Authorised Financial Services Provider – FSP No: 859

Fiscal Policy – The Folly & the Facts Presented by: Mr. Dawie Roodt Efficient Group: Executive Chairman, Chief Economist 2

A Simple Example Production = 100

Total Consumption = 90 Investment = 10 Consumption = 90

Total Consumption = 60 Taxes = 30 Consumption = 60 Investment = 10

Total Consumption = 75 Tax Redistributed = 15 Taxes = 15 Investment = 10 Consumption = 60

Total Consumption = 83 Consumption = 68 Imports = 8 Tax Redistributed = 15 Taxes = 15 Investment = 10 Consumption = 68 Imports = 8

Total Consumption = 75 Paid Back = 8 Consumption = 52 Tax Redistributed = 15 Taxes = 15 Consumption = 52 Investment = 10

Economic Laws LAW 1: Money = Wealth

Cash or Wealth? Source: SARB and Efficient Research, 2008

Cash or Wealth? Polynomial Trend Line (order of 5) Source: SARB and Efficient Research, 2008

Behind the Curve Source: SARB and Efficient Research, 2008

Individuals ALWAYS pay ALL taxes Economic Laws LAW 2: Individuals ALWAYS pay ALL taxes

Sources of Revenue Tax paid per Person = R12,887.00 Total Tax Revenue = R625,8 bn SA Population = 48.5m Tax paid per Person = R12,887.00 14

People react to Incentives Economic Laws LAW 3: People react to Incentives

Action Follows Incentive

Production & Consumption ALWAYS converge Economic Laws LAW 4: Production & Consumption ALWAYS converge

Balance of Payments Source: SARS and own calculations

C/A Deficit Funding “Hot Money” -DANGER- Source: SARS, 2008

Unintended Consequences BEWARE OF: Unintended Consequences

Keeping Bankrupt Companies Alive Denel’s Bill: 2006: -R1.3 bn 2007: -R549 m 2008: -R347 m

Keeping Bankrupt Companies Alive SAL’s Bill: Cash: 2003/04 – 07/08: R9.194bn!! Guarantees: 03/04 – 07/08: R2.86bn!!

BEWARE OF: Misplaced Targets

Misplaced Targets or Too High…. Unemployment Poverty Cars Food Prices Too Little…. Entrepreneurs Wealth Roads Food Production

The Economy at a Glance 25

Economic Overview 2006 2007 2008 GDP (full year) 5.4% 5.1% 3.0% Current Account: Nom -R111.0bn -R138.2bn -R167.4bn Current Account: GDP -6.4% -7.3% -8.1% R/$ (end of year) R7.04 R6.84 R8.70 M3 (average) 23.1% 23.7% 19.4% PSCE (average) 27.6% 22.2% 18.4% CPIX (average) 4.6% 6.5% 11.6% Prime (end of year) 12.5% 14.5% 15.5%

Economic Overview 2006 2007 2008 GDP (full year) 5.4% 5.1% 3.0% Current Account: Nom -R111.0bn -R138.2bn -R167.4bn Current Account: GDP -6.4% -7.3% -8.1% R/$ (end of year) R7.04 R6.84 R8.70 M3 (average) 23.1% 23.7% 19.4% PSCE (average) 27.6% 22.2% 18.4% CPIX (average) 4.6% 6.5% 11.6% Prime (end of year) 12.5% 14.5% 15.5%

Economic Overview 2006 2007 2008 GDP (full year) 5.4% 5.1% 3.0% Current Account: Nom -R111.0bn -R138.2bn -R167.4bn Current Account: GDP -6.4% -7.3% -8.1% R/$ (end of year) R7.04 R6.84 R8.70 M3 (average) 23.1% 23.7% 19.4% PSCE (average) 27.6% 22.2% 18.4% CPIX (average) 4.6% 6.5% 11.6% Prime (end of year) 12.5% 14.5% 15.5%

Fiscal Policy 29

Revenue and Expenditure Trends Delayed Taxes Gold Surplus Source: SARB and Efficient Group Forecast 30

Fiscal Revenue 31

Contribution to Fiscus 32

2008/09 Revenue Estimates R bn Budget ‘08 2008 MTBPS Expected Diff. (%) Income Tax 369.8 380.7 379.5 9.7 (2.6%) Individual 191.0 201.0 196.9 5.9 (3.1%) Company 156.5 158.9 161.8 5.3 (3.4%) STC 20.0 18.2 18.4 -1.6 (-8.0%) Other 2.2 2.6 2.4 0.2 (9.1%) VAT 167.0 161.6 -5.4 (-3.0%) Excise Duty 20.4 20.5 20.2 -0.2 (-1.0%) Fuel Levy 26.4 25.5 26.0 -0.4 (-1.5%) 63.9 53.6 58.4 -5.5 (-8.6%) Total 625.4 626.5 624.9 -0.5 (-0.1%) Source: Treasury and Efficient Group Forecast 33

Is Tax Crowding Out Savings..? Source: SARB Quarterly Bulletin, December 07 & MTBPS Oct 07; Efficient Research

Is Tax Crowding Out Savings..? Source: SARB Quarterly Bulletin, December 07 & MTBPS Oct 07; Efficient Research

