2. Presented by: Dawie Roodt 27 February 2007
Fiscal Efficiency
and the Budget
Presented by: Dawie Roodt
27 February 2007

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

4. Through the Eyes of the World
Source: The Economist
January 20-26, 2007
Full page advertisements

5. The Opposition p. 15

7. The Home Team p. 17

10. Missing Something?   But why say it? Macedonia South Africa Taxes
Efficiency
Competitive labour
Access to markets
Stability
Infrastructure
Property rights -
But why say it?

11. 2007: Economic Overview

12. Economic Overview 2006 2007 M3 (end of year) 21.9% 14.1%
PSCE (adj. end of year)
27.6%
17.1%
CPIX (average)
4.6%
4.8%
Prime (full year)
12.5%
Current Account: GDP
-6.4%
-4.9%
R/$ (end of year)
7.04
7.03
GDP (full year)
5.0%

13. Background

14. Consumption Expenditure by Households

15. Inflation

16. Interest Rate

17. GDP at Market Prices

18. Fiscal Overview

19. Background
Gold

20. Background

21. Background

22. FISCAL 2006/07…

23. Revenue

24. Contribution to Fiscus

25. 2006/07 in Review: Revenue R bn Budget ’06 Budget ‘07 Expected
Diff. (%)
Income Tax
245.8
274.3
274.1
28.3 (11.5%)
Individual
132.5
139.0
140.0
7.5 (5.7%)
Company
95.2
114.7
115.0
19.8 (20.8%)
STC
13.9
15.7*
16.0
2.1 (15.1%)
Other
4.3
4.9*
3.1
-1.2 (-27.9%)
VAT
131.2
134.6
133.6
2.4 (1.8%)
Excise Duty
16.6
16.1
16.9
0.3 (1.8%)
Fuel Levy
21.8
21.2
-0.6 (-2.8%)
49.1
49.6
52.6
3.5 (7.1%)
Total
446.4
475.8
479.5
33.1 (7.4%)
* Estimated

26. Quick Tax Burden Calculation
Trevor Manuel appointed as Minister of Finance in April 1996
1996: Revenue (22.5% GDP)
2005: GDP (fiscal): R1,417bn
22.5% of GDP = Revenue (2005): R319bn
Actual Revenue: R348bn
Difference: R29bn
‘…(w)e have announced over R72bn in tax cuts since 1994…’
Budget Speech
Where are the tax cuts?

27. Quick Calculation Tax Year Revenue exceeding 22.5%:GDP (Rbn)
PIT Relieve according to Budget (Rbn)
Total Tax Relieve according to Budget
1997
3.5
2.8
1998
5.9
3.7
1999
13.6
3.0
2000
9.8
9.9
2001
1.5
8.3
2002
12.5
15.0
2003
13.0
2004
12.1
4.0
72.0 (Budget speech)
2005
29.0
6.8
2006
55.6
12.1 (2007: 8.4)
19.1 (One year)
Total
153.4
78.6

28. Revenue Categories Personal Income Tax Company Tax VAT Total Overrun
Strong wage increases
Company Tax
Commodity cycle
Strong demand
VAT
Credit extension
Total Overrun
Mostly company tax

29. Expenditure

30. Spending Priorities

31. 2006/07 in Review: Expenditure
R bn
Budget ’06
Budget ’07
Expected
Diff. (%)
Voted Amounts
263.1*
260.8
262.5
-0.6 (-0.2%)
Central Gov.
34.9
32.7
-2.2 (-6.3%)
Fin. & Admin.
18.1
21.4
21.2
3.1 (17.1%)
Social Services
90.6
91.2
92.6
2.0 (2.2%)
Justice & Protect.
73.4
71.6
71.7
-1.7 (-2.3%)
Eco. & Infrastruc.
43.1
41.9
44.4
1.3 (3.0%)
State Debt Cost
52.0
52.2
50.5
-1.5 (-2.9%)
Transfer Provinces
150.8
0.0 (0.0%)
Other
6.8
7.0
0.2 (2.9%)
Total
472.7
470.6
470.5
-2.2 (-0.5%)
* Includes: Contingency Reserve (R3.1bn)

32. Funding

33. 2006/07: Funding R bn Budget ’06 Budget ’07 Expected Diff.
Extraordinary
1.7
3.3
-0.2
-1.9
TB’s
5.8
3.5
-2.3
Bonds
8.7
1.4
4.0
-4.7
Foreign Loans
2.4
0.7
-0.9
Use of balances
7.8
-12.3
-19.2
27.0
Total Funding
26.4
-1.1
-8.6
-35.0

