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2. 2 2006/07 Budget Review: Presented by: Dawie Roodt 16 February 2006 A Missed Opportunity

3. 3 Dawie Roodt Chief Economist Efficient Group 81 Dely Road Hazelwood 0081 Tel: (012) 460-9580 Cell: 082 456 0204 Email: dawie@efgroup.co.za

4. 4 Contents Some Background Some Background Some Fiscal Background Some Fiscal Background Review of 2005/06 Review of 2005/06 Fiscal 2006/07 – The Main Issues Fiscal 2006/07 – The Main Issues Asset Allocation Asset Allocation

5. 5 Some Background …

6. 6 Economic Overview 2006EfficientBudget Prime (full year) 10.0% M3 (end of year) 12.8% PSCE (adj. end of year) 17.2% CPIX (average) 4.5%4.5% Current Account: GDP - 4.4% -4.3% R/$ (end of year) 6.396.27 GDP (full year) 4.6%4.9%

7. 7 Political Overview PresidentChallenges: Poverty Poverty Underdevelopment Underdevelopment Marginalization – emphasis on authorities Marginalization – emphasis on authorities

8. 8 Political Overview ASGISA Sectors identified: Sectors identified: - Business Process Outsourcing - Tourism - Chemicals - Bio-fuels - Metals and metallurgy - Wood, pulp and paper - Agriculture - Creative industries - Clothing and textiles Particular attention: Particular attention: - Scarce skills - Supply side drivers - Authorities

9. 9 Some Fiscal Background…

10. 10 Background Gold Trevor’s reign! Zero?

11. 11 Background Gold Zero?

12. 12 Background

13. 13 2005/06 in Review …

14. 14 2005/06 in Review: Revenue R bn Budget ’05 Budget ’06 Expected Diff. (%) Income Tax 201.0228.7234.6 33.6 (16.7%) Individual116.9125.8127.4 10.5 (9.0%) Company68.784.990.0 21.3 (31.0%) STC8.711.911.9 3.2 (36.8%) Other6.76.25.3 -1.4 (-20.9%) VAT106.0115.0113.0 7.0 (6.6%) Excise Duty 14.514.614.2 -0.3 (-2.1%) Fuel Levy 20.720.720.2 -0.5 (-2.4%) Other27.932.132.0 4.1 (14.7%) Total370.1411.1414.0 43.9 (11.9%)

15. 15 Contribution to Fiscus

16. 16 Revenue What happened to the “surplus” R44bn R44bn SARB R36bn – long term deposit SARB R36bn – long term deposit Funding Funding

17. 17 2005/06 in Review: Expenditure R bn Budget ’05 Budget ’06 Expected Diff. (%) Voted Amounts 223.9226.3225.9 2.0 (0.9%) Central Gov. 27.624.427.7 0.1 (0.4%) Fin. & Admin. 15.317.915.3 0.0 (0.0%) Social Services 81.481.187.6 6.2 (7.6%) Justice & Protect. 65.268.263.1 -2.1 (-3.2%) Eco. & Infrastruc. 31.834.732.2 0.4 (1.3%) State Debt Cost 53.151.250.6 -2.5 (-4.7%) Transfer Provinces 134.7135.3134.7 0.0 (0.0%) Other6.16.26.0 -0.1 (-1.6%) Total417.8419.0417.2 -0.6 (-0.1%)

18. 18 Spending Priorities

19. 19 2005/06 in Review: Funding R bn Budget ’05 Budget ’06 ExpectedDiff. Extraordinary-5.5-2.4-2.62.9 TB’s5.05.95.20.2 Bonds25.823.322.6-3.4 Foreign Loans 12.00.70.5-11.5 Use of balances 10.6-19.6-22.5-33.1 Total Funding 48.07.93.2-44.8

20. 20 Summary 2005/06 R bn Budget ’05 Budget ‘06 ExpectedDiff. Revenue370.3411.1414.043.7 Expenditure418.3419.0417.2-1.1 Deficit/Surplus48.0-7.9-3.2-44.8 % of GDP 3.0%0.5%-0.3%

21. 21 Expansion vs. Contraction Deficit: Deficit: Changes in deficit – Contr. Changes in deficit – Contr. Level – Contr. Level – Contr. Debt Debt Changes in Debt – Contr. Changes in Debt – Contr. Level – Contr. Level – Contr. Mix of expenditure and revenue – Very Exp. Mix of expenditure and revenue – Very Exp.

