Presented by: Dawie Roodt 27 February 2007 Fiscal Efficiency and the Budget Presented by: Dawie Roodt 27 February 2007

Dawie Roodt Chairman and Chief Economist Efficient Group 81 Dely Road Hazelwood 0081 Tel: (012) 460-9580 Cell: 082 456 0204 Email: dawie@efgroup.co.za

Through the Eyes of the World Source: The Economist January 20-26, 2007 Full page advertisements

The Opposition p. 15

The Home Team p. 17

Missing Something?   But why say it? Macedonia South Africa Taxes Efficiency Competitive labour Access to markets Stability Infrastructure Property rights - But why say it?

2007: Economic Overview

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% 4.8% Prime (full year) 12.5% Current Account: GDP -6.4% -4.9% R/$ (end of year) 7.04 7.03 GDP (full year) 5.0%

Background

Consumption Expenditure by Households

Inflation

Interest Rate

GDP at Market Prices

Fiscal Overview

Background Gold

Background

Background

FISCAL 2006/07…

Revenue

Contribution to Fiscus

2006/07 in Review: Revenue R bn Budget ’06 Budget ‘07 Expected Diff. (%) Income Tax 245.8 274.3 274.1 28.3 (11.5%) Individual 132.5 139.0 140.0 7.5 (5.7%) Company 95.2 114.7 115.0 19.8 (20.8%) STC 13.9 15.7* 16.0 2.1 (15.1%) Other 4.3 4.9* 3.1 -1.2 (-27.9%) VAT 131.2 134.6 133.6 2.4 (1.8%) Excise Duty 16.6 16.1 16.9 0.3 (1.8%) Fuel Levy 21.8 21.2 -0.6 (-2.8%) 49.1 49.6 52.6 3.5 (7.1%) Total 446.4 475.8 479.5 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 Year Revenue exceeding 22.5%:GDP (Rbn) PIT Relieve according to Budget (Rbn) Total Tax Relieve according to Budget 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 13.0 2004 12.1 4.0 72.0 (Budget speech) 2005 29.0 6.8 2006 55.6 12.1 (2007: 8.4) 19.1 (One year) Total 153.4 78.6

Revenue Categories Personal Income Tax Company Tax VAT Total Overrun Strong wage increases Company Tax Commodity cycle Strong demand VAT Credit extension Total Overrun Mostly company tax

Expenditure

Spending Priorities

2006/07 in Review: Expenditure R bn Budget ’06 Budget ’07 Expected Diff. (%) Voted Amounts 263.1* 260.8 262.5 -0.6 (-0.2%) Central Gov. 34.9 32.7 -2.2 (-6.3%) Fin. & Admin. 18.1 21.4 21.2 3.1 (17.1%) Social Services 90.6 91.2 92.6 2.0 (2.2%) Justice & Protect. 73.4 71.6 71.7 -1.7 (-2.3%) Eco. & Infrastruc. 43.1 41.9 44.4 1.3 (3.0%) State Debt Cost 52.0 52.2 50.5 -1.5 (-2.9%) Transfer Provinces 150.8 0.0 (0.0%) Other 6.8 7.0 0.2 (2.9%) Total 472.7 470.6 470.5 -2.2 (-0.5%) * Includes: Contingency Reserve (R3.1bn)

Funding

2006/07: Funding R bn Budget ’06 Budget ’07 Expected Diff. Extraordinary 1.7 3.3 -0.2 -1.9 TB’s 5.8 3.5 -2.3 Bonds 8.7 1.4 4.0 -4.7 Foreign Loans 2.4 0.7 -0.9 Use of balances 7.8 -12.3 -19.2 27.0 Total Funding 26.4 -1.1 -8.6 -35.0

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 Budget ’07 Expected Difference Revenue 446.4 475.8 479.5 33.1 Expenditure 472.7 470.6 470.5 -2.2 Deficit/Surplus -26.4 5.2 9.0 35.4 % of GDP -1.5% 0.3% 0.5%

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. Mix of expenditure and revenue – Very Exp.

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 R7740 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

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

Main Budget Expenditure: Functional, National by Vote Where does the money go? Main Budget Expenditure: Functional, National by Vote Rand (Rbn) 2006/07 Percentage (%) Central Government Admin 35.4 7.5% Financial and Admin Services 18.8 4.0% Social Services 91.9 19.4% Justice and Protection Services 72.8 15.4% Economic Services and Infrastructure 47.3 10.0% State Debt Costs 52.6 11.1% Provincial Equitable Share 150.8 31.8% Other 9.7 2.0% Main Budget Expenditure 474.2 100.0%

Social Services Expenditure

Social Services Expenditure Budget 2006/07 Budget 2007/08 Functional allocation R260.9bn R296.6bn % of Total Expenditure 59.2% 59.0% % of GDP 14.6% 15.4% Expected Overrun R2.5bn

Social Services Expenditure as % of Total Expenditure Source: Various Budgets and own calculation

Human Poverty Index (HPI): Developing Countries (HPI-1),2004 Mali South Africa South Africa(1998) Average: 30 Cuba Median: 27 Source: Human Development Report, 2006 (undp.org)

