Budget Presentation: “ L eftward L iaisons” Presented by: Dawie Roodt 4 March 2008

A clear leftward shift can be seen in political leadership…

..But in the mean time the old guard still rules…

“…These are substantial steps towards our medium term economic goals – growth of 6 per cent a year or more, an unemployment rate of below 14 per cent by 2014, and an aggregate poverty rate half that recorded in Our commitment is not just an aspiration towards these targets, we intend to measure progress, step by step, in sharing the democratic dividend among all of our people….” - Finance Minister, Trevor Manuel. Medium Term Budget Policy Statement Speech 2007

In This Presentation: 1.Economic Overview 2.Fiscal Background /08 Revenue /08 Expenditure 5.Social Expenditure Analysis 6.Funding 6.Budget 2008/09 - Highlights

Economic Overview: The Grazing Ground

M3 (end of year)23.1%23.7%19.8% PSCE (adj. end of year)27.6%22.2%16.6% CPIX (average)4.6%6.5%8.1% Prime (end of year)12.5%14.5% Current Account: Nom-R111.0bn-R138.2bn-R145.1bn Current Account: GDP-6.4%-7.0%-6.5% R/$ (end of year) GDP (full year)5.4%5.1%3.5% Economic Overview

The Good, the Bad & the Ugly The Good –  Economy still likely to grow The Bad –  Credit demand remains strong  End of Inflation targets? The Ugly -  Eskom  Toothless SARB

Inflation Inflation bracket Source: StatsSA and own calculations CPIX Ave: 5.9%

Interest rates Toothless SARB Source: SARB and own calculations

A Quick Eish ’ kom Calculation Vision: " Together building the powerbase for sustainable growth and development." R60bn ‘investment’…?

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: +/ 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: – jobs lost Source: 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 FacilityGenerator Size (KVA) Capital Cost p KVA Total Capital Cost (excl. installation) House10 KVAR1250 – R5000 R – R Small/Medium Business 60 – 80 KVA R1400 – R3000 R – R Supermarket/ Butchery 130 – 140 KVA R1300 – R2500 R – R Source: Efficient Research

Electricity Levy (2c per KWh) Efficient Lighting Roll-Out Programme –Compact fluorescent light fittings (CFL’s) Solar Water Heating Programme –Government subsidise 20% – 30% –Cost R7 000 – R (R25 000) per geyser Fuel Switching –Liquefied Petroleum Gas used in cooking ‘Demand Side Management’ maybe not such a bright idea…

Fiscal Policy: Background

Background Gold Deficit Surplus

FISCAL 2007/08 …

Revenue: Fiscal 2007/08

Contribution to Fiscus

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

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

Registered Income Tax Payers IndividualsCompaniesTrustsTotal Registered Taxpayers 5.0 million1.7 million million Source: Fin24, Sep 2007

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

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

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

Results... Tax Burden shifted to companies Crowding out of Individual and Company savings Few income tax payers Internationally: –Income tax rates high –VAT tax rate low

2007/08 in Review: Revenue R bnBudget ’07Budget ‘08ExpectedDiff. (%) Income Tax (-0.6%) Individual (-0.9%) Company (0.8%) STC (-9.4%) Other (0.0%) VAT (2.0%) Excise Duty (-0.6%) Fuel Levy (1.3%) Other (-5.8%) Total (-0.1%)

Reasons collection changes Individual tax  Employment and Wage increases (inflation) Company tax  Consumption driven  High commodity prices STC  High profits  Foreign demands VAT  Larger VAT refunds

Lower VAT Collection Reasons Why: Larger VAT refunds –Higher non-wage input costs –Higher levels of fixed investment –Inventory accumulation caused by moderation in household consumption expenditure Household Consumption Expenditure Trends (2007 Quarter Three): Durable goods: Lower vehicle sales (consumer confidence, industry strike) Semi-durable goods: Lower sales of clothing and footwear Non-durable goods: Lower sales of food, beverages and tobacco Services: Slower growth in financial services sector, consumer spending on banking services Sources: MTBPS October 2007, SARB Quarterly Bulletin December 2007