34. 2006/07: Summary Strong Revenue Continues increase in Expenditure
Lower Deficit or surplus
Lower Debt
Support Consumption Expenditure

35. Summary 2006/07 R bn Budget ’06 Budget ’07 Expected Difference Revenue
446.4
475.8
479.5
33.1
Expenditure
472.7
470.6
470.5
-2.2
Deficit/Surplus
-26.4
5.2
9.0
35.4
% of GDP
-1.5%
0.3%
0.5%

36. Redistribution Rand In : Rand Out Ratio 2006/07 32 222 16.96 74 000
3.45
1.45
0.73
0.49
0.29
0.05

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

38. 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 R7740
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+)

39. 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

40. Fiscal Efficiency: An Expenditure Comparison

41. Close-up on South Africa
Category
2004
2006
Total population (000)
46.6mil
47.4mil
Annual population growth rate (%)
1.1%
-0.4% ?
Population 0-14 years(%)
33%
32%
Rural population (%) 41
Total fertility rate (births per woman)
2.8
2.7
Infant mortality rate (1,000) 53 60
Life expectancy at birth (years) 46 42
HIV rate (%) in adults (15-49 years)
15.6
20.0%
Poverty (% of pop. on less than $2 a day) 34
GDP per capita (PPP) US$
11 192
12 760
GDP growth rate (%)
4.5%
5.0%
Children of primary school-age who are out-of-school (%) 7
Source: Unesco and World Bank Development Indicators

42. Main Budget Expenditure: Functional, National by Vote
Where does the money go?
Main Budget Expenditure:
Functional, National by Vote
Rand (Rbn)
2006/07
Percentage (%)
Central Government Admin
35.4
7.5%
Financial and Admin Services
18.8
4.0%
Social Services
91.9
19.4%
Justice and Protection Services
72.8
15.4%
Economic Services and Infrastructure
47.3
10.0%
State Debt Costs
52.6
11.1%
Provincial Equitable Share
150.8
31.8%
Other
9.7
2.0%
Main Budget Expenditure
474.2
100.0%

43. Social Services Expenditure

44. Social Services Expenditure
Budget 2006/07
Budget 2007/08
Functional allocation
R260.9bn
R296.6bn
% of Total Expenditure
59.2%
59.0%
% of GDP
14.6%
15.4%
Expected Overrun
R2.5bn

45. Social Services Expenditure as % of Total Expenditure
Source: Various Budgets and own calculation

46. Human Poverty Index (HPI): Developing Countries (HPI-1),2004
Mali
South Africa
South Africa(1998)
Average: 30
Cuba
Median: 27
Source: Human Development Report, 2006 (undp.org)

47. South Africans (0-14) with One or Both Parents Dead
Source: StatsSA: Trends in the percentage of children who are orphaned in South Africa: 1995–2005

48. Grants 2001/02 to 2005/06 fiscal years: April 2001 to April 2005:
Foster care grants increase from R364m to R2,044m (5.6 times)
All social grants increase 2.5 times
April 2001 to April 2005:
Recipients of foster care grants from 86k to 256k (3 times)
(Source: SA, Department of Treasury)
2009/10: Foster care grant recipients to 472k
(Source: SA, Department of Social Development)

49. Summary Average (developing) level of poverty Appear to deteriorate
Assist almost 30% of population!
11m receive some form of social assistance (2006)
7m children (child support grant)
2m old age pension
Increasing number of orphans
Aggravated by health problem (HIV/Tuberculosis)
Contributes to lawlessness
Increasing dependency on state

50. Edducayshion

51. Bas(e)ing the Outcome…
Budget 2006/07
Budget 2007/08
Functional allocation
R92.0bn
R104.7bn
% of Total Expenditure
19.5%
20.8%
% of GDP
5.2%
5.4%
Expected Overrun
R1.5bn
2007 Budget: R8.1bn more for additional teachers

52. Education Spending as % GDP
Source: Various Budgets

53. Pass Rate of SCE and Education Spending
Source: HSRC

54. Learners and Educators in Ordinary Schools
Source: SNAP Survey (

55. Number of Schools and Educators in Ordinary Schools
Source: SNAP Survey (

56. Pass Rate of SCE and Matriculation Exemption
73.3
70.7
68.9
68.3
66.7
61.7
57.9
54.4
53.4
49.3
48.9
47.4
Source: HSRC

57. Learners Presenting For Standard and Higher Grade Exams
Subject
Year SG HG
HG as % Tot
Accounting
2002
100199
41216
29.1
2003
106621
39548
27.1
2004
112948
43442
27.7
2005
120129
42727
26.2
Biology
200608
98468
32.9
199432
86813
30.3
204073
96081
32.0
219838
111619
33.6
English (Second language)
22408
362534
94.2
18535
355965
95.1
Source: HSRC / Department of Education
Source: HSRC

