Draft state budget: Not just muddling through again<\/p>\n
Julia Puspadewi Tijaja, Centre of Strategic and International
\nStudies (CSIS), Jakarta<\/p>\n
Our economy, for once, seems determined to permanently recover
\nfrom the 1997 crisis. The 2004 state budget drawn last week
\nreceived the majority's welcome for its conservative yet
\nrealistic approach.<\/p>\n
Macroeconomic indicators have shown noteworthy improvement, and
\nthe white paper that would include our post-IMF measures for
\neconomic reform is nearly complete.<\/p>\n
With the IMF program ending in a few months' time, our
\ngovernment will be left with financing and a credibility gap. The
\ndraft 2004 state budget shows our government's determination to
\nreduce the deficit -- and to reach a balanced budget by 2005 --
\nby tightening the belt.<\/p>\n
With this commitment supported by both economic and non-
\neconomic stability, the government is hopeful of regaining the
\nmarket confidence that we truly need.<\/p>\n
Yet, even this attempt has been protested by some factions in
\nthe legislature for its lack of fiscal stimulus in more
\nproductive area. Cries ranging from higher pay for civil servants
\nto higher development spending were heard, hopefully as an
\nexpression of their genuine concern for civil servants' well-
\nbeing and not for populist -- a common pre-election syndrome --
\nreason. None of them seem to realize that an increase in any
\nportion of spending requires a trade-off from others, as
\ngovernment revenue is constrained.<\/p>\n
The concern over growth is not to be dismissed; neither should
\nwe forget that government spending only accounts for a small
\nfraction of our gross domestic product. Fiscal stimulus is not
\nthe only way to enhance growth, and definitely not at times of
\nhigh deficit. Growth could also be stimulated from the private
\nsector. However, that would direct us to the credibility gap
\nproblem.<\/p>\n
The government's ability to finance its deficit as in the
\nproposed 2004 state budget does not seem to suggest any clear,
\nlong-term focus. Issuance of foreign bonds as long-term debt
\ninstruments, should never be seen as an easy way out. The value
\nof these bonds depends on the performance of our economy in the
\nlong run. If we are apathetic towards this fact, these bonds will
\nserve as another time bomb for our economy by the time they reach
\nmaturity.<\/p>\n
Lower deficit, moderate inflation, low interest rates and a
\nstronger exchange rate are indicators of stability, which should
\nserve as a foundation for growth. Thus, the government should
\nnever attempt to undertake measures simply for the sake of fine-
\ntuning the economy.<\/p>\n
This usually means adjusting the economic components within
\ncertain bands, but neglecting real adjustments. Surely, the
\npeople would not cheer for another phase of growth built on a
\nvulnerable economic foundation.<\/p>\n
A vivid example is the case of debt repayment. It will not
\nsolve the real problem if we are to repay our debts by incurring
\nadditional debt. We know that the real burden of debt is the
\nlower level of capital stock that the country will have in the
\nlong run.<\/p>\n
So, economists should not only be concerned with repaying
\nthese debts, but also be concerned about building a national
\neconomy that no longer relies on debt financing. This could be
\ndone through effective taxation and direct investments.<\/p>\n
Taxation is a highly potential, yet currently idle, source of
\ngovernment revenue. Increasing the tax base -- rather than the
\ntax rate -- should be followed with an effective and strict tax
\ncollection system. An incorrupt administration, transparency and
\nminimal bureaucratic red tape are, of course, the invariable
\nprerequisites for enforcing taxation as a real and sustainable
\nsource of revenue.<\/p>\n
The need for foreign direct investment has been realized by
\nintroducing tax breaks, reducing costs of investment and easing
\ninvestment procedures. They are good initial steps, but improving
\nthe investment climate would require accountable and committed
\nfollow-up measures.<\/p>\n
The clear protection of property rights, sustainable
\nutilization of our natural resources and formulation of
\ninvestment policies that are sensitive towards environmental and
\nsocietal needs should be our long-term focus. Once these have
\nbeen implemented, we will succeed in attracting and maintaining
\nforeign direct investment.<\/p>\n
A lower future lending rate, as suggested by some elites, is
\nundeniably encouraging. A smaller gap between the lending and
\ndeposit rates will help reduce the problem of disintermediation
\n-- the inability or ineffectiveness of financial institutions to
\nchannel the funds deposited with them -- mainly due to low demand
\nfor loans. Financial institutions need to keep in mind, however,
\nthat channeling of funds should not be made solely for the
\npurpose of seeking profit.<\/p>\n
It is common to find that financial institutions are more
\nwilling to channel funds for high-risk consumption and property
\nloans, rather than working capital loans for small and medium
\nentrepreneurs. The people's economy should be built from the very
\nbottom of the economic ladder, thus small and medium
\nentrepreneurs should be supported and encouraged to flourish.<\/p>\n
There is no doubt that the realistic draft 2004 state budget
\nwould help the government maintain the reform momentum and
\nprovide the badly needed stability throughout the election year.
\nBut in the long run, we cannot afford another muddling through.
\nThe current stability is imperative for luring investors back to
\nthe country. Yet, investors would only be attracted to a strong
\neconomy with a clear and focused vision.<\/p>\n
Let us hope that the upcoming blueprint of economic reform
\nwill be able to win the hearts of economic actors. A long-term
\neconomic interest in enhancing the people's standard of living
\nshould not be sacrificed for mere populist decisions that would
\nbe disadvantageous in the future.<\/p>\n
The writer is currently studying for a degree in economics and
\npolitics at Queen Mary, University of London, England.<\/p>",
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