Authorised Financial Services Provider – FSP No: 859

2009 Pre-Budget Presentation:

“It’s Just a Jump to the Left”

Presented by: Dawie Roodt

4 February 2009

“It’s Just a Jump to the Left”

1. How your Tax Money is being spent?

2. Can the State afford the ANC Manifesto’s bill?

Basic Economic System

Production = 100

Consumption = 100

Economic Growth

Year 1:

Production = 100

Consumption

= 80

Investment = 20

Investment

= 22

Year 2: Eco. Growth = 5.0%

Production = 105

Consumption

= 83

+ 2

+ 3

Economic Growth

Things Certain in Life:Death & TAXES

Year 1:

Production = 100

Consumption = 55

Investment = 15

Taxes = 30

- 5

- 25

Scenario 1: All Taxes are Invested

Consumption = 55

Investment =15

Taxes = 30

Production

= 100 + 30= 45

Year 2: Eco. Growth = 10.0%

Production

= 110

Consumption = 62

Taxes = 30

Investment =18+ 3

+ 7

Economic Growth

Scenario 1

Scenario 2: All Taxes go to Expenditure

Consumption = 55

Investment =15

Taxes = 30

Production

= 100+ 30

= 75

+ 10

+ 20

= 25

Year 2: Eco. Growth = 7.0%

Consumption = 60

Investment =17

Taxes = 30Production

= 107+ 2

+ 5

Economic Growth

Scenario 2

Scenario 1

Scenario 3: Efficiency Loss

Consumption = 55

Investment =15

Taxes = 30

Production

= 100+ 30

= 73

+ 7

+ 18

= 22

!Efficiency Loss! + 25

Investment = 17.

Year 2: Eco. Growth = 6.0%

Consumption = 59

Taxes = 30Production = 106.0

+ 2

+ 4

Economic Growth

Scenario 3

Scenario 1

Scenario 2

Year 2: Eco. Growth = 6.0%

Consumption

= 59

Investment= 17

Taxes = 30Production

= 106.0

Want80

as before !!=127=106

!!!

• Consumption > Production

• CA Deficit

• Currency Volatility

• Pressure on Prices, i.e. Inflation

• Upward Pressure on Interest Rates

Adverse Impacts…2008 2009

CA Balance:GDPConsumption > Production

-7.5% -5.1%

Inflation (CPI, average)

11.6% 4.5%

Interest Rate (Prime, end of yr)

15.0% 11.5%

Rand(end of yr)

R9.52 R9.00

HH savings -0.3% (Q3) 0.1%

Economic Growth (full year)

3.0% 0.5%

EXTERNALLY

Undermining the Economy

INTERNALLYThe State

Takes from Savers – Gives to Spenders

CA Deficit

RandInflation

Interest %Savings

In Reality…..

Source: SARB, Efficient Research 2008

But in Reality…2007

GDP R2 000bn

GDP Growth (real) 5.1%

Total State Revenue R537bn

Total Company Income Tax R137bn

Total Investment R422bnSCRAPPE

D ??

What if Company Tax Scrapped?

2007

GDP R 2000bn

GDP Growth (real) 5.1%

Total State Revenue (excl CIT)

R537bn – R137bn = R400bn

Total Company Income Tax R0bn

Total InvestmentR422bn + 0.63*R137bn

= R422bn + R87.5bn= R509.5bn

5.1% + 0.9% = 6.0%

R 2020 bn

6 yrs R537bn

Therefore, Needed

1. Higher Savings:– Lower Corporate Taxes– Lower Personal Income Taxes

2. Less Social Expenditure:– 12m+ Grants Recipients– Education Results ??

3. Focus on State Efficiency

4. More Focus on Capital Expenditure/ Productive Capacity

Treasury’s Playground:

2008/09

Comparing Apples with Apples…2008/09 (Budget)

SA Reserve BankNational Government Finance

Revenue 625,4

Expenditure 611,1

Balance 14,3

+ Social Security

= Consolidated Central Government

+ provincial

+ local government

= Consolidated General Government

+ public enterprises

= Non-financial public sector?

National TreasuryMain Budget

Revenue 625,4

Expenditure611,1

Balance 14,3

+ Social Security

Revenue 24,7

Expenditure20,5

= Consolidated National Budget Balance 18,5

0.6% of GDP

0.8% of GDP

Three Spheres for Revenue

• Provincial– Motor vehicle licenses– Casino (gambling) taxes– Liquor licenses– Fuel levy?