58. Learners Presenting For Standard and Higher Grade Exams
Subject
Year SG HG
HG as % Tot
Mathematics
2002
226295
35518
13.6
2003
223156
35994
13.9
2004
236155
39939
14.5
2005
259099
44053
Physical Science
103044
51047
33.1
100166
52215
34.3
105245
55969
34.7
119491
62337
Source: HSRC / Department of Education

59. Case Study: Flow of Pupils from Grade 1 to Grade 12
Home Schooling?
learners
learners
1995 to 2006: 31.7%
31.7
Note: Repeaters and drop outs not indicated
Source: HSRC

60. Flow in Secondary Schools
Repeaters?
1.3%
- 6.4%
17.0%
- 49.3%
Source: Dept Education

61. Grade 1 and Grade 2 Pupils - 21.3% - 13.1% - 15.1% - 9.4%
Source: Department of Education

62. Education expenditure comparison (2002-2004 as available)
Lesotho
South Africa (’06 & ’07)
Average: 4.7
Zimbabwe
Equatorial Guinea
Source: Human Development Report, 2006 (undp.org)

63. Source: Human Development Report, 2006 (undp.org)
Adult Literacy Rate (2005)
Median: 87.4
Average: 79.5
South Africa: 82.2
Estonia
South Africa (1991): 82.1
Mali
Source: Human Development Report, 2006 (undp.org)

64. Pupils-Teacher Ratio in Primary Education (Newest data available)
Central African Republic
Libya
South Africa (2006)
Average: 26.7
Median: 23.0
South Africa
Source: UNESCO

65. Home Schooling
1999: Between parents giving home schooling
2001: parents
Reason:
“Quality of education in public schools is low”
“Implementation of outcome based education”
“Marks ‘adjusted’ for better results“
Research conclusions: Gr.4 pupils in home schooling perform better than above average pupils in public schools
Source: Tydskrif vir Geestenswetenskappe

66. Higher Output Research outputs at Wits: 1998: 1 100 2005: 700
Source: Dept Education

67. Summary Above average spending on education
Below average teacher : pupil ratio
Ordinary schools, change between :
Learners: 4.1%
Educators: 7.9%
Schools: -3.2%
Weaker higher grade enrollment
Low critical subject enrollment
Obvious efficiency problem but improving

68. Health

69. Healthy Spending…?
Budget 2006/07
Budget 2007/08
Functional allocation
R53.5bn
R60.3bn
% of Total Expenditure
12.1%
12.0%
% of GDP
3.0%
3.1%
Expected Overrun
R0.1bn
2007 Budget: R7.2bn more for HIV-Aids, hospitals and salaries of health workers

70. Health Spending as % GDP
Source: Various Budgets

71. Public Expenditure on Health Comparison (2003-04)
Iceland
Cuba
Malawi
South Africa (‘04&’06)
Average: 3.5
South Africa (’07)
Median: 3.0
Myanmar
Source: Human Development Report, 2006 (undp.org)

72. Life Expectancy at Birth (years) Most Recent 2000-05
Japan
Cuba
Swaziland
Median: 70.1
Average: 65.5
South Africa
South Africa (2006 est.)
Malawi
Source: Human Development Report, 2006 (undp.org)

73. Public Health Expenditure (2003) vs. Life Expectancy at Birth (2000-05)
Source: Human Development Report, 2006 (undp.org)

74. Physicians Cuba South Africa(2001) Malawi South Africa Average: 147.0
Median: 109.0
Source: Human Development Report, 2006 (undp.org)

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

76. Percentage of People ages 15-49 Infected with HIV, 2005
Swaziland
Zimbabwe
Japan
South Africa
Average: 2.0
Source: Human Development Report, 2006 (undp.org) from UNAIDS (Joint United Nations Programme on HIV/AIDS). 2006

77. Number of HIV Positive and Cumulative HIV Deaths
Source: Centre for Actuarial Research and South African Medical Research Council, 2004

78. Estimated HIV Prevalence Amongst Antenatal Clinic Attendees, by Age
Age group (years)
2000 prevalence %
2001 prevalence %
2002 prevalence %
2003 prevalence %
2004 prevalence %
2005 prevalence %
<20
16.1
15.4
14.8
15.8
15.9
20-24
29.1
28.4
30.3
30.8
30.6
25-29
31.4
34.5
35.4
38.5
39.5
30-34
23.3
25.6
29.5
30.9
34.4
36.4
35-39
19.3
19.8
23.4
24.5
28.0
40+
11.0
9.8
17.2
17.5
Source: Avert international AIDS charity

