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Cape Town - Finance Minister Nhlanhla Nene has little room to manoeuvre in his maiden mini budget (Medium Term Budget Policy Statement) and may have to get tough on state-owned entities and civil servants in a way that will earn him little political popularity, observers predicted.
Economists Annabel Bishop and Mike Schüssler agreed that Nene would have to keep a tight rein on spending, given lower revenue intake and warnings of further credit down-ratings.
Schüssler said this would mean the minister getting stricter still with parastatals and making good on his predecessor Pravin Gordhan's warning to state employees to prepare for an end to salary increases above the inflation rate.
"It is going to be difficult in the political climate that is still leaning to the left but he is going to have to say we need to control our costs. It is difficult when it is your first MTBP statement," Schüssler added.
But he cautioned that the continual cost of bailing out stricken state-owned entities, notably South African Airways, was untenable and said they should expect "some hard words" from the Treasury chief.
Read: Eskom, SAA to stay drain on tax coffers
In the poor growth and revenue climate, Schüssler said, Nene could be expected to sell off state assets where he could without steering into the politically troubled waters of privatisation.
He predicted that Nene would go ahead with selling the state's Vodacom stake, and cut grants to areas such as basic education.
The much-trumpeted infrastructure drive would not be immune either, he said, since existing projects such as Eskom's two new coal plants had gone way over time and budget, leaving less funding for other components of the plan.
Schüssler, like Investec chief economist Bishop, predicted Nene would cut National Treasury's February forecast of year-on-year GDP growth of 2.7% to around 1.5%, and said he believed that Nene would also be compelled to adjust the growth forecast for next year downwards.
Read: Nene likely to revise GDP to 1.5% - Investec
Bishop said Nene had to exercise caution against direct debt rising as Moody's rating agency had warned South Africa risked a further downgrade if there was any sign of unsustainability.
"Should the Medium Term Budget Policy Statement deliver higher net debt ratio projections, or fiscal slippage with the fiscal deficit projected to reach 3.0% of GDP after 2016/17, then SA could receive a further credit rating downgrade, which would then cause the rand to weaken closer to our down case."
But Bishop said communication from Treasury ahead of Wednesday's mini budget had signalled a commitment to fiscal efforts to avoid this scenario.
She said as the 2014/15 financial year reached its halfway mark, government spending was slightly higher than budgeted compared to 2013/14, and revenue collection somewhat lower.
Nene could therefore give pointers to potential tax changes to be implemented come the main budget in February, though income tax changes would cost the government political points.
Read: Taxpayers in for added squeezing - analyst
The Democratic Alliance said South Africans were facing the toughest economic conditions since 2009, and Nene was facing the hard choice of budget cuts or a bigger deficit.
The party called for an end to wasteful expenditure and "hand-outs" to state-owned enterprises, cuts to the public sector wage bill, and the cutting of what it calls unnecessary government ministries.
DA parliamentary leader Mmusi Maimane told reporters: "I think we should not deceive ourselves into believing everything is well... South Africa's economy is stuck in low gear. Slow economic growth and high levels of unemployment, coupled with high inflation, are likely to continue for some time," he said.
The party's finance spokesperson Dion George said the economic picture now was very different to the one sketched by Gordhan in February this year.
At that time, predicted economic growth for 2014 was 2.7%.
Read: SA economy in serious trouble - DA
"This figure has recently been slashed to almost half of that, with revised predictions by the International Monetary Fund and the SA Reserve Bank at 1.4% and 1.5% respectively.
"We might not even see that level of growth for this year," he said.
"I think it [the possibility of recession] is very real, and I think if we don't take steps now, we're in very serious trouble."
He said growth in the first and second quarters of this year - at minus 0.6% and 0.6% respectively - had essentially stood still.
"So there is a real threat. And also... if we don't accelerate the economy fast enough, never mind being in recession, even if we grow at the projected rate as it originally was, just under three percent, it's not fast enough."
George said that while it was necessary that government cut spending, this should not apply to spending on infrastructure and transport, which should be increased to help drive the economy and attract foreign investors.
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