• Local– Property rates– RSC levies (prior to 06/07)

• National– PIT, CIT, VAT, Fuel levy

Source: 2008 Tax Statistics,National Treasury and SARS

Revenue

Revenue

Revenue Categories

Strong Demand

Economic Activity,Commodity CycleWage Increases,Inflation… 12.0%

Revenue Sources (Est. 2008/09)

31%

28%

25%

3%

4%

9%

Individual Tax

Companies (incl STC)

VAT

Excise Duties

Fuel Levy

Other

National Tax Revenues

Registered Income Tax Payers

Registered Taxpayers

Individuals Companies Trusts PAYE

2004/05 4.1m 930k 320k 300k

2005/06 4.5m 1.1m 345k 330k

2006/07 4.8m 1.2m 375k 350k

2007/085.2m

(9.3% y/y)1.6m

(30.0% y/y)385k

(2.8% y/y)380k

(8.8% y/y)

Source: National Treasury & SARS, 2008, business Day 3 Feb 08

45% Total PITpaid by top 5.0%

75% Total CIT paid by 1.2% companies

2008/09 in Review:Revenue

Budget ’08 MTBPS ’08Efficient Estimate

Diff. (%)

Income Tax 369.7 380.7 383.8 14.0 (3.8%)

Individual 191.1 201.0 196.8 5.8 (3.0%)

Company 156.5 158.9 163.8 7.3 (4.7%)

STC 20.0 18.2 19.7 -0.3 (-1.5%)

Other 2.2 2.6 2.2 -0.1 (0.0%)

VAT 167.0 167.0 154.2 -12.9 (-7.7%)

Fuel Levy 26.4 25.5 25.0 -1.4 (-5.3%)

C&E&Other 91.2 80.4 81.7 -9.5 (-10.4%)

SACU -28.9 -27.1 -27.5 -1.4 (-4.8%)

Total 625.4 626.5 617.2 -8.1 (-1.3%)

Reasons for Under Shooting• Individual tax

High wage and salary negotiations (wage inflation)

• Company taxCommodity prices (“Two halves” of 2008 – commodity

boom/bust)

• STC Retained income

• VATConsumption expenditure plummets

Total Budget Revenue

• Interest

• Dividends

• Rent on land

• Sales of good and services

• Fines and penalties

• Botswana, Lesotho, Namibia, Swaziland (BLNS)

• Similar excise and customs (import) duties

•Revenues pooled and distributed based on formula

Source: 2008 Tax Statistics,National Treasury and SARS

SA Contributions to and received from SACU Pool

-30-20-10

01020304050

2000 2001 2002 2003 2004 2005 2006 2007 2008

Rbn Contribution to and received from SACU pool

Contribution to (include some BLNS collections) Receive from Loss

Source: 2008 Tax Statistics,National Treasury and SARS

SACU Revenue Share Formula

1. Customs component– Country’s share of intra-SACU trade, including re-

exports

2. Excise component– Based on GDP, net of development component

3. Development component– Set at 15% of total excise pool– GDP p.c. vs average SACU GDP p.c.– GDP < SACU average: compensated

Source: 2008 Tax Statistics,National Treasury and SARS

SACU Economic IndicatorsBotswana Lesotho Namibia South

AfricaSwaziland

GDP per capita R51.4k R6.3k R26.4k R41.1k R18.6k

To SACU pool (07/08) R0.2bn R0.1bn R0.4bn R45.4bn R0.1bn

From SACU pool (07/08) R9.0bn R4.1bn R6.6bn R21.5bn R4.9bn

Win or loose R8.8bn R4.0bn R6.2bn R23.9bn R4.8bn

Out:In Ratio 45x 41x 16x 0.5x 49x

SACU receipt : GDP 10.3% 36.3% 12.5% 1.1% 23.9%

SACU : state revenue 34.8% 91.2% 50.4% 4.5% 88.5%

Source: 2008 Tax Statistics, IMF, own calculations *Calculated using average R/$7.05

Expenditure

“Budget priorities for the period ahead are focused on social solidarity and building a more equitable society”

(Source: 2008 MTBPS)

Expenditure

Rein in Expenditure

Lower foreign debt

Spending Priorities Expenditure: Functional Classification (2008/09 Est.)