South Africans (0-14) with One or Both Parents Dead Source: StatsSA: Trends in the percentage of children who are orphaned in South Africa: 1995–2005

Grants 2001/02 to 2005/06 fiscal years: April 2001 to April 2005: 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 Budget 2007/08 Functional allocation R92.0bn R104.7bn % of Total Expenditure 19.5% 20.8% % of GDP 5.2% 5.4% Expected Overrun R1.5bn 2007 Budget: R8.1bn more for additional teachers

Education Spending as % GDP Source: Various Budgets

Pass Rate of SCE and Education Spending Source: HSRC

Learners and Educators in Ordinary Schools Source: 2001-2005 SNAP Survey (www.education.gov.za)

Number of Schools and Educators in Ordinary Schools Source: 2001-2005 SNAP Survey (www.education.gov.za)

Pass Rate of SCE and Matriculation Exemption 73.3 70.7 68.9 68.3 66.7 61.7 57.9 54.4 53.4 49.3 48.9 47.4 Source: HSRC

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 Biology 200608 98468 32.9 199432 86813 30.3 204073 96081 32.0 219838 111619 33.6 English (Second language) 22408 362534 94.2 18535 355965 95.1 Source: HSRC / Department of Education Source: HSRC

Learners Presenting For Standard and Higher Grade Exams Subject Year SG HG HG as % Tot Mathematics 2002 226295 35518 13.6 2003 223156 35994 13.9 2004 236155 39939 14.5 2005 259099 44053 Physical Science 103044 51047 33.1 100166 52215 34.3 105245 55969 34.7 119491 62337 Source: HSRC / Department of Education

Case Study: Flow of Pupils from Grade 1 to Grade 12 Home Schooling? 486 786 learners 1 207 066 learners 1995 to 2006: 31.7% 31.7 Note: Repeaters and drop outs not indicated Source: HSRC

Flow in Secondary Schools Repeaters? 1.3% - 6.4% 17.0% - 49.3% Source: Dept Education

Grade 1 and Grade 2 Pupils - 21.3% - 13.1% - 15.1% - 9.4% Source: Department of Education

Education expenditure comparison (2002-2004 as available) Lesotho South Africa (’06 & ’07) Average: 4.7 Zimbabwe Equatorial Guinea Source: Human Development Report, 2006 (undp.org)

Source: Human Development Report, 2006 (undp.org) Adult Literacy Rate (2005) Median: 87.4 Average: 79.5 South Africa: 82.2 Estonia South Africa (1991): 82.1 Mali Source: Human Development Report, 2006 (undp.org)

Pupils-Teacher Ratio in Primary Education (Newest data available) Central African Republic Libya South Africa (2006) Average: 26.7 Median: 23.0 South Africa Source: UNESCO

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 Budget 2007/08 Functional allocation R53.5bn R60.3bn % of Total Expenditure 12.1% 12.0% % of GDP 3.0% 3.1% Expected Overrun R0.1bn 2007 Budget: R7.2bn more for HIV-Aids, hospitals and salaries of health workers

Health Spending as % GDP Source: Various Budgets

Public Expenditure on Health Comparison (2003-04) Iceland Cuba Malawi South Africa (‘04&’06) Average: 3.5 South Africa (’07) Median: 3.0 Myanmar Source: Human Development Report, 2006 (undp.org)

Life Expectancy at Birth (years) Most Recent 2000-05 Japan Cuba Swaziland Median: 70.1 Average: 65.5 South Africa South Africa (2006 est.) Malawi Source: Human Development Report, 2006 (undp.org)

Public Health Expenditure (2003) vs. Life Expectancy at Birth (2000-05) Source: Human Development Report, 2006 (undp.org)

Physicians Cuba South Africa(2001) Malawi South Africa Average: 147.0 Median: 109.0 Source: Human Development Report, 2006 (undp.org)

Public Health Expenditure (2003) vs. Physicians 2004) Source: Human Development Report, 2006 (undp.org)

Percentage of People ages 15-49 Infected with HIV, 2005 Swaziland Zimbabwe Japan South Africa Average: 2.0 Source: Human Development Report, 2006 (undp.org) from UNAIDS (Joint United Nations Programme on HIV/AIDS). 2006

Number of HIV Positive and Cumulative HIV Deaths 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 15.9 20-24 29.1 28.4 30.3 30.8 30.6 25-29 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 19.3 19.8 23.4 24.5 28.0 40+ 11.0 9.8 17.2 17.5 Source: Avert international AIDS charity

Tuberculosis Cases – Prevalence per 100 000 People, 2004 Djibouti Zimbabwe South Africa Iceland Average: 200 Median: 83 Source: Human Development Report, 2006 (undp.org)

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

2007 Budget: R6.8bn more for justice and crime prevention Our Fine for Crime Budget 2006/07 Budget 2007/08 Functional allocation (Protection services) Police R79.4bn R34.3 R86.9bn R37.8bn % of Total Expenditure - Police 18.0% 7.8% 17.3% 7.6% % of GDP 4.5% 1.9% Expected Under run (R1.6bn) 2007 Budget: R6.8bn more for justice and crime prevention

Foreign Bribery by Exporters Index South Africa Switzerland India Source: Transparency International

Protection Services Spending as % GDP Source: Various Budgets and own calculation

Military

Military Expenditure, % of GDP (2004) Oman South Africa Mauritius South Africa (’07) Average: 2.3 Median: 1.7 Source: SIPRI (Stockholm International Peace Research Institute). 2006c.

