Misleading budget needs correction<\/p>\n
By Steven Susanto<\/p>\n
JAKARTA (JP): A long-standing conceptual error had been
\nofficially preserved in the construction of the Indonesian State
\nBudget (APBN)) until the IMF team revealed the difference between
\nits definition of a balanced budget and that of the government of
\nIndonesia.<\/p>\n
It remains a mystery why prominent economists, inside and
\noutside the country, never attempted to revise the error. It is
\nhigh time the government reworked its conception of a balanced
\nbudget and, accordingly, public savings and investments.<\/p>\n
Crudely speaking, it is safe to say that most economists in
\nIndonesia are sufficiently aware of the distinction between the
\nIndonesian balanced budget and the standard balanced budget. They
\nalso know that our version is an exception rather than the rule.<\/p>\n
However, it is not safe to say these economists are acutely
\naware that the Indonesian concept is a misleading exception.<\/p>\n
By undeniable definition, a balanced budget means the amount
\nthat a government adds to the stream of spending through its
\npurchase of goods and services must match precisely the amount
\nthat it withdraws from the stream of income generated by spending
\non goods and services.<\/p>\n
The government arbitrarily defines a balanced budget as the
\nequality of revenues and expenditures. Included in the revenue is
\nforeign assistance.<\/p>\n
This anomalous version of a balanced budget severely violates
\neconomists' understanding of what a balanced budget is supposed
\nto mean.<\/p>\n
The Indonesian \"definition\" only creates confusion in
\nprofessional discussions because the term is often used
\ndifferently by different policymakers and, unfortunately, even by
\nthe same policymakers to mean different things at different times
\nand in different places.<\/p>\n
Policymakers mistakenly believe that the use of
\nexemplification can provide a definition of a concept.
\nProfessional communication and progress can only occur when
\ndefinitions are cast not in terms of specific illustrations but
\nare formulated in terms of universal understanding.<\/p>\n
This clumsy version of the balanced budget only leads to an
\nentirely false understanding of the role of aggregate demand,
\nparticularly the budget deficit policy the government has been
\nexercising for a couple of decades.<\/p>\n
The existence of foreign assistance on the revenue side of the
\nState Budget since the First Five-Year Development Program
\nindicates that the government has been adopting an expansionary
\nfiscal policy through its deficit budget.<\/p>\n
This is to say that the government has been withdrawing from
\nthe income side less than it places there through its purchase of
\ngoods and services. This reality is disguised under the
\nmisleading definition of a balanced budget which balances the
\nunbalanced flow of withdrawals and injections.<\/p>\n
It is odd that the economy is based on an incompatible concept
\nand even odder that we, especially the economists, have accepted
\nthe ambiguous term but not the true meaning of it.<\/p>\n
Ironically, the misleading concept has been widely accepted as
\nif it were the same as the universally accepted one. Not only do
\nwe preserve the logical error, but we also sanely but
\nsurreptitiously validate the institutionalized mistake nationally
\nand internationally.<\/p>\n
It is advisable that the reform packages recently announced
\nalso entail a program to redesign the format and content of the
\nState Budget, including public saving and investment, as well as
\nthe gross domestic capital formation in the national income
\naccounts.<\/p>\n
A balanced budget must be redefined as the equality of
\nwithdrawals and injections to reflect the true financial
\nstrengths of the government.<\/p>\n
It is also recommended that government saving be described as
\nexcess of revenues over expenditures. The existing definition of
\npublic saving, as excess of domestic revenues over routine
\nexpenditures, offers no intellectual guide to understanding,
\nexplanation, or prediction.<\/p>\n
Public saving, if defined as above, is emphatically negative
\nand accordingly does not record the availability of public
\nresources for capital formation as ordinarily concluded.<\/p>\n
It is more useful for policymakers if the budget is divided
\ninto consumption spending and capital spending or public
\ninvestment. The current classification of routine and development
\nexpenditures is ineffective since policymakers have to reclassify
\nthem again to know for instance the state contribution to capital
\nformation.<\/p>\n
By clearly defining public saving and public investment, the
\nvalue of gross domestic capital formation or the sum of public
\nand private investment in the national income accounts, can
\neasily be separated to account for its contribution to the
\nperformance of the economy. It is misleading to integrate the
\nprivate and public investments because of their different
\nbehavior.<\/p>\n
In every system of accounts, the elements ought to be
\nhomogeneous; that is, each unit within an account should behave
\nsimilarly, or have similar functions. Private investment and
\npublic investment can be expected to respond differently to the
\nsame economic stimuli.<\/p>\n
During the current state of depression marked by deficiency of
\ndomestic demand, the private sector has retracted investment
\nbecause it is unprofitable.<\/p>\n
In contrast, the government must promote labor-intensive
\nprojects to avoid massive unemployment. In other words, the
\ngovernment is expected to activate the idle capacity of equipment
\nand manpower by employing an expansionary fiscal policy to offset
\nthe increasingly contracted activity.<\/p>\n
Because of these definitions of public saving and investment,
\nthe dynamics of deficit budget in activating the economy through
\nits multiplier effect fall from sight, the role of foreign aid in
\nforging capital goods is misinterpreted and misunderstood, and
\nthe difference in behavior between private and public investment
\nis overlooked. To facilitate reliable analyses of the current
\ndismal state of affairs, it is indispensable to reconstruct the
\nleaky structure of the State Budget and its components.<\/p>\n
Not only is the proper definition of importance, but the
\nofficial confirmation of the way Indonesia has defined its
\nbalanced budget as \"an equally valid truth\" -- vis-a-vis the
\nother truth from the IMF and perhaps the rest of the world --
\nreflects a totally false perception of the workings of the
\neconomic system.<\/p>\n
This is because so far no attention has been willingly paid to
\nthe extent to which the State Budget must express the reasonable
\nconditions and realistic assumptions as indicated by the
\nanomalous yet misleading definition of the balanced budget.
\nNevertheless, it is by no means unreformable or insurmountable.<\/p>\n
The writer is a financial consultant of PT ISI & Rekan,
\nJakarta.<\/p>",
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