Slow growth, a rising deficit — and an election — leave the finance minister little room to manoeuvre.
The situation is likely to get tougher for consumers in the immediate future, economists warn, with tax increases being seen as one of the most obvious solutions open to Finance Minister Pravin Gordhan.
They believe that finding more ways to cut back on government spending and raising taxes are the only immediate options open to Gordhan, who is presenting the annual budget at the end of this month.
The South African consumer is already stressed, dealing with the side effects of a weakened rand, higher interest rates, inflation increases and now high petrol prices, which resulted in motorists rushing to fill tanks before the price hike to R13.96 a litre came into effect on February 5.
"[Gordhan] does not have much room to manoeuvre with growth turning out to be lower than forecast. If you cannot get economic growth, then you need to look at increasing tax or trying to get more efficiency in government," said Econometrix chief economist Azar Jammine.
The risk of not being seen to be dealing with South Africa's deficit is further rate cuts by rating agencies.
Targeting high incomes
It is not clear whether Gordhan will wait for the results of the Davis tax committee probe, expected after the budget announcement, before introducing tax changes. The committee is investigating whether tax is being spent correctly.
But both Jammine and Stanlib chief economist Kevin Lings said that the market is not expecting radical changes, and that the most Gordhan can do is "tinker" with tax and government spending or risk reducing economic growth even further.
Lings said any changes made to tax will "be focused on higher income earners, which is a world trend. The rise cannot be too dramatic, however, because the ability to pay high tax is not there."
Capital gains tax would likely be increased, he said, or tax margins might be moved to increase the number of taxpayers in certain brackets.
"I am not seeing VAT, or the introduction of new broad-based taxes. There may be more specifics rather than more fuel levies or rates."
Jammine said capital gains tax might be targeted "to tap into capital gains on equity prices", which have been doing well.
Ernst & Young is not convinced that Gordhan will allow the tax to gross domestic product (GDP) ratio to increase by more than 25%. It has moved down from 27.6% in 2007-2008 and is expected to have gone above 25% for the 2012-2013 financial year.
It said the data showed that the wealthy have been compensated for the rise in tax rate solely because of inflation-linked wage increases, with the tax on someone earning R1-million a year dropping from about 42% to 37%.
Deloitte's national leader of taxation services, Nazrien Kader, said a tax increase just ahead of an election would not be well received.
"With so much focus on wasteful spending in the public sector, subdued economic growth projections, and hence declining revenue projections and a rising tax to GDP ratio, South Africans will not take kindly to any tax hikes."
She believes Gordhan may wait for the outcome of the Davis committee, which is looking at, among other things, the overall tax base and the spread of the tax burden, how the tax system promotes and assists small, medium and micro enterprises (SMMEs), and a review of the corporate tax system.
Lings supports government's decision to spend its way out of the recession, but questions whether the money was well spent.
He said he believes spending it on the consumer rather than on big infrastructure development was a mistake. At least in the case of infrastructure spending, the government would have had assets when the benefits of money coming from the United States ceased.
He expects South Africa to continue to feel the pressure until about 2015, whereas Jammine believes it may take longer.
"The public sector bill doubled over the past five years. Double-digit increases in salaries were recorded at the same time as the private sector was cutting jobs and was under strain. So, money was pushed into the economy, which got a bit of a revival and was cushioned to some extent from the global downturn, but it resulted in consumers spending in retail, which largely benefited countries importing to South Africa. Lings said South Africa now had a problem.
"The strongest part of the economy, the consumer, is now the weakest part as a result of the halting of public sector job growth and unsecured lending in negative territory.
"So, what happens is that disposable income becomes depleted and you don't get a rise in credit; transport and energy [costs] go up, leading to a reduction in general spending; and the country does not have an alternative source of growth to fill the gap. As a whole, this will be seen as a slump, and confidence is low."
It means South Africa will now have to play a waiting game because it does not have any more money to spend in areas such as big infrastructure.
"South Africa is in an awkward position," Lings said. "It is now playing a waiting game for [improved] world growth to benefit the country, as exports to Europe and the United States lift."
He said the country was also waiting to see the effects of infrastructure delivery. "Transnet is spending more than R300-billion, Eskom's Medupi first phase is coming on line, and Kusile is 40% complete. Medupi coming on line will provide a big boost."
Jammine said reports of sudden doom and gloom in South Africa in the past two weeks were not very accurate. "The truth is there has been a slow deterioration in South Africa's economy for some time.
"I foresee more tough times for a while, not a total disaster, but people will struggle."
Improvement in 2015
There is some good news, however. "The building industry is showing a small uptick, as is foreign tourism, which is booming. Recent figures show a 27% increase in vehicle sales, and the growth in consumer spending is now 2% and likely to stay that way for a while, compared to 6% a few years ago."
Jammine said that, although there had been negative reaction to the recent 39c-a-litre petrol price increase, the public had forgotten that there had been a 41c increase in February last year.
"Improvement in South Africa's situation is a 2015 story, I think," said Lings.
But he did see tourism, both local and foreign, indications of increased trade with Africa, which is currently growing at 6%, as well as greater access to electricity as contributing significantly this year to South Africa's growth.
What was needed, he said, was for South Africa to send out a strong message to counter negative perceptions. The government needs to indicate it is serious about the economy.
"It needs to show progress on the National Development Plan. It's a massive document, but it is light on implementation information and does not indicate which are priority areas.
"These are to address water-treatment plants and deteriorating road infrastructure; to create an environment and legislation that inspires and develops SMMEs to create jobs; to actively support expansion into Africa; to speed up border facilitation; and to make the transportation of goods easier."
"Gordhan [in his February budget] needs to restore confidence," said Kader. "Not just to South Africans, but [also] to some rating agents who will pounce on any indication that our budget deficit will come in way off target.
"Leadership skills are indeed tested in time of strife," she said.
Weaker growth tempered Gordhan's outlook
Finance Minister Pravin Gordhan in his medium-term budget policy statement in October said South Africa's revenue collection was R896-billion.
He said then that the economic and fiscal outlook had weakened over the previous few months.
Combined with weaker economic growth, he said, commodity export prices had declined in the first nine months of 2013 and bond yields had begun to rise, placing added pressure on interest costs and an increased reliance on foreign investors to finance the budget deficit.
The country's gross domestic product was expected to grow by just 2.1% this year, rising to 3.5% in 2016.
Although a spending ceiling has been set for 2016-2017, which will hold real non-interest expenditure growth to an annual average of 2.2% over the three-year spending period, net national debt is projected to stabilise at 44%, Gordhan told Parliament.
Total expenditure for 2013-2014 has been revised down to R1.05-trillion, R5.7-billion less than the estimate tabled in the 2013 budget.