Pre-Budget Presentation: Leftward Liaisons Presented by: Dawie Roodt 6 February 2008

Chairman and Chief Economist Efficient Group 81 Dely Road Hazelwood 0081 Tel: (012) Cell: Dawie Roodt

Intro

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

To Stay or Not to Stay...?? UKAustraliaCanadaSouth Africa Average Destination of Emigrates (%) 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

A Quick Eish ’ kom Calculation Vision: "Together building the powerbase for sustainable growth and development."

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

‘Demand Side Management’ 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 BULL!

Economic Overview: The Grazing Ground

M3 (end of year)23.1%23.7%19.8% PSCE (adj. end of year)27.6%22.2%18.3% CPIX (average)4.6%6.5%7.3% Prime (end of year)12.5%14.5% Current Account: Nom-R111.0bn-R138.2bn-R144.2bn Current Account: GDP-6.4%-7.0%-6.5% R/$ (end of year) GDP (full year)5.4%5.1%3.6% Economic Overview

Credit Demand Source: SARB and own calculations

Household debt to disposable income Source: SARB and own calculations 44.5% 50.2% 56.9% 59.4%

Savings to disposable income of households Source: SARB and own calculations 9.2% 5.4% 2.6% 0.5%

Is Tax Crowding Out Savings..? Crowding Out ? Income Tax Revenue from Companies and Individuals vs Private Sector Savings

Inflation Inflation bracket Source: StatsSA and own calculations 14.6% 10.0% 5.3%

Interest rates

GDP at Market Prices Source: StatsSA and own calculations

Fiscal Policy

Background Gold Dissaving

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

FISCAL 2007/08 …

Revenue: Fiscal 2007/08

Contribution to Fiscus

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

Redistribution Rand In : Rand Out Ratio2007/08 Family 1* – very poor 8.61 Family 2 – poor, 1 tax payer 1.41 Family 3 – middle class, 2 tax payers, Low investments 0.53 Family 4 – upper middle class, 2 tax payers, medium investments 0.23 Family 5 – Affluent 0.02 *Average family consists of 4 people, aggregates taken per capita Source: Efficient Research

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

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

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

2007/08 in Review: Revenue R bnBudget ’07MTBPS ’07ExpectedDiff. (%) Income Tax (5.4%) Individual (7.4%) Company (3.7%) STC (14.4%) Other (-86.9%) VAT (-3.3%) Excise Duty (0.5%) Fuel Levy (1.7%) Other (-1.0%) Total (2.1%)

Expenditure: Fiscal 2007/08

Spending Priorities Social Spending

2007/08 in Review: Expenditure R bnBudget ’07MTBPS ’07ExpectedDiff. (%) Voted Amounts299.2* (2.1%) Central Gov (-0.5%) Fin. & Admin (-2.7%) Social Services (1.7%) Justice & Protect (1.1%) Eco. & Infrastruc (10.1%) State Debt Cost (0.2%) Transfer Provinces (0.9%) Other (4.0%) Total (1.2%) * Includes: Contingency Reserve (R3.0bn)

Expenditure Analysis: Money Well Spend?

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)

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)

Eddjucation

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

The Reading Literacy of Fourth Grade Students Source: US Department of Education, PIRLS 2006 HighIntermediateLowNone Russian Federation(565) United States (541) Macedonia (439) South Africa (302)

Breakdown: Population Education Source: Community Survey 2007, StatsSA

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

Enrolment for SC HG Maths and Science as % of SC enrolment Source: Dep. 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: Dep. of Education, Statistics in SA at a glance, 1999 – 2005; Senior Certificate Examination Results, 2006.

Pass Rates for SC, SC HG Maths & Science Source: Dep 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% Source: Department of Education, Senior Certificate Examination Results, % 16%

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 benefit 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: Centre for Development and Enterprise

Leftward Proposals

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)25.0% Grant in Aid (full-time attendance) % Source: 2007 Budget

Social Grants Beneficiary Numbers Grant Type (‘000) (projected) % Change Old Age Grant2,0222,1442,1868.1% Disability Grant9531,3191, % War Veterans Grant % Foster Care Grant % Care Dependency Grant (disabled) % Child Support2,6307,0457, % Total5,80810,91811, % Source: 2007 Budget

Correlation? Household Expenditure vs Social Grants

Summary  Social grant beneficiaries doubled between 2003 to 2007  Child support recipients tripled between 2003 to 2007  Child Support grant age doubled from 7 (1998) to 14 (2007)  Constant sharp rise as percentage of economy (%GDP)  2007: 11,9m recipients (25.0% of SA population) Important social responsibility; however rising by alarming rate…!