Final Consumption Expenditure by Households Source: SARB and Efficient Research forecast

Expenditure: Fiscal 2007/08

Total Expenditure Trend Over Time Source: SARB and Efficient Research Forecast

Spending Priorities Social Spending

2007/08 in Review: Expenditure R bnBudget ’07Budget’08ExpectedDiff. (%) Voted Amounts299.2* (-0.9%) Central Gov (-3.3%) Fin. & Admin (-1.4%) Social Services (-0.4%) Justice & Protect (0.5%) Eco. & Infrastruc (0.2%) State Debt Cost (0.2%) Transfer Provinces (0.0%) Other (-6.0%) Total (-0.6%) * Includes: Contingency Reserve (R3.0bn)

Social Expenditure Analysis: Money Well Spent?

Health

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

Private Expenditure on Health Comparison 2004 Source: Human Development Report, 2006 (undp.org) Solomon Islands Average: 2.5 United States South Africa

Core Health Care Indicators Health Care IndicatorNumber (2004)Density per 1,000 SA vs. (Sample average) Physicians34, (1.45) Nurses184, (3.45) Dentists5, (0.32) Pharmacists12, (0.35) Community health workers 14, (0.98) Health management and support workers 22, (1.84) Source: World Health Statistics 2007, WHO (

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

Education

To Stay or Not to Stay...?? Source: Documented Migration Publication, StatsSA

To Stay or Not to Stay...?? UKAustraliaCanadaSouth Africa Average Destination of Emigrants (%) 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$1.14CAN$1.02R7.10 Marginal Tax Rate40%48.5%29%40% Socio Indicators Life Expectancy at birth Adult Literacy rate (>15yr,%) UN HDI Rank16 th – th – rd th – Murders p capita, rank ( ) 46 th – th – th – nd – 49.6 Sources: Economic Indicators, Economist. UN HDI 2007/2008, 7 th UN Survey of Crime Trends 1998 – 2000

Importing Skills – A realistic solution..? US (1 st ) UK (7 th ) Australia (6 th ) Canada (3 rd ) India (17 th ) China (26 th ) South Africa (30 th ) Source: “Mapping Global Talent” - Heidrick&Struggles and The Economist Intelligence Unit, 2007

Education Comparison Expenditure on Education as % GDP, % (4.7%)* Teachers per capita (1000), Primary 4.5 (5.1)* Teachers per capita (1000), Secondary 3.2 (5.4)* *Weighted Average (190 countries) Source: World Development Indicators Database, Human Development Report, 2006 (undp.org)

The Reading Literacy of Fourth Grade Students Source: US Department of Education, PIRLS 2006 HighIntermediateLowNone Russian Federation(565) United States (540) Macedonia (442) South Africa (302) Morocco (323) Qatar (353)

Breakdown: Population Education Source: Community Survey 2007, StatsSA Canada – 50.6% Ireland – 47.9% Japan – 47.7% U.S. – 39.0% Mexico – 18.1% Poland – 15.3% Hungary – 14.75%

SC HG Maths & Science Passes Source: Department of Education, Education Statistics in SA at a glance, SC Examination Results, 2006

Enrollment for SC HG Maths and Science as % of SC enrolment Source: Department of Education, Education Statistics in SA at a glance, SC Examination Results, % 9 %

Government Targets for SC HG Maths passes vs. Actual passes  Achieved  Targets Sources: Department of Education, Statistics in SA at a glance, 1999 – 2005; Senior Certificate Examination Results, 2006.