6%

15%

16%

8% 1%

19%

16%

8%

11%

54%

General Gov Protection Serv. Eco. & Infra.State Debt Cost Other EducationSocial Dev. Housing, Com Dev. Health

Social Expenditure

Source: Various budgets, own calculations

2008/09 in Review:Expenditure

R bn Budget ’08 MTBPS ’08EfficientEstimate

Diff. (%)

Voted Amounts 345.3 370.2 366.4 21.1 (6.1%)

Central Gov.* 48.4 51.6 48.9 0.5 (1.0%)

Fin. & Admin. 23.6 33.8 31.1 7.5 (31.8%)

Social Services 117.3 121.0 118.1 0.8 (0.7%)

Justice & Protect. 88.7 90.3 93.2 4.4 (5.1%)

Eco. & Infrastruc. 67.2 73.5 75.0 7.8 (11.6%)

State Debt Cost 51.2 54.0 52.7 1.5 (2.9%)

Transfer Provinces 199.4 204.0 205.2 5.7 (2.9%)

Other 15.2 7.3 14.1 -1.1 (-3.9%)

Total 611.1 635.5 638.8 27.7 (4.5%)

* Includes: Provincial and local government

Balance/Debt

Revenue and Expenditure

Fiscal Balance

-5

-4

-3

-2

-1

0

1

1996 1998 2000 2002 2004 2006 2008 2010

Budget balance adjusted for cash flows, to GDP

Source: SARB Forecast: Efficient Group

State Debt

10

20

30

40

50

1996 1998 2000 2002 2004 2006 2008 2010

Total national State Debt, to GDP

Source: SARB Forecast: MTBPS, Efficient

Domestic debt: R485.5bn

Foreign debt: R81.9bn

The Grey Area- Applying Monetary Policy the Fiscal Way!

Source: SARB, Treasury

Liquidity drainage

‘Loss’ paid by State to SARB:

Interest received = 3%

Interest Paid = 8%

“Cost” = R3bn

Summary 2008/09

Budget ’08 MTBPS ’08EfficientEstimate

Difference(Eff – Budget)

Revenue 625.4 626.5 617.2 -8.1

Expenditure 611.1 635.5 638.8 27.7

(Deficit)/Surplus 14.3 -8.9 -21.6 35.9

% of GDP +0.6% -0.4% -0.9%

Budget 2009/10Reality Check!

Summary 2009/10

Budget ’08 MTBPS ’08EfficientEstimate

Revenue 692.9 682.9 667.2

Expenditure 681.3 735.0 749.6

(Deficit)/Surplus 11.6 -52.1 -82.4

% of GDP +0.5% -2.0% -3.4%

Expenditure

Trev’s Plans…(MTBPS)

“Achieving Social Solidarity and Equitable society”

Budget Priorities• Education

– Broaden employment opportunities

– Raise productivity

• Health

– Human resource capacity

– Child mortality

– HIV, TB, etc.

• Crime Prevention

– Detective and investigation services

– Improving court processes

• Infrastructure

– Water, sanitation, housing, electricity, public transport

• (Rural ) Poverty Alleviation

– Raise rural incomes

– Improve livelihoods (access to arable land, agri services)

Infrastructure Spending

• Public sector infrastructure spending, R568.1bn (+18.0% y/y/) over medium term (Expect R70bn+ more)

• Capex to total expenditure expected to rise from 6.3% in 2004/05 to

11.0% in 2010/11 (MTBPS 2008)

• Total: R342.8bn• 73% Generation• 12% Transmission• 10% Distribution

On Whose Books?Credit Rating?

Many Smiles…

Social Grants Beneficiary Numbers

Grant Type

(‘000)

2003 2006 2007 2008 (projected)

% Change

2003-2008

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 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 Budget2008: 12.5m recipients 26.0% of SA population

Fraud!! – R1bn annuallyFraud!! – R1bn annually

Source: 2008 Budget

Changes to Social Grants

Grant Type (R) 2007 20082009 Efficient

EstCost to State

Old Age Grant – men age 61 (63)

870 940 1050 R3.0bn

Disability Grant 870 940 1050 R1.8bn

War Veterans Grant 890 960 1080 R0.0bn

Foster Care Grant 620 650 720 R0.4bn

Care Dependency Grant (disabled)

870 940 1050 R0.2bn

Child Support 18yrs?200 220 250

R3.0bn + (R3.0bn?)