79. Tuberculosis Cases – Prevalence per 100 000 People, 2004
Djibouti
Zimbabwe
South Africa
Iceland
Average: 200
Median: 83
Source: Human Development Report, 2006 (undp.org)

80. Summary Low/average spending on health Very low life expectancy
Lack/losing skilled medical personnel
HIV and Tuberculosis:
Top prevalence rates in the world
Appears to escalate
Lack of commitment from Government (Department of Health)
Impact on economy
Serious competence and planning deficiency
PROBABLY THE WORST RUN DEPARTMENT!

81. Protection

83. 2007 Budget: R6.8bn more for justice and crime prevention
Our Fine for Crime
Budget 2006/07
Budget 2007/08
Functional allocation (Protection services)
Police
R79.4bn
R34.3
R86.9bn
R37.8bn
% of Total Expenditure
- Police
18.0%
7.8%
17.3%
7.6%
% of GDP
4.5%
1.9%
Expected Under run
(R1.6bn)
2007 Budget: R6.8bn more for justice and crime prevention

84. Foreign Bribery by Exporters Index
South Africa
Switzerland
India
Source: Transparency International

85. Protection Services Spending as % GDP
Source: Various Budgets and own calculation

86. Military

87. Military Expenditure, % of GDP (2004)
Oman
South Africa
Mauritius
South Africa (’07)
Average: 2.3
Median: 1.7
Source: SIPRI (Stockholm International Peace Research Institute). 2006c.

88. 2007 Budget: R2.4bn more to get 190 000 police by 2010
Police and Crime
2007 Budget: R2.4bn more to get police by 2010

89. Murders (per capita) by Country (1998-2000)
Colombia
South Africa
South Africa (2006)
Jamaica
Qatar
Venezuela
Source: UN Survey of Crime Trends and Operations of Criminal Justice Systems, 2000

90. Reported Crime Figures for the financial years 1994/95 to 2005/06
Source: Institute for Security Studies (issafrica.org) / saps.gov.za

91. Illegal Possession of Firearms and Ammunition Financial Years 1994/95 to 2002/03
Source: Institute for Security Studies (issafrica.org) / saps.gov.za

92. Burglary at Residential Premises for the Financial Years 1994/95 to 2002/03
Source: Institute for Security Studies (issafrica.org) / saps.gov.za

93. Crime and Policing Facts:
2000: SA murder rate 3rd of 63 countries. (Behind Swaziland and Colombia)
Murder rate per :
1994/05: 66.9
2005/06: 39.5
World average: 5.5
Policing Expenditure
% GDP: 2.0% (1994), 1.8% (2003)
% budget expenditure: 6.7% (1994), 7.9% (2003), 7.8% (2007 est)
Security personnel outnumber police officers 3:1
2006: Almost security officers (1996: )
2006: SAPS employment complement , of which around (only) officers
Source: Institute for Security Studies (issafrica.org) / SAPS Annual Report / own calculations /
UN Survey of crime trends and operations of criminal justice systems

94. Cost of Crime
Violent crime has affected 8 out of 10 businesses in South Africa (Survey of 200 companies)
Effects of crime on businesses:
88%: Increased costs for security
65%: Decreased productivity of staff
65%: Decrease in motivation
41%: Decrease in creativity and resourcefulness
32%: Loss of personnel
18%: Loss of clients
Source: Grant Thornton Accountants: International Business Report for Business Day 1 February 2007

95. Police (per capita) by country (2000)
Montserrat
Costa Rica
Average: 2.9
Median: 2.6
South Africa
Source: United Nations Office on Drugs and Crime, Centre for International Crime Prevention

96. Prisoners (per capita) by Country, 2003
United States
Russia
South Africa
South Africa (2006)
Burkina Faso
Average: 157
Median: 111
Source: International Centre for Prison Studies – World Prison Brief

97. Lack of commitment…Questionable statistics… Be scared, be very scared!
Summary
Average number of police officers
Change in different crimes:
Rape and attempted Rape: % 1.6%
Murder: % -16.7%
Robbery with aggravating circumstances: 49.7% -8.6%
Burglary at residential property: % -15.1%
Illegal possession of firearms and ammunition: 44.0% -18.0%
Security personnel outnumber police officers 3:1= (police efficiency?)
8 out of 10 businesses affected by crime
Murders per almost 8 times higher than world average!
President Mbeki’s stance on crime?
Lack of commitment…Questionable statistics…
Be scared, be very scared!