Pass Rates for SC, SC HG Maths & Science Source: Department of Education, Education Statistics in SA at a glance, SC Examination Results, % HG Maths Passes – 4.8% 43% HG Science Passes – 5.7%

Senior Certificate Mathematics Results (2006) 11% 81% 71% 16% Source: Department of Education, Education Statistics in SA at a glance, SC Examination Results, 2006

Time Spent by Teachers on Different Activities Source: “Educator workload in SA”, Pretoria: Human Sciences Research Council, % – Optimal Time Allocation

Alternative Solutions…? SETA: –5 Seta’s researched in 3 Sectors –Key Findings: Only 2% of employees benefited 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: “The Skills Revolution”, Centre for Development and Enterprise Oct 2007 “..Our Seta's held over R3.7bn in cash reserves…” - MTBPS, 07

Social Security and Welfare

Changes to Social Grants Grant Type (R) % Change Old Age Grant % Disability Grant % War Veterans Grant % Foster Care Grant % Care Dependency Grant (disabled) % Child Support (14) 210 – 1April08; 220 – 1 Oct % Grant in Aid (full-time attendance) % Source: 2008 Budget

Social Grants Beneficiary Numbers Grant Type (‘000) (projected) % Change Old Age Grant2,0222,1442,1952,22510% Disability Grant9531,3191,4221, % War Veterans Grant % Foster Care Grant % Care Dependency Grant (disabled) % Child Support2,6307,0457,8638, % Total5,80810,91811,99112, % Source: 2008 Budget

Correlation? Household Expenditure vs Social Grants Source: 2007 Budget, SARB Quarterly Bulletin; Efficient Research 1% Increase in Social Grants = 0.60% increase in Household Expenditure R-squared = (small sample)

Correlation? Excise Duties vs. Social Grants 1% Increase in Social Grants = 0.49% increase in Excise Duties R-squared = (small sample) Source: 2007 Budget, SARB Quarterly Bulletin; Efficient Research

Negative Correlation? Social Grants vs. Savings Source: 2007 Budget, SARB Quarterly Bulletin; Efficient Research

Summary  Social grant beneficiaries doubled between 2003 to 2008  Child support recipients tripled between 2003 to 2008  Child Support grant age doubled from 7 (1998) to 15 (2008)  Constant sharp rise as percentage of economy (%GDP)  2007: 11,9m recipients (26.0% of SA population) Important social responsibility; however rising by alarming rate…!

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

Aiming For Equality Source: Efficient Research

Aiming For Equality Source: Efficient Research % %

Aiming For Equality 19.9%closer Source: Efficient Research 27.5% closer

From those who give….more will be taken

Thus.. Higher taxes leads to lower savings Increase in Social Expenditure leads to Stronger Demand (inflation, Current Account, etc)

Accountability Spilling the Milk…?

Qualified Audit Opinions: Department Independent Complaints Directorate ✓ Land Affairs ✓✓ Transport ✓✓ Labour ✓✓✓ Justice ✓✓✓✓ Parliament ✓✓✓ Health ✓✓✓✓ Defense (R3.3bn ) ✓✓✓✓ Correctional Services (R2.9bn ) ✓✓✓✓✓ Water Affairs & Forestry ✓✓✓✓✓ Home Affairs ✓✓✓✓✓✓ General Report of the Auditor General on Audit Outcomes for the Financial Year

Spending by Departments DepartmentBudget 2006/07 R mil Audited R mil Under (-) / Over (+) % of Budget ICD % Land Affairs4,8523,726-1, % Transport12,87013, % Labour1,5131, % Justice6,2706, % Parliament % Health11,27011, % Defence23,83023, % Correctional Serv.10,6319,251-1, % WAF4,4774, % Home Affairs2,8002, % Source: 2007 MTBPS and Efficient Research calculations

Additional Facts All departments qualified in also received a qualified audit opinion in % 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: National Anti-Corruption Hotline Number ReceivedFeedbackPercentage Feedback % Financial Disclosure: Senior Management Service Members Number of membersNumber of forms outstanding % Received % National Departments Source: 2007 State of the Public Service Report, PSC

Vacancies in National Departments Average Vacancy (National and Provincial): Senior Management Vacancies: 35% %23.4%25.1% Source: Skills Revolution Report, CDE Oct 2007

Unqualified Reports for Public Entities 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

But what do(es) the people(s) say…?