Tax Comparison: Individuals Denmark Ireland Russia Median: 36.0% Average: 35.4% South Africa USA Source: worldwide-tax.com 36

Tax Comparison: Companies Egypt Median: 29.0% USA Average: 26.6% South Africa South Africa + STC (’07) South Africa + STC (’06) Ireland Bulgaria Source: worldwide-tax.com 37

Tax Comparison: VAT Median: 18.0% Average: 16.7% Source: worldwide-tax.com 38

Revenue Do’s & Don’ts DO’s: Decrease Company & Personal Income Taxes Burden has increased significantly Discourage savings Higher than international levels Few income tax payers Increase VAT Fights inflation Lower than international DON’Ts: Zero-rate more foodstuffs Demand & Supply curves are flat Costs outweigh benefits

Fiscal Expenditure 40

Expenditure Trend Source: SARB and Efficient Group Forecast 41

Spending Priorities Social Spending 42

2008/09 Expenditure Estimates R bn Budget’08 2008 MTBPS Expected Diff. (%) Voted Amounts 345.3 370.2 365.1 19.8 (5.7%) State Debt Cost 51.2 53.9 53.2 2.0 (3.9%) Transfer Provinces 199.4 204.0 202.1 2.7 (1.4%) Other 15.2 7.4 13.2 -2.0 (-13.2%) Total 611.1 635.5 633.6 22.5 (3.7%) Source: Treasury and Efficient Group Forecast 43

Redistribution in Perspective… 44

Redistribution Estimation: R1 in = R? out Rand In : Rand Out Ratio 1997 2003 2007 Family 1* (R20k) R4.29 R13.94 (225%) R15.62 (12%) Family 2 (R43k) R1.36 R2.10 (54%) R3.22 (53%) Family 3 (R100k) R0.30 R0.61 (100%) R0.87 (43%) Family 4 (R300k) R0.80 R0.14 (87%) R0.21 (44%) Family 5 (R500k) R0.04 R0.08 (81%) R0.11 (37%) Family 6 (R1mil) R0.02 R0.03 (77%) R0.04 (24%) Source: Efficient Research *Average family consists of 4 people, aggregates taken per capita

Aiming For Equality Source: Efficient Research

Aiming For Equality Source: Efficient Research

Aiming For Equality Source: Efficient Research

Shrinking Tax Base??

What Trevor Did Say… 50

About Financial Regulation… “But we proceed from the premise that this Parliament has entrusted us with responsibility for licensing and oversight of our financial institutions; and licenses to do business are granted on the understanding that the highest standards of financial responsibility and integrity will be maintained.” - Min. Trevor Manuel, MTBPS Speech Oct 08

What Trevor Didn’t Say… 52

Qualified Audit Opinions: General Report of the Auditor General on Audit Outcomes for the Financial Year 2005-06 Department 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Independent Complaints Directorate Land Affairs Transport Labour Justice Parliament Health Defense Correctional Services Water Affairs & Forestry Home Affairs

Education 54

Education expenditure comparison Lesotho South Africa (’06 & ’07) Average: 4.7 Zimbabwe Equatorial Guinea Source: Human Development Report, 2006 (undp.org)

The Reading Literacy of Fourth Grade Students Russian Federation(565) United States (540) Macedonia (442) Qatar (353) Morocco (323) South Africa (302) High Intermediate Low None Source: US Department of Education, PIRLS 2006

Social Security & Welfare 57

Social Grants Beneficiary Numbers Grant Type (‘000) 2003 2006 2007 2008 (projected) % Change 2003-2008 Old Age Grant 2,022 2,144 2,195 2,225 10% Disability Grant 953 1,319 1,422 1,409 47.8% War Veterans Grant 4 3 2 -50.0% Foster Care Grant 138 313 400 446 223.2% Care Dependency Grant (disabled) 58 94 98 110 89.7% Child Support 2,630 7,045 7,863 8,208 212.1% Total 5,808 10,918 11,991 12,402 106.5% Source: 2008 Budget 2008: 12.4m recipients 26.0% of SA population 58

Unintended Consequences Grant Type (‘000) 2003 2007 2008 (projected) % Change 2003-2008 Old Age Grant 2,022 2,195 2,225 10% Disability Grant 953 1,422 1,409 47.8% War Veterans Grant 4 2 -50.0% Foster Care Grant 138 400 446 223.2% Care Dependency Grant (disabled) 58 98 110 89.7% Child Support 2,630 7,863 8,208 212.1% Total 5,808 11,991 12,402 106.5% Incentive to Save Less/Not at All? Incentive to Stay Sick? Incentive for Girls to have Children? Source: 2008 Budget Increase Dependency on State 59

Expenditure Do’s & Don’ts SPEND LESS Increase Efficiency Poor results Poor conduct More on capital DON’Ts: SPEND MORE Increase Social Grants Adverse Incentives Unsustainable …or of parliamentarians…

State Debt & Interest Payments 61

Budget Balance Source: SARB and own calculations

Total State Debt Source: SARB and Efficient Group Forecast 63

Real Interest Costs on State Debt Source: SARB and Efficient Group Calculations 64

Authourised Financial Services Provider – FSP No: 859 www.efgroup.co.za