98. Capital Expenditure 2007 Budget: - R13.3bn more for 2010 World Cup
- R2.3bn more for public transport

99. Capital Expenditure

100. Too much emphasis on current expenditure
Summary
Improving trend
Main “reason” for our low savings
Improve mainly due to higher taxes (lower deficit)
Planned capex welcomed
….lower current expenditure would be better
Too much emphasis on current expenditure

101. Financial Management Auditor General:
12% of state departments received clean audit reports (2005/06)
Qualified audit reports of state departments:
2005/06: 32%
2004/05: 21%
Large number of qualifications fell into level two:
Lack of basic financial control
Generally deficient financial control, and deteriorating……..leading indicator of corruption?

102. Fiscal Efficiency: Summary
Social Spending: Increasing burden on state
Education: Efficiency problem but improving
Health Care: Serious efficiency problem and deteriorating
Safety and Security: Shocking figures, questionable statistics!
Capital Expenditure: Glimpse of hope

103. Fiscal Efficiency: A Revenue Comparison

104. Contribution to Fiscus

105. Tax Compliance Time of Mid-Size Company, per Country (2006)
Cameroon
South Africa
United Arab Emirates
International Ave
Median: 248
Source: World Bank and PriceWaterhouseCoopers LLP 2006

106. Budget Revenues (per $ GDP) by Country, 2006
Kuwait
Collection cost: 1.3% of revenue; US 0.5%
Libya
South Africa (07/08 est.)
South Africa
Afghanistan
Average: 0.32
Median: 0.29
Source: Nationmaster: CIA, World Factbook

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

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

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

110. Fiscal Efficiency: Revenue Summary
Average tax red tape
Individual tax rate: above average (high marginal rate, low threshold)
Company tax rate: above average
VAT rate: below average
Urgent overhaul of tax regime required!

111. The 2007 Budget

112. Changes to Taxes

113. New Tax Table 2006/07 2007/08 Taxable Inc (R) Rates of Tax 0 – 100 000
18%
0 – –
R % –
R % –
R % –
R % –
R % –
R % –
R % –
R % –
R % –
R %
Rebates
Primary
7 200
7 740
Tax Threshold
Below 65
40 000
43 000

114. Effect of Adjustment Income 2006/07 Tax 2007/08 Tax Difference R100k

115. What to do with the “surplus”?
Actually app. R29bn
Water under the bridge
Pay off debt
Balances currently R100bn!
R45bn to SARB

116. Changes to Energy Taxes
Fuel levy increased – 5c/l
Originally intended to maintain road network (toll roads!)
Windfall tax on Sasol
Possibly on back burner
Likely to be linked to subsidy
Western Cape/Gauteng (and other provinces) fuel levy

117. Possible Other
Tax breaks for science and research (increased education spending)
Threshold for transfer duties upped
Tax changes clubs (R100k)
Possible smallish adjustments on medical deductions
What about a flow through share?
Sin taxes to be upped
A new land tax?

118. Lower frequency/Higher threshold
Taxes: A Wish List
Tax Category
Wish
Outcome
VAT
Higher 
STC
Lower/Scrap 
Company tax
Lower
PIT (Mid/high income)
Transfer duty
Abolish
Customs Duties
Pension fund tax
Scrap
Small comp. VAT returns
Lower frequency/Higher threshold
Flat tax rate
22%

119. Expenditure

120. Main Expenditure Trends
More for Education (R8.1bn) and Health (R7.2bn)
Service delivery to get more and more
Capital spending
World Cup (R13.3bn)
Housing (R3.7bn)
Let’s hope; safety and security (R11bn) - World Cup
Higher revenue helps spending higher – danger!!

121. Possible Changes to Social Grants
Grant Type
2006
Expected
Outcome
Old Age Grant
R820
R860
R870
Disability Grant
War Veterans Grant
R838
R890
Foster Care Grant
R590
R620
Care Dependency Grant (disabled)
Child Support
R190 (13)
R200 (15?)
R200
Grant in Aid (full-time attendance)
R180

122. BIG remains too Big Cost R110 per beneficiary
Population: 47.4m Cost: R62.6bn Vat Increase: 5.3%
Workforce: 29.9m Cost: R39.4bn Vat Increase: 3.4%
Unemployed: 17.4m Cost: R23.0bn Vat Increase: 2.0%
Unlikely now with SST

123. Summary 2007/08 MTBPS Budget ‘07 Efficient Difference Revenue 543 544
545 2
Expenditure
534
536
Deficit/Surplus 9 10
% of GDP
0.5%
0.6%