Public Sentiment: State Service Delivery Delivery Area Change Transparency and Accountability 67%39%-28% Reducing the Crime Rate54%33%-21% Narrowing the Income Gap65%45%-20% Fighting Corruption63%43%-20% Retaining Skilled People48%28%-20% Educational Needs78%65%-13% Improving Basic Health Services 73%64%-10% Reducing Unemployment40%32%-8% Welfare Payments85%80%-5% Source: SA Reconciliation Barometer Survey Report Nov 2007, IJR

Public Confidence in Institutions Institution Change National Government73%63%-10% Political Parties48%37%-10% Provincial Government66%57%-9% Presidency77%68%-9% Parliament69%62%-8% Local Government50%43%-7% Legal Systems61%55%-6% Big Companies65%60%-6% Constitutional Court66%61%-5% Religious Institutions70%69%-1% Source: SA Reconciliation Barometer Survey Report Nov 2007, IJR

Thus… Huge increase in Social Expenditure (social grants) International Comparison : Spend more Compare worse Financial management in a MESS! People are losing confidence in government

Funding

2007/08: Funding R bnBudget ’07Budget ’08ExpectedDiff. Extraordinary TB’s Bonds Foreign Loans Use of balances Total Funding

State’s Cash Coffer Source: SARB

Budget Sustainability Source: Fiscal Policy, 2007 MTBPS Main Budget and Structural Budget Balances, 2000/01 – 2010/11

Summing Up: Fiscal 2007/08

Summary 2007/08 R bnBudget ’07Budget ‘08ExpectedDifference Revenue Expenditure (Deficit)/Surplus % of GDP0.6%1.0%0.8%

Budget 2008 How Much can the Cash Cow be Drained..?

2008 Budget Highlights: Finance:  2007/08 fiscal year surplus of 1% of GDP  2008/09 surplus budgeted for is 0.8% of GDP Individuals:  PIT brackets adjustment  Primary rebate up to R8, 280  Interest on dividends to R19k (R27 for 65+)  Capital gains tax exemption to R16k

2008 Budget Highlights: Companies:  Corporate tax lowered to 28%  Turnover-based tax package for SMEs <R1m  Compulsory VAT registration from R1m  STC to be replaced by dividend tax in 2009 (10%)  Tax incentives for investments in SMEs by venture capital  R5bn subsidies to support Industrial Policy Other:  R60bn allocated for Eskom’s capital financing  Electricity levy introduced - 2c per kilowatt hour  Exchange control abolished on institutional investors  Companies, trusts, partnerships and banks allowed to participate in the rand futures market on the JSE without restriction

Changes to Taxes The Milk Machine…

New Personal Income Tax Table 2007/082008/09 Taxable Inc (R)Rates of TaxTaxable Inc (R)Rates of Tax 0 – %0 – % – R % – R % – R % – R % – R % – R % – R % – R % –R % R % Rebates Primary7 740Primary8280 Tax Threshold Below Below Source: 2008 Budget

Effect of Adjustment Income2007/08 Tax2008/09 TaxDifference R100kR10 260R9 720R540 (5.3%) R150kR21 885R20 680R1 205 (5.5%) R200kR35 385R33 430R1 955 (5.5%) R300kR67 885R64 930R2 955 (4.4%) R400kR R R3 855 (3.7%) R500kR R R4 655 (3.2%) Source: 2008 Budget

Income Tax: Companies TypeTax RatePossible changes Companies29%Down 1% - 28% Small Business Corporations (SMEs) R0 – R (46 000)0%Bracket adjustment (threshold to R46k) R – R %Bracket adjustment (unchanged) R & above29%Large Bracket adjustment? (28%) Employment Companies34%Lower – (33%) STC to Dividend base10% (1 Oct 07)More clarity on dividend tax 10%) Source: 2008 Budget and Efficient Research