Grant in Aid (full-time attendance)

200 210 240 n/a

Additional: R8.3bn (R11.3bn?)

Other Expenditure Surge in Social Spending Wage Subsidy (<R46k) Job Security/ UIF More for Education and Health More for Land Reform Budget Service delivery to get more and more Capital spending

World Cup Housing

Let’s hope; safety and security - World Cup

JZ’s Plans…(Manifesto)

Spending Plans..

Education HealthPoverty

Alleviation

Manifesto ? ? ?

Budget 2008/09

R120.5bn R72.9bn R105.1bn

TOTAL R120.5bn R72.9bn R105.1bn

Manifesto: Education

Spending Plans..

Education HealthPoverty

Alleviation

Manifesto R2.0bn+ ? ?

Budget 2008/09

R120.5bn R72.9bn R105.1bn

TOTAL R122.5bn R72.9bn R105.1bn

Manifesto: Health

Spending Plans..

Education HealthPoverty

Alleviation

Manifesto R2.0bn+ Rbn? ?

Budget 2008/09

R120.5bn R72.9bn R105.1bn

TOTAL R122.5bn R72.9bn R105.1bn

Manifesto: Poverty Alleviation

Spending Plans..

Education HealthPoverty

Alleviation

Manifesto R2.0bn+ Rbn? R40bn+

Budget 2008/09

R120.5bn R72.9bn R105.1bn

TOTAL R122.5bn R72.9bn R145.1bn

Budget Deficit:GDP = 5.0% ? (3.4% prev)

Taxpayer’s Pains…

The Salary Story….

Total Remuneration

Salaries/GDP @ cap

Salaries/Ave Grant p yr

President R 2,107,224 51 187

Speaker: National Assembly R 1,896,546 46 168

Minister R 1,612,053 39 143

Deputy Minister R 1,327,560 32 118

House Chairperson R 1,232,766 30 109

Parliamentary Council: President R 1,043,067 25 93

Member of Parliament R 691,641 17 61

Municipal Counselor R 322,899 8 29

Department 2002-03 2003-04 2004-05 2005-06 2006-07

Arts & Culture,Sport & Recreation

Public Works

Independent Complaints Directorate

Land Affairs

Transport

Labour

Justice

Parliament

Health

Defence

Correctional Services

Water Affairs & Forestry

Home Affairs

Qualified Audit Opinions: General Report of the Auditor General on Audit Outcomes for the Financial Year 2006-07

Introducing…The White Elephants

Elephant #1: SAA

SAA’s Bill:

Cash:

03/04 – 07/08:

R9.2 bn!!

Guarantees:

03/04 – 07/08:

R2.9 bn!!

Public vs Private

SAA Comair

2006: Profit/(Loss) (R883.0m) R 78.8m

2007: Profit/(Loss) (R850 m) R 109.2m

Employee/Aircraft Ratio

8 227/58 = 147

1559/23 =68

Profit..“Restructuring costs”

Dumbo 2 & Dumbo 3:

Sentech Denel2006: Profit/(Loss)

(R85.3m) (R 1,3 bn)

2007: Profit/(Loss) (R 17.6m) (R 549.1m)

2008: Profit/(Loss) R17.5m (R 347.2m)

TOTAL (R 85.4 M) (R 2,2 BN)

Receives R 200m

Receives R 257m

Receives R 2 BN

RECEIPTS R 457 M R 2.0 BN

Revenue

Mercy Please Trev?

Efficient’s Possible, Likely, Probable New Tax Table

2008/09 2009/10

Taxable Inc (R) Rates of Tax Taxable Inc (R) Rates of Tax

0 – 122 500 18% 0 – 135 000 18%

122 501 – 195 000 R21 960 + 25% 135 001 – 210 000 R24 300 + 25%

195 001 – 270 000 R40 210 + 30% 210 001 – 300 000 R43 050 + 30%

270 001 – 380 000 R62 710 + 35% 300 001 – 420 000 R70 050 + 35%

380 001 – 490 000 R101 210 + 38% 420 001 – 550 000 R112 050 + 38%

490 001 – R143 010 + 40% 550 001 – R161 450 + 40%

Rebates Rebates

Primary 8 280 Primary 9 000

Tax Threshold Tax Threshold

Below 65 46 000 Below 65 50 000

Effect of Adjustment

Income 2008/09 Tax 2009/10 Tax Difference

R100k R9 720 R9 000 R720 (7.4%)

R150k R20 555 R19 050 R1 505 (7.3%)

R200k R33 430 R31 550 R1 880 (5.6%)

R300k R64 930 R61 050 R3 880 (6.0%)

R400k R100 530 R96 050 R4 480 (4.5%)

R500k R138 730 R133 450 R5 280 (3.8%)

“Cost” = R8.0bn

Do not cover inflation!