22. 22 FISCAL 2006/07 …

23. 23 TAXES

24. 24 Current Effective Tax Rates

25. 25 Redistribution Rand In : Rand Out Ratio 2005/06 32 222 18.40 74 000 3.54 115 000 1.45 155 000 0.73 195 000 0.49 270 000 0.29 1 000 000 0.05

26. 26 Fiscal Redistribution 2005/06

27. 27 Low Saving Personal saving rate decline when tax burden increase Personal saving rate decline when tax burden increase Tax cuts accrued to those with least capacity to save Tax cuts accrued to those with least capacity to save

28. 28 Trevor’s Gift Parcel ONLY R 19.1 bn!

29. 29 The Good, the Bad, and the Terrible GoodBadTerrible RSC - R7bn cut RSC - R7bn cut SMME tax relief SMME tax relief Retirement tax relief - 9% Retirement tax relief - 9% Transfer duties – R500 000 Transfer duties – R500 000 Tax amnesty Tax amnesty Training allowance and R&D Training allowance and R&D Personal tax – R13.5bn Personal tax – R13.5bn Company tax Company tax RAF RAF STC STC SASOL SASOL

30. 30 Changes to Taxes TAXChange (R bn) Companies & STC Exemption R40k, Middle bracket up to R300k Top rate down to 28% (29%) -3.3/-0.4 Personal Income Tax Increase Brackets (Lowest bracket R10k R20k, Middle brackets R20k R40k, Top brackets R30k R100k) Reduce all (except first bracket) by 1% no change Increase Rebate by R900 -18.5/-12.1 Excise Duties +10% 1.0/1.4 Fuel Levy/RAF +5c/l each Only RAF 1.0/0.0 VATUnchanged 0.0/-0.1 Other-10.2/-7.9 TOTAL-30.0/-19.1

31. 31 Tax Table Efficient 2006/07 Budget 2006/07 Taxable Inc (R) Rates of Tax Taxable Inc (R) Rates of Tax 0 – 90 000 18% 0 – 100 000 18% 90 001 – 150 000 R16 200 + 24% 100 001 – 160 000 R18 000 + 25% 150 001 – 200 000 R30 600 + 29% 160 001 – 220 000 R33 000 + 30% 200 001 – 270 000 R45 100 + 34% 220 001 – 300 000 R51 000 + 35% 270 001 – 330 000 R65 500 + 37% 300 001 – 400 000 R79 000 + 38% 330 001 – R91 400 + 39% 400 001 – R117 000 + 40% RebatesRebates Primary 7 200 Primary Tax Threshold Below 65 40 000 Below 65 40 000

32. 32 Effects of Tax Changes Income Budget Tax Efficient Tax Benefit (% Inc.) Benefit (% Inc) 35 000 00 0 (0.0%) 50 000 1 800 900 (1.8%) 75 000 7 200 6 300 900 (1.2%) 100 000 10 800 11 400 1 700 (1.7%) 2 300 (2.3%) 175 000 30 300 30 650 3 450 (2.0%) 3 100 (1.8%) 225 000 45 550 46 400 4 950 (2.2%) 4 100 (1.8%) 300 000 71 800 72 800 6 900 (2.3%) 7 900 (2.6%) 500 000 149 800 150 200 9 500 (1.9%) 9 900 (2.0%) 1 000 000 349 800 345 200 14 500 (1.5%) 9 900 (1.0%)

33. 33 New Effective Tax Rates New Effective Tax Rates

34. 34 Redistribution Rand In : Rand Out Ratio 2006/07 32 222 17.86 74 000 3.55 115 000 1.47 155 000 0.75 195 000 0.51 270 000 0.30 1 000 000 0.05

35. 35 Tax Redistribution 2006/07

36. 36 Individuals

37. 37 Allowances Allowances Travel allowances tightened Yes Travel allowances tightened Yes Home office expenditures deductible? No Home office expenditures deductible? No

38. 38 Medical Medical Help poor and nail rich Help poor and nail rich First two members R500, thereafter R300 No First two members R500, thereafter R300 No Health department proposal (4,5% payroll tax) No Health department proposal (4,5% payroll tax) No - unlikely Additional Medical Expenditures: Yes Additional Medical Expenditures: Yes Younger than 65: expenditures in excess of 5% of taxable income still deductible. Definition to exclude medical scheme contributions. 5% possibly increased to 7.5% including medical contributions Younger than 65: expenditures in excess of 5% of taxable income still deductible. Definition to exclude medical scheme contributions. 5% possibly increased to 7.5% including medical contributions