State of the Nation Education: “Kha Ri Gude”  Mass literacy campaign  people, 4.7 million 2012 – R3bn Schools  new schools to be build – R100m  new jobs created Job Creation: Military  Program for Military Skills - Up new enrollments from to  R700m already committed EPWP  More than R1 bn for new programmes Land Reform  Funds allocated to Agricultural Credit Scheme (Mafisa)  Greater support for new farmers Social Grants  Equalising age for old age pension – men to 60 yrs, , R5.7bn (26% of pop.) In line with Apex priorities…

But What About ? R300bn Capital Expenditure (R60bn, R20bn 2008/09) Credit ratings Future Privatisation Electricity levy – 2c per kw hour

Other: Individuals  Individual offshore – R500k + R2m  Transfer duties - threshold higher (R500k) (R500k)  Estate duty – 20% flat rate on all property of residents and SA property of non-residents  Donations tax Of property, donated exempt R200k (R100k) (unchanged – R100k)  Further adjustments on deductions for medical aid contributions First dependant R550 (R530) (R570) Additional dependant R350 (R320) (R345)  Sin taxes to be upped (as usual) – Beer 5c, Cigarettes 66c  Fuel levy – up 5 cent – 6c (2 April 08)  RAF – up 5 cent (5c)  Electricity levy – 2c per kilowatt hour

Other: Businesses  STC replaced by dividend tax (‘2 nd Phase’) – rate of 10% in 2009  Pension funds will be exempt from dividend tax

VAT changes for SMEs SMME’s <R1mill: “Presumptive turnover tax” as alternative to income tax and VAT Farmers submitting tax returns every 6 months - raised to R1.5bn Businesses submitting tax returns every 4 months - raised to R1.5bn VAT registration threshold: R1mil (R300k)

Presumptive Turnover Tax (SMEs) TurnoverRate 0 – R % R – R % on each R1 above R100k R – R R % R – R R % R – R1mR %

Additional Company Tax Proposals “Closely held passive companies” taxed at 40% (28%) - Definition to be clarified Retirement funds exempt from new dividend tax replacement for STC on companies

Environmental Structures  R2bn set aside for efficient use of electricity, generation from renewable sources, installation of electricity-saving devices and co-generation projects  Tax relief given to private conservation by private land users  Urban Development Zone incentive extended to 2014.

Exchange Control Scrapped on institutional investors System of prudential regulation (SARB) Foreign exposure limit (interim measures) Pension Funds & Long-term Insurer’s underwritten policies – 20% of retail assets Collective investment schemes, investment managers and investment business of long term insurers – 30% of retail assets Rand futures market on JSE – companies, trusts, partnerships and banks participate without restriction Further work will be done on lowering bank’s exchange control restrictions

Taxes: A Wish List Tax CategoryWish PIT (Mid/high income)Lower Company taxLower ✓ STCLower/Scrap VATHigher Transfer dutyAbolish Customs DutiesLower/Scrap Small comp. VAT returnsLower frequency/Higher threshold ✓ Flat tax rate22%

Expenditure The Milky Way…

Expenditure Trends  2009 – Election Year!  Social Spending Sssspree  More for Education and Health (R33.2bn)  Service delivery to get more and more (and do less and less) (R6.5bn)  Capital spending  World Cup (R2bn)  Housing (R6bn)  Let’s hope; safety and security - World Cup Higher revenue helps spending higher – danger!!

Changes to Social Grants Grant Type (R) Expected Old Age Grant (age – 63 men, /10, /11)* Disability Grant War Veterans Grant Foster Care Grant Care Dependency Grant Child Support (age – 15)200 (14) 210 – 1 Apr 08; 220 – 1 Oct (age?) Grant in Aid (full-time attendance) Source: 2008 Budget and Efficient Research Forecast *Old Age Grant R4.7bn ( x R940)

Social Security and Retirement Reform MORE ON… 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: R 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 Budget ’08EfficientDifference Revenue Expenditure Deficit/Surplus % of GDP0.8%0.4%

The William Webb Ellis is still in SA (*Soon to be joined by FIFA World Cup trophy) Some Good News…