Income Tax: Indiv. & CompaniesType 2008/09 Possible changes ?

Medical Aid Contributions R570 first two members (R530, +7.6%)

R345 second members

(R320)

R630 first two members (10.5%)

R380 second members (10.5%)

Interest Exemption R19 000 (R18k) R25 000

Capital Gains Tax R16 000 (R15k) R20 000

STC 10% Replaced by Dividend withholding tax

SME Presumptive Turnover Tax

Include Professional service providers?

(accountants, optometrist

< R100k Zero Bracket Adjustment

R100 001 – R300k 2.0% > 100k

R300 001 – R500k R4000 + 4.0%

R500 001 – R750k R12 000 + 5.5%

R750 001 – R1m R25 750 + 7.5%

Carbon Tax Paying for your footprint?

• 2008 Budget Proposal: – R100/ton on carbon dioxide equivalent– Increased to R250/ton by 2010

• SA economy based on (low priced) carbon intensive energy

• Involve electricity demand management, renewable energy and reduction in emissions (Min. V Schalkwyk)

• Cap-and-trade system (Deloitte)– Incentivise behavioral change

Large Industrial Projects

• R5bn of tax incentives for ‘large projects’ meeting SA’s ‘industrial-policy objectives’

• R10bn over next three years• To replace oversubscribed strategic industrial projects

incentive.

Electricity Levy

– Where’s the incentive?– Where’s the alternative?– Estimated R2.0bn to revenue in 2008/09 and R4bn in

2009/2010. – 2c/kWh up to 4c/kWh?

Life’s Little Pleasures

Sin Taxes’ contribution to state revenue fiscal 2008/09 (09/10):

Beer R5.5bn (R5.8bn)

+ Wine and spirits R3.0bn (R4.3bn)

+ Cigarettes R8.5bn (R9.6bn)

= R17.0bn (2.8% of revenue) (R19.7bn) (2.9% exp)

Disposable income under pressure…?

What Else…

Forex Controls- Blessing or Burden?

• Blessings:– Protect from risky international investments– We need to keep capital in SA– “Unpatriotic”

• Burdens:– Capital should be free to flow to highest yield– Limits business and economic growth– Complicates international investment structures– The return of the “FORWARD BOOK”

Cost of Forex Controls

Source: SARB

Talking about the SARB…

Central Banker

CountryGDP @

cap PPP $

Salaries,PPP $

Salaries/GDP p cap

CPI

Joseph Yam Hong Kong 44,413 913,262 20.6 2.7%

Mervyn King BOE 36,571 440,063 12.0 3.1%

Jean-Claude Trichet

ECB 33,882 289,352 8.5 1.1%

Tito Mboweni

SARB 10,187 814,751 80.0 10.1%

Mark Carney Canada 39,339 297,617 7.6 1.2%

Ben Bernanke

US 47,025 144,059 3.1 0.1%*

* y/y, all urban consumers

… or a jump to the reality!

An (affordable?) Wish ListBased on fiscal 2008/09 estimates

Tax Category Wishes Granted in 2008 We want more!

PIT (Mid/high income) Lower Lower

Company tax Lower ✓ Lower (i.e. R5.8bn loss in revenue, per 1%)

STC Lower/Scrap Scrap (R20.0bn loss)

VAT Higher Higher (i.e. R11.0bn gain in revenue, per 1%)

Transfer duty Abolish Abolish (R6.0bn loss)

Customs Duties Lower/Scrap Lower/Scrap (SACU outflow!!)

Small comp. VAT returns Lower frequency/Higher threshold ✓

Flat tax rate 22%

… or just a jump?

Manuel: Lucky number 13?

Possible successors: • Mandisi Mphalwa (Min. trade and industry)• Ndlanhla Nene (Deputy Finance minister)• Cyril Ramaphosa (businessman, ex politician)• Max Sisulu (ANC national executive committee)

www.efgroup.co.za

Authourised Financial Services Provider – FSP No: 859