Moderate budget deficit acceptable<\/p>\n
Anis Chowdhury, Jakarta<\/p>\n
Balancing the state budget remains a paramount policy
\nparameter in Indonesia. The House of Representatives (DPR) has
\npenciled at 0.6 percent of gross domestic product (GDP) for the
\n2005 state budget. This is lower than this year's target of 1.2
\npercent of GDP. This must be a very happy outcome for any finance
\nminister around the world.<\/p>\n
A careful examination of the state budget of the New Order
\nperiod (1967-1998) reveals that it was never balanced in the true
\nsense. This slight of hand behind a seemingly balanced budget was
\nmainly the inflow of foreign aid. Because of the strategic
\nimportance of Indonesia in the context of first the Vietnam war
\nand later Cold war, the donor countries treated the New Order
\nregime very favorably.<\/p>\n
Such financial support enabled foreign aid to be treated as
\na regular revenue source, becoming in time an implicit
\n\"guarantee\". This in turn helped to generate a balanced budget.
\nThe task was made easier by the windfall from the two oil price
\nshocks.<\/p>\n
While this was the story from the revenue side, on the
\nexpenditure side the civil service pay structure also played a
\nrole. The civil servants, including the police and military, were
\npaid what is known as basic pay, and they were allowed to
\ngenerate additional income from \"other\" sources. This meant the
\nrecurrent expenditure remained low.<\/p>\n
Is it possible to do the same trick now? First, although
\nIndonesia may still have some strategic importance even after the
\nend of the Cold war, there has been globally a declining trend in
\nforeign aid. Donor support that came at the wake of the crisis
\nhas already tapered off. As a requirement of the numerous
\nletters of intent signed with the International Monetary Fund,
\nthe state budget now follows the international practice and no
\nlonger treats foreign aid as revenue.<\/p>\n
Second, oil price rises that came as a blessing in the past,
\nnow have become a curse as Indonesia turned into a net importer
\nof oil. The rise in oil prices put pressure on the state budget
\ndue to increased fuel subsidy. The recent oil price rise is
\nexpected to increase 2004 budget deficit as the fuel subsidy is
\nprojected to triple.<\/p>\n
Third, it is widely believed that the civil service pay
\nstructure is mainly responsible for sprawling corruption. One of
\nthe elements of governance reform thus is civil service pay,
\nincluding that of police and military. This means the routine
\nexpenditure can no longer be kept artificially low for long.<\/p>\n
Thus, it is almost clear that the old trick of balancing the
\nbudget is no longer possible. Does it mean that Indonesia is
\nheading towards a disaster of the mid-1960s? The answer is,
\nhopefully not.<\/p>\n
Indonesia must try to avoid \"reckless\" budget deficit by
\nincreasing its effort in raising domestic revenue. Its tax-GDP
\nratio is one of the lowest among comparable developing countries,
\neven lower than the Philippines. However, reforming the tax
\nsystem and improving the governance are a long haul.<\/p>\n
In the interim, one should not be upset about the prospect of
\na moderate budget deficit. Note the use of reckless and moderate
\nbudget deficit. International evidence shows that most countries
\nhave a budget deficit ranging between 3 percent and 5 percent of
\nGDP. But none of these countries ended up in hyperinflation or
\neconomic stagnation. It is not a surprise that the Maastricht
\nTreaty allowed European Union member countries a budget deficit
\nof 3 percent of GDP. The Treaty also allows a higher deficit in
\nthe case of emergency.<\/p>\n
This brings us to the last question -- is it desirable to hold
\non to the balanced budget principle at any cost? The crisis dealt
\na serious blow to the Indonesian society. The infrastructure is
\nin ruin, about one-third of the primary school buildings are not
\nuseable, nearly half the population remains vulnerable to poverty
\nand one-third of the labor force is either unemployed or
\nunderemployed. The infant mortality rate among the poor is
\nalarmingly high -- about three times that among the rich. The
\ncondition of the public healthcare system has created a \"health
\ndivide\". Do not all these fit the definition of an emergency?<\/p>\n
No one perhaps would say no. Unemployment, poverty, education,
\nhealth, infrastructure are all high on the agenda of all
\npresidential candidates. A dogmatic adherence to the balanced
\nbudget principle will not see an avalanche of foreign or domestic
\nprivate investment in order to enable the newly elected president
\nto fulfill his or her election pledges. At least this is the
\nexperience of last five years.<\/p>\n
Whoever wins the coming presidential election will have to
\noffer the ordinary citizens a relief from the daily worries of
\nlife as a dividend of democracy. This cannot be done, at least in
\nthe immediate future, within the current macroeconomic policy
\nframework which is driven by the fear of reckless deficit. One
\ncan be cautious, but fear cannot be the basis of public policy.<\/p>\n
However, while inviting the policy makers to be bold, one
\nneeds to keep in mind the golden rule of deficit -- you never
\nborrow to finance your present consumption. If possible, save by
\nlimiting consumption. Any sound private sector business or
\nindividual follows this rule barring exceptional circumstances.
\nViolation of this rule on a permanent basis brings disaster.<\/p>\n
The business and households not only balance their routine
\nbudget and even try to create a surplus there, but they are not
\nfearful to borrow to finance investment. If they are unable or
\nunwilling to borrow and try to restrict their investment only to
\nthe extent possible from the surplus in the routine budget, then
\nno business will grow beyond a warung (roadside inn)<\/p>\n
Balancing budgets sounds like a sensible policy. But balancing
\nthe budget can be a dangerously simplistic policy. And it is not
\nalways good economics, especially when there are well-known
\nbenefits from investing in infrastructure, education, health and
\npublic safety. So spending on these sectors can be made without
\nsigning up to simplistic balanced Budget proposals.<\/p>\n
What is more, economic prosperity brought about by public
\ninvestment will generate dividend of complementary private
\ninvestment and increased tax revenue.<\/p>\n
The writer is Professor of Economics, University of Western
\nSydney, Australia and currently is working as consultant at
\nUNSFIR. This view is strictly personal.<\/p>",
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