Johannesburg - Finance Minister Pravin Gordhan
is fast running out of safe fiscal options that would not threaten credit ratings as he faces a dilemma of slower growth and sluggish revenue.
Tuesday's medium-term budget policy statement - his outline of fiscal policy plans for the next three years - will be a test of just how committed President Jacob Zuma
's administration is to a prudent fiscal path embraced by the previous government.
South Africa recorded a budget surplus for two years prior to the recession in 2009 but has since swung back into deficits in its counter-cyclical approach in which it raised spending in the past few years to offset the impact of the global slow down.
Gordhan's plans to cut the budget deficit to around 4.0% of GDP by 2014 from 5.0% are in jeopardy as he is expected to slash his growth forecasts, with revenue taking up to three years to recover to pre-recession levels.
The optimism generated by the hosting of the 2010 World Cup is a distant memory with Zuma's approval rating taking a serious knock in the past year as the poor become increasingly disillusioned with their plight.
Even after 650 basis points worth of interest rate cuts since late 2008, the economy is still structurally challenged, with growth stuck in the 3% area and about a quarter of the labour force unemployed.
Faced with under performing revenue and increasing global uncertainty, Gordhan seems to have the Cabinet's backing to stay on the prudent path. Unlike his predecessor Trevor Manuel
, he has not faced much political pressure and criticism to spend freely to fix the economy.
At least not yet.
"There's been enough agreement and understanding at cabinet level that there are fiscal constraints that need to be dealt with," said Nazmeera Moola
, macro strategist at Macquarie First South.
"While there might be pressure from some quarters, there is general understanding that a conservative budget is necessary so the National Treasury will not be irresponsible."
Instead of putting pressure on Gordhan, Zuma's government last year released a New Growth Path - a set of policy measures and economic reforms that are needed to deal with the challenges of high unemployment and low growth.Fiscal slippage
Any hint that Gordhan will allow a further slippage in the fiscal accounts without a clear consolidation plan will put credit ratings under pressure.
The main challenge is a ballooning wage bill that has risen to 11.5% of GDP in 2010/11 from 9.5% in 2007/08.
Above-inflation deals have become a norm in South Africa, making the country uncompetitive compared to its peers such as Brazil and China and India, where average worker salaries are a fraction of those in South Africa and productivity is higher.
"Government needs to cut back on spending ... or risk South Africa being placed on negative watch by the rating agencies which means it would be at risk of a ratings downgrade, Annabel Bishop, economist at Investec said in a note.
To help create jobs, Gordhan is likely to re-direct more funds towards investment spending, in a country where a quarter of the labour force is unemployed.
Trade and Industry Minister Rob Davies
said this week Gordhan was set to announce new plans to boost struggling manufacturers.
To make up for weak revenue, he will likely increase borrowing in a measured manner.
With South Africa's gross stock debt is currently at a third of GDP there is space for more borrowing.
Government already expects debt to peak at around 43% in 2013/14, and has said it will keep a lid on purse strings once it gets to that level.
"They might have to borrow more but will be careful to keep it under control," said Salomi Odendaal, economist at Citadel.
"They've seen that countries that allow it to run away get into a position where you are trapped and have difficulty paying back the debt," she added.