Cape Town - South Africa will increase income tax rates for the first time in 20 years, Finance Minister Nhlanhla Nene said in a gloomy budget speech on Wednesday, as he cut growth forecasts for an economy beset by chronic power shortages.
Nene also widened budget deficit estimates and said the government would have to borrow more domestically and in global markets to plug the funding gap.
Unsustainable debt levels, he said, would threaten South Africa's credit rating, which is close to junk status.
"The South African economy faces a difficult few years ahead," Nene told parliament.
READ: All about Nene's budget - as it happened
"Our primary challenge is to deal with the structural and competitiveness challenges that hold back production and investment in our economy," he added, singling out the worst energy crisis since 2008.
The economy would expand by just 2% this year, down from an earlier forecast of 2.5%, and growth would be a still sluggish 2.4% next year, Nene said. Those forecasts could be cut again if electricity shortages worsened.
With substantial debt repayments in the pipeline, the government could no longer postpone raising taxes to boost its revenues, Nene said.
Personal income tax would rise by one percentage point on annual salaries above R181 900, taking the top marginal rate to 41%. The first increase since 1995, the move is likely to be unpopular with the public and businesses suffering from persistently lacklustre growth since a 2009 recession.
READ: Slight dent in pay packets for some taxpayers
The weak economy has dented the standing of President Jacob Zuma. Many analysts say his government has failed to clamp down on corruption or overhaul stifling labour laws, leading to a wave of strikes that have hurt mining output in the last few years. Power shortages are partly blamed on a lack of investment in infrastructure.
Nene said depressed government revenues would lead to a budget deficit of 3.9% of GDP for the 2015/2016 financial year, above the 3.6% forecast in October.
The rand extended its losses against the dollar for the day to 0.44% after Nene's speech, while South African government bonds pared earlier gains.
READ: Rand weakens, bonds pare gains after budget
The government has increased its borrowing over the last five years to try and boost the economy after the 2008/09 global financial crisis, resulting in net debt nearly doubling to 40.8% of GDP by 2014/15.
"Unsustainable debt levels would threaten South Africa's investment grade credit rating and jeopardise the country's ability to finance the budget deficit," the Treasury said in a budget review tabled to parliament.
READ: The full budget speech
Nene said the government's debt stock would increase by about R550bn over the next three years to R2.3trn by 2017/18.
South Africa is rated BBB-, the lowest investment level, by Standard & Poor's, while Fitch has a negative outlook on its BBB rating, two notches above junk.
Moody's warned of poor prospects for medium-term growth and rising public debt when it downgraded South Africa to Baa2 November.
"The risk of further ratings action persists," Standard Chartered analyst Razia Khan warned on Wednesday.
"We don't think there is any immediate trigger for further ratings action, but South Africa would still be seen as vulnerable to any deterioration in the external environment."
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