39. 39 Companies

40. 40 Corporate Tax Corporate Tax Effective corporate tax rate (37.9%) Effective corporate tax rate (37.9%) 7.8% higher than global average 7.8% higher than global average STC : Perhaps – 10% No STC : Perhaps – 10% No - Lets hope 5%? Corp. tax down - 28% No Corp. tax down - 28% No - Lets hope more! Group taxes No Group taxes No

41. 41 Small Businesses Small Businesses Currently complete 12 tax returns Currently complete 12 tax returns Increase turnover limit (R6mil. - last year) R14mil. Increase turnover limit (R6mil. - last year) R14mil. Increase payroll limit (last year R500k) No Increase payroll limit (last year R500k) No Increase tax threshold to R40k (R35k) Yes Increase tax threshold to R40k (R35k) Yes

42. 42 RSC RSC Replaced by: Replaced by: VAT on property No VAT on property No Regional company tax No Regional company tax No Company licensing tariff No Company licensing tariff No Grant to municipalities Yes Grant to municipalities Yes Part of fuel levy No Part of fuel levy No Electricity levy No Electricity levy No Royalties to municipalities No Royalties to municipalities No

43. 43 Retirement Industry Retirement Industry Currently 18% on rent and interest Currently 18% on rent and interest Cut to 15%? Cut to 15%? Perhaps 10%? Perhaps 10%?9%

44. 44 VAT

45. 45 VAT Certain state organizations no longer need to be registered Yes Certain state organizations no longer need to be registered Yes More goods exempted – unlikely No More goods exempted – unlikely No Farmers with turnover of R1m - VAT returns every six months - up to R5m? Yes R1.2m Farmers with turnover of R1m - VAT returns every six months - up to R5m? Yes R1.2m

46. 46 General General

47. 47 Taxes

48. 48 Wet Blankets: Taxes Long Unchanged CGT: CGT: Exemption primary residence R1m, since 2001 Exemption primary residence R1m, since 2001 Average price of medium house R2.2m in 2005 Average price of medium house R2.2m in 2005 Up exemption to R2m? R1.5m Up exemption to R2m? R1.5m Retirement Funds: Retirement Funds: Yearly deduction for pension fund and retirement annuity, since 1980 on R1 750 per annum No Yearly deduction for pension fund and retirement annuity, since 1980 on R1 750 per annum No Single amount exemption on retirement annuity, provisional and-pension funds almost 20 years fixed on R120 000 No Single amount exemption on retirement annuity, provisional and-pension funds almost 20 years fixed on R120 000 No Single amount retirement gratification of the employer last changed in 1984, equals R30 000 No Single amount retirement gratification of the employer last changed in 1984, equals R30 000 No Transfer duties: Transfer duties: Up limit to R210k (now R180k) R500k 0% Up limit to R210k (now R180k) R500k 0%

49. 49 Minor Revenue Sources, R bn Tax on retirement 2.22.4 STC13.913.9 Transfer Duties 6.06.2 Other Property Taxes 2.62.6 Other Taxes on Goods 0.70.9 Other Taxes on Int. Transactions 0.30.4 Stamp Duties 0.91.0 Non-Tax Revenue 8.48.6 Other (Nine small fry) 7.67.5 Total42.643.5

50. 50 Expenditure

51. 51 The Good, the Bad, and the Dangerous GoodBadDangerous World Cup – R3bn World Cup – R3bn Police – R5.4bn Police – R5.4bn Municipal infra. – R9.3bn Municipal infra. – R9.3bn Municipal Grant – RSC – R24bn Municipal Grant – RSC – R24bn National road/rail – R3.5bn National road/rail – R3.5bn Gautrain –R7.1bn Gautrain –R7.1bn Social sector employment program – R4bn Social sector employment program – R4bn RAF – extra R2.7bn RAF – extra R2.7bn Denel R2bn Denel R2bn Child support grants & Disability grants Child support grants & Disability grants - Too many dependants

52. 52 Spending Priorities 2006/07 Should be stopped!

