1. Authorised Financial Services Provider – FSP No: 859

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

3. A Simple Example
Production = 100

4. Total Consumption = 90
Investment = 10
Consumption = 90

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

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

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

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

9. Economic Laws
LAW 1:
Money = Wealth

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

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

12. Behind the Curve
Source: SARB and Efficient Research, 2008

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

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

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

16. Action Follows Incentive

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

18. Balance of Payments
Source: SARS and own calculations

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

20. Unintended Consequences
BEWARE OF:
Unintended Consequences

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

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

23. BEWARE OF:
Misplaced Targets

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

25. The Economy at a Glance 25

26. 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%

27. 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%

28. 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%

29. Fiscal Policy 29

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

31. Fiscal Revenue 31

32. Contribution to Fiscus32

33. 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

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

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

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

37. 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

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

39. 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

40. Fiscal Expenditure 40

41. Expenditure Trend
Source: SARB and Efficient Group Forecast 41

42. Spending Priorities
Social Spending 42

43. 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

44. Redistribution in Perspective…44

45. Redistribution Estimation: R1 in = R? out
Rand In : Rand Out Ratio
1997
2003
2007
Family 1* (R20k)
R4.29
R (225%)
R (12%)
Family 2 (R43k)
R1.36
R (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

46. Aiming For Equality
Source: Efficient Research

47. Aiming For Equality
Source: Efficient Research

48. Aiming For Equality
Source: Efficient Research

49. Shrinking Tax Base??

50. What Trevor Did Say… 50

51. 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

52. What Trevor Didn’t Say…52

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

54. Education 54

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

56. 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

57. Social Security & Welfare57

58. Social Grants Beneficiary Numbers
Grant Type
(‘000)
2003
2006
2007
2008 (projected)
% Change
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

59. Unintended Consequences
Grant Type
(‘000)
2003
2007
2008 (projected)
% Change
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

60. 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…

61. State Debt & Interest Payments61

62. Budget Balance
Source: SARB and own calculations

63. Total State Debt
Source: SARB and Efficient Group Forecast 63

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

65. Authourised Financial Services Provider – FSP No: 859