GDP

Source: Various Budgets

Life Expectancy at Birth (years)most recent 2000-05

Life Expectancy at Birth

30

40

50

60

70

80

90

0 20 40 60 80 100 120 140 160

Countries

Years

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

South Africa

Swaziland

Japan

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

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

Defence and Police

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

% GDP

Defence and Intelligence Police

Source: Various Budgets and own calculation

Reported Crime Figures for the financial years 1994/95 to 2002/03

Crime Categories, per 100 000 population

0

50

100

150

200

250

300

1995 1996 1997 1998 1999 2000 2001 2002 2003

Rat

io p

er 1

00 0

00

Rape and attempted rape Murder Aggrevated Robbery

Source: Institute for Security Studies (issafrica.org)

Fast Crime and Policing Facts:

Change in different crimes 1994-2003:• Rape and attempted Rape: 17.2%• Murder: -17.0%• Robbery with aggravating circumstances: 49.7%

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

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

Police (per capita) by country (2000)

Police (per capita) per Country

0

1

2

3

4

5

6

7

8

0 5 10 15 20 25 30 35 40 45 50Countries

Per 1

000

peop

le

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

South Africa

Costa Rica

Montserrat

Defence Spending

Highest Defence Exp. % of GDP

North Korea 9.5

Oman 9.0

Eritrea 9.0

Myanmar 8.9

Saudi Arabia 8.5

Israel 8.1

Jordan 7.7

Kuwait 7.6

Syria 7.6

South Africa 4.4

Funding

2006/07 in Review:Funding

R bn Budget ’06 Expected Diff.

Extraordinary 1.7 -0.2 -1.9

TB’s 5.8 2.4 -3.4

Bonds 8.7 4.1 -4.6

Foreign Loans 2.4 3.0 -0.6

Use of balances 7.8 -10.5 18.2

Total Funding 26.4 -1.3 -27.7

Summary 2005/06

R bn Budget ’06 MTBPS ’06 Expected Difference

Revenue 446.4 466.6 473.3 26.9

Expenditure 472.7 474.2 471.9 -0.8

Deficit/Surplus -26.4 -7.6 1.3 27.7

% of GDP -1.5% -0.4% 0.1%

Expansion vs. Contraction

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

Debt Changes in Debt – Contr. Level – Contr.

Mix of expenditure and revenue – Very Exp.

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

Wish List

Tax Category Wish

VAT Higher

STC Scrap

Company tax Lower

PIT (Mid/high income) Lower

Customs Duties Lower/Scrap

Sin Tax ?

Exchange controls Scrap

4% of African area

23% of African GDP

21.2% of African Exports

GDP

Africa, South Africa, World GDP per Capita

0

1000

2000

3000

4000

5000

6000

7000

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

$

Source: UN

Mistakes made in Africa Private Property Rights Regulated Prices Idolise Leaders Marketing Boards Nepotism Incompetence Corruption Poor Fiscal Discipline Poor Monetary Policy Unrealistic Projects

?

?

?

?

?

Asset Allocation

Local Equities, 2006Economic Sector MC EAA JSE Sector

Mining and Quarrying 32% 35% Mining, Platinum, Gold, Coal

Finance, prop and bus. serv 30% 25%Banks, Insurance, Life Ass, Media & Pht, IT, Property, Support Serv

Manufacturing 12% 12%Auto, Basic Ind, Beverages, Chem, Elect, IT Hard, Pharm & Bio, Steel & Other

Personal Service 6% 5%Cyc Serv, Health, Leisure Ent, Non-cyc Serv, Person Care

Transport, storage and comm. 6% 8% Telecomm, Transport

Trade, hotels and restaurants 6% 4%Cyc Cons, Food & Drug, Gen Retail, House Goods, Non-cyc Cons

Electricity, gas and water 4% 3% Oil & Gas

Agri, Forestry and Fishing 3% 2% Food Prod

Construction 2% 6% Const & Build

100% 100%