Govt must make hard choices in new budget<\/p>\n
By Rikza Abdullah<\/p>\n
President Soeharto is scheduled to present the government's
\ndraft budget to the House of Representatives on Tuesday. Saddled
\nwith its worst economic crisis in 30 years, the government
\nconfronts an unenviable choice between cutting spending in
\ncompliance with the prescription of the International Monetary
\nFund, or boosting it to stimulate growth. The Jakarta Post
\ninterviewed several economists about their predictions for the
\nbudget, and what they believe would be the best remedy for the
\nailing economy.<\/p>\n
JAKARTA (JP): There are two possibilities when President
\nSoeharto unveils the draft government budget for the fiscal year
\nstarting April 1. Spending could go up, as it has always done, or
\nthere could be the precedent of it being reduced.<\/p>\n
Many economists fear the latter will be the case, with all its
\nattendant severe consequences for the economy, but they still
\nhold hope the government will have the will to bolster spending.<\/p>\n
A term in the IMF's US$40 billion rescue package loan for
\nIndonesia in October was that the government strive to produce a
\nbudget surplus equivalent to 1 percent of the country's gross
\ndomestic product.<\/p>\n
With the GDP estimated at Rp 474.63 trillion in March 1997,
\nthis translates into the government endeavoring to earn Rp 4.7
\ntrillion more than it intends to spend during the year.<\/p>\n
It can achieve this by bolstering income, a difficult if not
\nimpossible course under the current economic downturn, or cut
\nback on spending, an unpopular but more likely measure. This
\nwould be a departure from the long-held principle of a balanced
\nbudget.<\/p>\n
The implication is that the government will take more money
\nout of the economy than it is putting in. It will be a
\ncontractive budget, one that will affect aggregate demand in the
\neconomy already battered by the economic crisis.<\/p>\n
Sri Mulyani, an economist at the University of Indonesia, said
\nthe IMF term was intended to take off the pressure on Indonesia's
\nbalance of payments.<\/p>\n
\"But we hope the government would also try to use the budget
\nas an instrument to contain the domestic effects of the monetary
\ncrisis -- high inflation and unemployment -- and to stimulate
\neconomic activities,\" Mulyani said.<\/p>\n
\"A surplus budget will contract the economy. The government
\nshould renegotiate with the IMF on the surplus requirement.\"<\/p>\n
The government's budget has never been a major instrument to
\nstimulate growth. Instead, people were looking at economic reform
\npolicies, including deregulation and debureaucratization, as
\nstimulants.<\/p>\n
Economists agree a contractive budget is bound to have severe
\nrepercussions on the economy.<\/p>\n
Didi J. Rachbini, director of the Institute for Development of
\nEconomics and Finance, said the government should not feel
\nobliged to meet the IMF's requirements on the budget surplus in
\nview of the stagnant economy.<\/p>\n
Economist Kwik Kian Gie said the budget clause would lower
\npeople's purchasing power because the government would likely try
\nto collect as much revenue as possible through taxation, but
\nlimit its spending for development activities.<\/p>\n
Mari Pangestu of the Centre for Strategic and International
\nStudies said the government would effectively cease to play any
\nrole in stimulating the economic growth rate if it complied
\nwith the IMF's term.<\/p>\n
The monetary crisis has already lowered economic growth
\nprojections from an optimistic 7 percent to 5 percent at best.
\nEconomists now predict the growth rate will plunge to between 1
\npercent and 3 percent this year. The economy needs to grow by at
\nleast 5 percent annually simply to absorb the two million young
\npeople who join the labor market each year.<\/p>\n
The major political forces have also called on the government
\nto raise its spending in 1998\/99 despite the IMF term. Golkar has
\nproposed a balanced budget of Rp 110.9 trillion, the Armed Forces
\ncalled for spending totaling Rp 113.35 trillion and the United
\nDevelopment Party for spending of Rp 115.7 trillion.<\/p>\n
Analysts believe the government is looking for ways to bolster
\nspending since 1998 is regarded as a \"political year\", with the
\npresidential election in March.<\/p>\n
Mari, Kwik and Mulyani believed the government's ability to
\nraise spending in 1998\/1999 would be severely limited even if it
\nwanted to follow that course.<\/p>\n
There are already predictions the government will not reach
\nits budget targets in the current fiscal year. The current budget
\nis slated to balance between spending and revenues at Rp 101.08
\ntrillion ($18.5 billion at the Jan. 2 exchange rate).<\/p>\n
\"If the government, for political reasons, wants to raise its
\nspending, it will not exceed Rp 110 trillion,\" Mulyani says.<\/p>\n
She pointed out that revenues from non-oil taxes -- the major
\nsupplier of total domestic revenue -- will likely fall to Rp 50
\ntrillion from the Rp 73.1 trillion originally targeted this year
\ndue to falling profitability of companies.<\/p>\n
Revenues from the oil and gas sectors will come to the
\ngovernment's salvation as they are priced in dollars.<\/p>\n
She noted Indonesia's OPEC oil quota had been raised from 1.33
\nmillion barrels per day (bpd) to 1.45 million bpd beginning in
\nthe first half of 1998, and that the rupiah earnings from this
\nsector would be bolstered following the sharp depreciation of the
\nrupiah against the dollar.<\/p>\n
Minister of Mines and Energy Ida Bagus Sudjana has already
\nindicated that the government will calculate the 1998\/1999 budget
\non the basis of an average oil price of $17 a barrel compared to
\n$16.50 this fiscal year.<\/p>\n
Mulyani said the government's foreign aid receipts would also
\nincrease its revenues when converted into rupiah at the lower
\nexchange rate.<\/p>\n
Kwik believed the international community would be
\nparticularly interested in the government's exchange rate the
\ngovernment will use in calculating the budget.<\/p>\n
It will automatically signal what the government believes is
\nthe \"equilibrium\" level of the rupiah's value, he says.<\/p>\n
The rupiah's value has plunged from Rp 2,400 to the dollar in
\nJune to more than Rp 5,000.<\/p>\n
None of the economists interviewed by the Post thought the
\ngovernment would increase the salaries and wages of civil
\nservants and members of the Armed Forces.<\/p>\n
The government most recently raised their salaries by an
\naverage of 34.4 percent in May 1997, and had applied 10 percent
\nhikes in each of the three previous fiscal years.<\/p>\n
Mulyani said some spending would have to be increased
\nnevertheless, such as servicing the government's debt and in
\nproviding subsidies on the domestic sales of fuels.<\/p>\n
But many analysts are also predicting the fuel subsidy may
\nhave to be phased out in the coming fiscal year.<\/p>\n
Mulyani predicted the crisis would eliminate the government
\nsaving -- the difference between total domestic revenues and
\nroutine spending -- which in the past exceeded Rp 20 trillion.<\/p>\n
She said most of the spending cuts in the next budget would
\nhave to come from the government's development spending (public
\ninvestment), set at Rp 38.92 trillion in 1997\/1998, to reach
\nabout Rp 27 trillion if it has to allocate a surplus equivalent
\nof 1 percent of GDP.<\/p>\n
Kwik forecast that development spending may fall to as low as
\nRp 21.73 trillion.<\/p>",
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