2007 Budget: R2.4bn more to get 190 000 police by 2010 Police and Crime 2007 Budget: R2.4bn more to get 190 000 police by 2010

Murders (per capita) by Country (1998-2000) Colombia South Africa South Africa (2006) Jamaica Qatar Venezuela Source: UN Survey of Crime Trends and Operations of Criminal Justice Systems, 2000

Reported Crime Figures for the financial years 1994/95 to 2005/06 Source: Institute for Security Studies (issafrica.org) / saps.gov.za

Illegal Possession of Firearms and Ammunition Financial Years 1994/95 to 2002/03 Source: Institute for Security Studies (issafrica.org) / saps.gov.za

Burglary at Residential Premises for the Financial Years 1994/95 to 2002/03 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) Montserrat Costa Rica Average: 2.9 Median: 2.6 South Africa Source: United Nations Office on Drugs and Crime, Centre for International Crime Prevention

Prisoners (per capita) by Country, 2003 United States Russia South Africa South Africa (2006) Burkina Faso Average: 157 Median: 111 Source: International Centre for Prison Studies – World Prison Brief

Lack of commitment…Questionable statistics… Be scared, be very scared! 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 2007 Budget: - R13.3bn more for 2010 World Cup - R2.3bn more for public transport

Capital Expenditure

Too much emphasis on current expenditure 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 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

Contribution to Fiscus

Tax Compliance Time of Mid-Size Company, per Country (2006) Cameroon South Africa United Arab Emirates International Ave Median: 248 Source: World Bank and PriceWaterhouseCoopers LLP 2006

Budget Revenues (per $ GDP) by Country, 2006 Kuwait Collection cost: 1.3% of revenue; US 0.5% Libya South Africa (07/08 est.) South Africa Afghanistan Average: 0.32 Median: 0.29 Source: Nationmaster: CIA, World Factbook

Company Tax Rate, per Country (2006) Egypt Median: 29.0% Average: 26.6% USA South Africa South Africa + STC (’07) Ireland South Africa + STC (’06) Bulgaria Source: worldwide-tax.com

Individual Tax Rate, per Country (2006) Denmark Ireland Russia Median: 36.0% Average: 35.4% South Africa USA Source: worldwide-tax.com

VAT Rate, per Country (2006) Median: 18.0% Average: 16.7% Source: worldwide-tax.com

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

Changes to Taxes

New Tax Table 2006/07 2007/08 Taxable Inc (R) Rates of Tax 0 – 100 000 18% 0 – 112 500 100 001 – 160 000 R18 000 + 25% 112 501 – 180 000 R20 250 + 25% 160 001 – 220 000 R33 000 + 30% 180 001 – 250 000 R37 125 + 30% 220 001 – 300 000 R51 000 + 35% 250 001 – 350 000 R58 125 + 35% 300 001 – 400 000 R79 000 + 38% 350 001 – 450 000 R93 125 + 38% 400 001 – R117 000 + 40% 450 001 – R131 125 + 40% Rebates Primary 7 200 7 740 Tax Threshold Below 65 40 000 43 000

Effect of Adjustment Income 2006/07 Tax 2007/08 Tax Difference R100k

What to do with the “surplus”? Actually app. R29bn Water under the bridge Pay off debt Balances currently R100bn! R45bn to SARB

Changes to Energy Taxes Fuel levy increased – 5c/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 (increased education spending) Threshold for transfer duties upped Tax changes clubs (R100k) Possible smallish adjustments on medical deductions What about a flow through share? Sin taxes to be upped A new land tax?

Lower frequency/Higher threshold Taxes: A Wish List Tax Category Wish Outcome VAT Higher  STC Lower/Scrap  Company tax Lower PIT (Mid/high income) Transfer duty Abolish Customs Duties Pension fund tax Scrap Small comp. VAT returns Lower frequency/Higher threshold Flat tax rate 22%

Expenditure

Main Expenditure Trends More for Education (R8.1bn) and Health (R7.2bn) Service delivery to get more and more Capital spending World Cup (R13.3bn) Housing (R3.7bn) Let’s hope; safety and security (R11bn) - World Cup Higher revenue helps spending higher – danger!!

Possible Changes to Social Grants Grant Type 2006 Expected Outcome Old Age Grant R820 R860 R870 Disability Grant War Veterans Grant R838 R890 Foster Care Grant R590 R620 Care Dependency Grant (disabled) Child Support R190 (13) R200 (15?) R200 Grant in Aid (full-time attendance) 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

Summary 2007/08 MTBPS Budget ‘07 Efficient Difference Revenue 543 544 545 2 Expenditure 534 536 Deficit/Surplus 9 10 % of GDP 0.5% 0.6%