53. 53 Changes to Social Grants CurrentExpectedBudget Child Support (13) R180R190190 Old Age/Disability R780R810820 Foster Care R560R585590

54. 54 Other Spending increases on: Yes Spending increases on: Yes Housing Housing Crime prevention Crime prevention Improving local government Improving local government Transport Transport Education Education Health Health Social welfare Social welfare Upgrade all settlements Upgrade all settlements National roads is to be increased substantially National roads is to be increased substantially

55. 55 Special attention Special attention More to provinces for schools, hospitals, social development and welfare More to provinces for schools, hospitals, social development and welfare Increased investment in infrastructure (World cup – R5bn), support emerging farmers Increased investment in infrastructure (World cup – R5bn), support emerging farmers Investment in housing, municipal infrastructure, water, public transport, community facilities Investment in housing, municipal infrastructure, water, public transport, community facilities Education, hospital revitalization, libraries Education, hospital revitalization, libraries Communications infrastructure, national roads Communications infrastructure, national roads Courts, police and improved access to justice Courts, police and improved access to justice Investing in public admin., including the modernization of financial admin. Investing in public admin., including the modernization of financial admin. Denel’s to secure R5bn bail-out? Yes R2bn Denel’s to secure R5bn bail-out? Yes R2bn Total R29.3bn

56. 56 Capital Expenditure

57. 57 Funding ExpectedBudgetEfficientDifference Extraordinary1.71.70.0 Short Term Debt 5.05.85.5-0.3 Long Term Debt 10.28.78.70.0 Foreign Debt 3.32.42.3-0.1 Cash Balances 12.87.84.5-3.3 Total30.326.422.6-3.7

58. 58 What happened to privatisation? Telkom value – R30bn Telkom value – R30bn ACSA value – R40bn ACSA value – R40bn SAA – just give it away, get Kulula as flag carrier SAA – just give it away, get Kulula as flag carrier Two additional allocations: Two additional allocations: Denel – R2bn capital investment Denel – R2bn capital investment Road Accident Fund – R2.7bn Road Accident Fund – R2.7bn

59. 59 Summary 2006/07 ExpectedBudgetEfficientDifference Revenue440.3446.4450.84.4 Expenditure470.6472.7473.40.7 Deficit-30.3-26.3-22.63.7 % of GDP -2.0%-1.5%-1.4%

60. 60 Foreign Exchange Control Foreign Exchange Control Amnesty unit to tie up – offshore individual allowance to R2m Amnesty unit to tie up – offshore individual allowance to R2m Major relaxation for individuals Major relaxation for individuals Perhaps abolish Perhaps abolish Retirement funds to invest 20% abroad (15%) Retirement funds to invest 20% abroad (15%) Unit trusts to invest 30% abroad (20%) Unit trusts to invest 30% abroad (20%) FDI from 50% to 25% for SA corporates and parastatals, investment in Africa FDI from 50% to 25% for SA corporates and parastatals, investment in Africa

61. 61 Asset Allocation

62. 62 Local Equities, 2006 Economic Sector Q2 06 Q:Q Weighted Allocation Asset Allocation Agri, Forestry and Fishing 3.6%1.5%0.0% Mining and Quarrying 3.4%3.4%12.5% Manufacturing5.0%12.4%10.0% Electricity, gas and water 0.9%0.3%0.0% Construction10.8%4.0%5.0% Trade, hotels, restaurants 5.9%11.9%10.0% Transport, storage, comm. 6.1%9.0%10.0% Finance, prop and bus. Serv 5.0%14.0%17.5% Personal Service 5.1%5.2%5.0%

63. 63 Local Equities, 2006 Economic Sector EAA JSE Sector Agri, Forestry and Fishing 0% Food Prod Mining and Quarrying 10% Mining, Platinum, Gold, Coal Manufacturing15% Auto, Basic Ind, Beverages, Chem, Elect, IT Hard, Pharm & Bio, Steel & Other Electricity, gas and water 0% Oil & Gas Construction5% Const & Build Trade, hotels and restaurants 7% Cyc Cons, Food & Drug, Gen Retail, House Goods, Non-cyc Cons Transport, storage and comm. 12% Telecomm, Transport Finance, prop and bus. Serv 15% Banks, Insurance, Life Ass, Media & Pht, IT, Property, Support Serv Personal Service 5% Cyc Serv, Health, Leisure Ent, Non-cyc Serv, Person Care Total Investment 61%

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