Accountability Spilling the Milk…?

Qualified Audit Opinions: Department Independent Complaints Directorate ✓ Land Affairs ✓✓ Transport ✓✓ Labour ✓✓✓ Justice ✓✓✓✓ Parliament ✓✓✓ Health ✓✓✓✓ Defense ✓✓✓✓ Correctional Services ✓✓✓✓✓ Water Affairs & Forestry ✓✓✓✓✓ Home Affairs ✓✓✓✓✓✓ Source: General Report of the Auditor General on Audit Outcomes for the Financial Year

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: Number of Alleged Corruption Cases Received Percentage of Total FeedbackPercentage Feedback %35932% Financial Disclosure: Number of sms members Number of forms received Number of forms outstanding % Received % Source: 2007 State of the Public Service Report, PSC National Departments

Vacancies in National Departments Average Vacancy (National and Provincial): Senior Management Vacancies: 35% %23.4%25.1%

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

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 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 2007, IJR

Capital Expenditure

First Picture of Cape Town’s New Stadium:

Capital Expenditure Institute Time Horizon Planned Capital Expenditure (Rbn) Sasol Eskom World Cup 2010: Gautrain Acsa Stadiums Transnet (Rail, Ports, Pipelines) State (National Budget)

Funding

State’s Cash Coffer

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

Summing Up: Fiscal 2007/08

Summary 2007/08 R bnBudget ’07MTBPS ’07ExpectedDifference Revenue Expenditure (Deficit)/Surplus % of GDP0.6%0.7%0.8%

Budget 2008 How Far can the Cash Cow be Pushed…?

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 R7,740  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

Possible Changes to Taxes The Milk Machine…

Efficient ’ s Possible, Likely, Probable New 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 740Primary8 280 Tax Threshold Below Below

Effect of Adjustment Income2007/08 Tax2008/09 TaxDifference R100kR10 260R9 720R540 (5.3%) R150kR21 885R20 470R1 415 (6.5%) R200kR35 385R32 970R2 415 (6.8%) R300kR67 885R61 970R5 915 (8.7%) R400kR R96 970R7 415 (7.1%) R500kR R R8 415 (5.9%)

Income Tax: Companies TypeTax RatePossible changes Companies29%Down 1% Small Business Corporations (SMEs) R0 – R %Bracket adjustment (threshold to R46k) R – R %Bracket adjustment R & above29%Bracket adjustment Employment Companies34% Foreign Resident Companies in SA34% STC to Dividend base10% (1 Oct 07)More clarity on dividend tax

Possible Other  Tax breaks for science and research  Transfer duties - threshold higher  Donations tax - currently R100k of property donated exempt  Further adjustments on deductions for medical aid contributions  Mining Royalties? (Mines shocked from both sides)  Sin taxes to be upped (as usual)  Threshold for foreign direct investment (FDI) – lowered from 50% to 25%.  Fuel levy – as if fuel price not high enough!

Environmental Structures  Depreciation on environmental capital structure (dams, tanks) currently allowed  Announcement surrounding costs related to solar water geysers?  Die Geyser-kombers?

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

Expenditure The Milky Way…

Expenditure Trends  2009 – Election Year!  Surge in Social Spending  More for Education and Health (good!)  Service delivery to get more and more  Capital spending  World Cup  Housing  Eish’kom?  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 Disability Grant War Veterans Grant Foster Care Grant Care Dependency Grant (disabled) Child Support (14)220 (age?) Grant in Aid (full-time attendance) Source: 2007 Budget

Social Security and Retirement Reform 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 MTBPSBudget ‘07EfficientDifference Revenue Expenditure Deficit/Surplus % of GDP0.5%0.6%0.5%